Published October 13, 2010
Visiting Scholar, UC Berkeley
Assistant Professor, Maastricht University
Buildings and their associated construction activities account for almost a third of world greenhouse gas emissions. The construction and operation of buildings accounts for about forty percent of worldwide consumption of raw materials and energy. For this reason, important analyses of climate mitigation policies have identified the built environment as an important target for greenhouse gas abatement and have noted that small improvements could have large effects on their current and future energy consumption. Energy also costs money – about thirty percent of operating expenses in the typical office building in the U.S. On average, this cost is the single largest and most manageable expense in the provision of office space. Thus, building and managing better buildings is a critical part of both environmental and economic well being.
My colleagues and I have written two new papers that provide the first systematic analysis of economic effects of some recent trends in green buildings. We concentrate on commercial property, and we investigate the relationship between investments in energy efficiency, effective rents (that is, rents adjusted for building occupancy levels), and selling prices. We analyze a large sample of office buildings, some of which have been certified for energy efficiency by the U.S. Environmental Protection Agency (EPA) Energy Star program, or for sustainability by the U.S. Green Building Council (USGBC) Leadership in Energy and Environmental Design (LEED) system.
The results, which rigorously control for quality differences among buildings, clearly indicate the value of certifications in the market for commercial buildings. The results suggest that an otherwise identical commercial building with an Energy Star or LEED certification will rent for about three percent more per square foot; the difference in effective rent is estimated to be about six percent. The increment to the selling price may be as much as 13 percent.
Most importantly, our analysis supports a detailed investigation of the sources of the economic premiums embedded in the individual rents and asset prices of several thousand green buildings. This investigation relies upon internal documents made available by the EPA and the USGBC. For buildings certified by the Energy Star program, we obtained the data on energy efficiency (i.e., kBTU usage per square foot) as measured and reported in the certification process. For the buildings certified by the LEED program, we obtained the raw data on sustainability as evaluated in the certification process. Within the population of certified green buildings, we find that variations in rents and asset values are systematically related to the energy efficiency of the buildings, and also to other indicia of sustainability which are measured in the certification process. We also find that, within the population of certified buildings, variations in energy efficiency are fully capitalized into rents and asset values.
Last, we investigate the price dynamics of energy efficient and sustainable commercial buildings during the recent period of turmoil and of unprecedented decline in U.S. property markets. We gather and analyze a panel of certified green buildings and nearby control buildings observed in 2007 and again in 2009. The results show that large increases in the supply of green buildings during 2007-2009, and the recent downturns in property markets, have not significantly affected the rents of green buildings relative to those of comparable high quality property investments; the economic premium has decreased slightly, but rents and occupancy rates are still higher than those of comparable properties.
Our findings have implications for investors and developers of commercial office buildings. Green building now accounts for a considerable fraction of the market for office space, and in some U.S. metropolitan areas certified office space extends to more than a quarter of all commercial space. Measured attributes of sustainability and energy efficiency are incorporated into property rents and asset prices, and this seems to persist through periods of volatility in the property market. These developments will affect the existing stock of non-certified office buildings. The findings already suggest that property investors attribute a lower risk premium for more energy efficient and sustainable commercial space. Rated buildings may provide a hedge against shifting preferences of both tenants and the capital market with respect to environmental issues. Increasing market awareness of climate change, and rising energy costs can only increase the salience of this issue for the private profitability of investment in real capital.
Our findings may also have broader implications for current considerations of energy conservation policies and of measures to reduce global warming and climate change. It appears that modest programs by government and by nonprofit organizations to provide information to participants in the property market (i.e., “nudges”) do have a large payoff. Buildings certified by independent entities as more energy efficient or sustainable command economic premiums in the marketplace. Energy savings in more efficient buildings are capitalized into asset values, and this is not affected by the recent volatility in the U.S. property market.
These results suggest that more aggressive policies – in the U.S. and elsewhere – of certifying, rating, and publicizing buildings along these dimensions (including, perhaps, those buildings that score low on measures of energy efficiency) can have a large payoff in affecting energy use and maybe the course of global warming.