Green Noise or Green Value? Measuring the Price Effects of Environmental Certification in Commercial Buildings

Fuerst, Franz and McAllister, Patrick (2008): Green Noise or Green Value? Measuring the Price Effects of Environmental Certification in Commercial Buildings.

Abstract

The environmental performance of a building is rapidly gaining importance as a metric in real estate investments. This study investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and non-certified buildings. These are additional occupier benefits, lower holding costs for investors and a lower risk premium. Drawing upon the CoStar database of US commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. The results suggest that, compared to buildings in the same submarkets, eco-certified buildings have both a rental and sale price premium.

• Item Type: MPRA Paper
• Language: English
• Keywords: Green buildings, LEED, Energy Star certification, commercial real estate, appraisal, price premium, innovation diffusion
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C31 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions ; Social Interaction Models; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R33 - Nonagricultural and Nonresidential Real Estate Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation

References

Ambrose, B., P. Hendershott and M. Klosek. 2002. Pricing Upward-Only Adjusting Leases. Journal of Real Estate Finance and Economics 25: 33-49.

Anderson, S. and R. Newell. 2004. Information programs for technology adoption: the case of energy-efficiency audits. Resource and Energy Economics 26: 27-50.

Berry, T. 2007. Towards a green building and infrastructure investment fund: A review of challenges and opportunities. Compass Resource Management.

Bond, S., P. Loizou and McAllister, P. 2008 Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?, Journal of Real Estate Finance and Economics, forthcoming.f

Bollinger, C.R., K.R. Ihlanfeldt and Bowes, D.R. 1998. Spatial Variations in Office Rents in the Atlanta Region. Urban Studies 35: 1097-1118.

Booth, P. and D. Walsh. 2001. An option pricing approach to valuing upward only rent review properties with multiple reviews. Insurance: Mathematics and Economics. 28: 151- 171.

Can, A. and I. Megbolugbe. 1997. Spatial Dependence and House Price Index Construction. Journal of Real Estate Finance and Economics 14: 203-222.

Casetti, E. 1997. The Expansion Method, Mathematical Modeling and Spatial Econometrics. International Regional Science Review 20: 9-33.

Clapp, J. M. 1980. The Intrametropolitan Location of Office Activities. Journal of Regional Science 20: 387-399.

Clapp, J. M. 1993. The Dynamics of Office Markets. Washington: Urban Institute Press.

Clapp, J. M. 2003. A Semiparametric Method of Valuing Residential Locations: Application to Automated Valuation. Journal of Real Estate Finance and Economics 27: 303-320.

Clapp, J. M. 2004. A Semiparametric Method for Estimating Local House Price Indices. Real Estate Economics 32: 127-160.

Dunse, N., C. Leishman and C. Watkins. 2002. Testing the Existence of Office Submarkets: A Comparison of Evidence from Two Cities. Urban Studies 39: 483-506.

ECOFYS. 2003. Cost Effective Climate Protection in the EU Building Stock. Report for EURIMA.

Eicholtz, P., N. Kok, and J. Quigley, Doing Well By Doing Good? Green Office Buildings, Working paper, Fisher Center for Real Estate and Urban Economics, UC Berkeley, April, 2008.

Ellison, L., S. Sayce and J. Smith. 2007. Socially Responsible Property Investment: Quantifying the Relationship between Sustainability and Investment Property Worth. Journal of Property Research, 24: 191 – 219. 27

Englund, P., A. Gunnelin, M. Hoesli, and B. Söderberg. 2004. Implicit Forward Rents As Predictors of Future Rents. Real Estate Economics 32: 183-215.

Garrod, G. and K. Willis. 1999. Methodological issues in valuing the benefits of environmentally sensitive areas. Journal of Rural Studies 15: 111-117.

Gat, D. 1998. Urban Focal Points and Design Quality Influence Rents: The Tel Aviv Office Market. Journal of Real Estate Research 16: 229-247.

Glascock, J., S. Jahanian and C.F. Sirmans. 1990. An analysis of market rents: Some empirical evidence. AREUEA Journal 18: 105-119.

Grenadier, S.R. (1995). The valuation of leasing contracts: a real options approach. Journal of Financial Economics 38: 297-331.

Guy, S. 1998. Developing Alternatives: Energy, Offices and the Environment. International Journal of Urban and Regional Research 22: 264-282.

GVA Grimley. 2007. Towards Sustainable Offices. Research Bulletin, Spring, 2007.

Kats, G. 2003. The Costs and Financial Benefits of Green Buildings – A Report to California’s Sustainable Building Task Force. Capital E, October 2003.

Kotchen, M. 2006. Green Markets and Private Provision of Public Goods. Journal of Political Economy 114: 816-834. McGraw Hill Construction. 2006. Green Building Smart Report.

Mills, E. 1992. Office rent determinants in the Chicago area. AREUEA Journal 20: 156-171.

Morrison Hershfield. 2005. A Business Case for Green Buildings. Internal Morrison Hershfield Report.

Nelson, A. 2007. The Greening of U.S. Investment Real Estate – Market Fundamentals, Prospects and Opportunities. RREEF Research Report No. 57.

RICS. 2005. Green Value: Green Buildings, Growing Assets. London: RICS.

Roberts, T. 2007. Green Buildings Get Tax Relief. Green Source, April 2007, 22-23.

Rosen, S. 1974. Hedonic prices and explicit markets: production differentiation in pure competition. Journal of Political Economy 82: 34–55.

Rosen, K. T. 1984. Toward a Model of the Office Building Sector. Journal of the American Real Estate and Urban Economics Association 12: 261-269.

Sanstad, A., M. Hanemann and M. Auffhammer. 2006. End-Use Energy Efficiency in a ‘Post- Carbon’California Economy: Policy Issues and Research Frontiers. in Managing Greenhouse Gas Emissions in California, 2006.

Shilton, L. and A. Zaccaria. 1994. The Avenue Effect, Landmark Externalities, and Cubic Transformation: Manhattan Office Valuation. Journal of Real Estate Finance and Economic 8: 151-65. 28

Sirmans, C.F. and K.A. Guidry. 1993. The Determinants of Shopping Center Rents. Journal of Real Estate Research 8: 107-115.

Sirmans, G.S., C.F. Sirmans and J. Benjamin. 1989. Determining Apartment Rent: The Value of Amenities, Services and External Factors. Journal of Real Estate Research, 4: 33-43.

Slade, B.A. 2000. Office Rent Determinants during Market Decline and Recovery. Journal of Real Estate Research 20: 357-380.

Stern, N., S. Peters, V. Bakhshi, A. Bowen, C. Cameron, S. Catovsky, D. Crane, S. Cruickshank, S. Dietz, N. Edmonson, S.-L. Garbett, L. Hamid, G. Hoffman, D. Ingram, B. Jones, N. Patmore, H. Radcliffe, R. Sathiyarajah, M. Stock, C. Taylor, T. Vernon, H. Wanjie, and D. Zenghelis. 2006. Stern Review: The Economics of Climate Change, HM Treasury, London.

UNEP. 2007. Buildings and Climate Change Status, Challenges and Opportunities. Paris: UNEP.

Upstream. 2004. Sustainability and the Built Environment: An Agenda for Action. RICS Foundation, London.

Vandell, K. and J. Lane. 1989. The economics of architecture and urban design: some preliminary findings. AREUEA Journal 17: 121-136.

Wheaton, W. 1984. The incidence of inter-jurisdictional differences in commercial property taxes. National Taxation Journal 37: 515–527.