No Rent Premium for LEED Buildings
Tuesday, March 10, 2009 at 4:04PM In a research paper entitled "Doing Well by Doing Good: Green Office Buildings" released from the Institute of Business and Economic Research at UC-Berkeley, prominent real estate economists P. Eichholtz, N. Kok, and J. Quigley provide useful evidence to answer the question of whether or not there is economic value for “green” in commercial office buildings. Using a sample of 8,000+ office buildings, they find that green office space rents for a premium of 2% higher than non-green office space. When occupancy rates are taken into consideration, they find that green office rents are 6% higher than non-green rents.
These results serve as objective evidence that green building features have definite economic value and not just social or psychological value. Though the results can only be interpreted at the aggregate level for this sample of buildings, these findings make a strong “business case” for green building investment.
Interestingly, the study conducted by these researchers indicates that buildings with Energy Star certification exhibit rent premiums, but that buildings with LEED certification do not. The researchers offer no comments in their study about this difference. Given the rigor of both the Energy Star and LEED rating systems, it seems incongruous that the two systems would lead to different results. This disparity suggests that additional research is needed to further examine whether or not real estate values are truly enhanced by green building features.
Reader Comments (4)
Just a wild guess, but food for thought:
Energy Star certification implies to the buyer that his energy cost will be less. Thus, he expects his net operating income to be greater. LEED certification probably conveys no such expectation of energy savings and communicates no expectation of increase in NOI. Perhaps LEED needs to have a new acronym created which suggests some sort of savings to the buyer. The real estate market, like most other markets, is driven by the bottom line rather than altruism.
Jim,
While your point is excellent and spot on, the study references premiums in rent, not sales price. From a practical perspective, a 2% premium is really not that significant, especially in markets that have gross rents at less than $30 per foot (which is most markets). It is actually less than most first year escalations. The real benefit from an owner/developer perspective is the economic value of 6%, which takes into account concessions (free rent during the term) and lease up velocity. This is a much more significant number, and one that would definitely make it worthwhile to implement energy efficiency into designing or retrofitting a building.
My guess is that LEED, for all of the hoopla, is still a relatively unknown commodity. I heard someone from the EPA speak a couple of weeks ago that said Energy Star was one of the top 10 names for brand awareness in the US. People know what it means and have an understanding of the rigor o the process, whereas LEED process is still unknown by most.
This is interesting. Actually, a significant percentage of LEED O&M certification is based on Energy Star, so people just must not know enough about the rating system yet.
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