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RICS Study: No Premium for LEED-Certified Commercial Office Buildings

Last week, the Royal Institution of Chartered Surveyors (“RICS”) released the results of a study authored by Piet Eichholtz and Nils Kok of Maastricht University and John Quigley of Berkeley. Titled “Doing Well By Doing Good? An Analysis of the Financial Performance of Green Office Buildings in the USA,” the purpose of the study was to determine whether investors are currently willing to pay any premium for green (Energy Star- and LEED-certified) commercial office buildings and, if so, what that premium is. The authors identified 1360 buildings- 286 LEED-certified, 1045 Energy Star-certified, and 29 certified under both systems- and were able to obtain complete building characteristics and monthly rents from CoStar for 649 of them, as well as sales data for 199 buildings that swapped hands between 2004 and 2007. To create a pool of peer buildings, the authors used the CoStar database to identify all other office buildings within a quarter mile radius of the subject green building to create a “cluster” of buildings for each of the 893 subject buildings. The average cluster contained 12 buildings; overall, 8182 buildings were included in the rental data study and 1816 for the sales study. The study concluded that “the type of label matters. We find consistent and statistically significant effects in the marketplace for the Energy Star-labeled buildings. We find no significant market effects associated with the LEED label. Energy Star concentrates on energy use, while the LEED label is much broader in scope. Our results suggest that tenants and investors are willing to pay more for an energy-efficient building, but not for a building advertised as ‘sustainable’ in a broader sense.”

The authors used a standard commercial real estate valuation formula that related the logarithm of the rent per square foot or sales price per square foot of each building cluster to a variety of hedonic building characteristics, including quality, amenities, age, and location. Some pertinent conclusions as set forth in the report are as follows:

  • “The results suggest that the LEED rating has no statistically significant effect upon commercial rents, but the Energy Star rating is associated with rents higher by 3.3 percent.”
  • With respect to sales price, “[w]hen the certification is reported separately for the Energy Star and the LEED systems, there is no evidence that hte latter certification is associated with higher selling prices.”
  • “The premium in rents and values associated with an energy label varies considerably across buildings. It is positively related to the intensity of the climate surrounding the rated building; a label appears to add more value when heating and cooling expenses are likely to be a larger part of total occupancy cost.”

I am extremely curious to see the reaction to the RICS study in the coming weeks. Already, several major media outlets have reported that it demonstrates “certified green buildings rent and sell at a higher price than non-certified buildings,” failing to note the study’s conclusions about the role a LEED rating may play in obtaining that higher price.

I look forward to your comments on the merits of the study once you have had the opportunity to review it; the study is available for download via the link below.

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10 Responses to RICS Study: No Premium for LEED-Certified Commercial Office Buildings

  1. Will April 13, 2009 at 7:33 pm #

    RICS also mentioned the difficulty in identifying a peer group for the LEED buildings, which were mostly new Class-A commercial. I think that cuts both for and against valuation, but that it is likely to overstate any LEED benefits. The increased value for markets with greater HVAC use makes sense since these projects are most obviously marketed (and can demonstrate) energy efficiency.

    I share your surprise that the lack of a LEED bonus has not been widely mentioned.

  2. Susan Aiello November 6, 2009 at 2:36 pm #

    I find the RICS findings confusing, since the study was based on data provided by CoStar. And according to CoStar, occupancy rates in LEED buildings is increasing as occupancy rates in all other buildings is declining. Aren’t occupancy rates at least as strong an indicator of value than rent per square foot?

    I got permission from CoStar to use their very compelling slide on occupany rates for a lecture I gave, and also used the same slide to illustrate the following entry on my blog:

    • Stephen Del Percio March 20, 2010 at 5:04 pm #

      In this economy, absolutely, but I think one of the general critiques of the CoStar study was that most LEED buildings are brand-new and Class A, so of course they’re going to command higher rental rates. Also, those LEED buildings that were sold during the study period (2002-2007) traded hands in the most volatile real estate market in recent history.

      The point I take from these studies which I emphasize in my presentations is that there just isn’t enough data yet on green buildings to draw meaningful conclusions that can serve as the basis for policymaking.

  3. TOM W. February 10, 2010 at 12:47 am #

    LEED for most intents and purposes is a fad; and an expensive one at that.
    Building owners are of a mind that LEED “is nice to have”, but in no way justifies the cost, which is approximately 2 to 4% additional to the original construction price.
    Saving energy is a different matter entirely and is handled nicely by EnergyStar and other programs, without going to the extra cost and bother of trying to get LEED certified.
    Every architect and their dog is a LEED AP now; that’s one reason why LEED is being pushed so hard, but until and unless it’s mandated by law, most builders and developers are not going to be interested.

  4. Jeffrey Geibel APR, LEED AP March 4, 2010 at 3:35 pm #

    The RICS study contradicts a study done by Costar in 2008 – which would be approximately the same period studied by RICS: 2004-2007(reference below).

    It would appear that they both used the same Costar data.
    CoStar Study Finds Energy Star, LEED Bldgs. Outperform Peers
    Demand in Marketplace for Sustainability Creates Higher Occupancy Rates, Stronger Rents and Sale Prices in ‘Green’ Buildings
    March 26, 2008

    • Stephen Del Percio March 20, 2010 at 5:01 pm #

      Correct- same data, but different methodologies and conclusions. The CoStar study though is what has been widely disseminated for the proposition that green buildings are worth more and command higher leasing rates.


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