Doing Well by Doing Good? Green Office Buildings

The behavior of the building and real estate sectors is quite important in matters of environmental sustainability. It is reported, for example, that buildings account for approximately 40 percent of the consumption of raw materials and energy. In addition, 55 percent of the wood that is not used for fuel is consumed in construction. Overall, buildings and their associated construction activity account for at least 30 percent of world greenhouse gas emissions (Royal Institution of Chartered Surveyors, RICS 2005). The impact of energy costs directly affects tenants and building owners. Energy represents 30 percent of operating expenses in a typical office building; this is the single largest and most manageable operating expense in the provision of office space. Thus the design and operation of real estate can play an important role in energy conservation in advanced societies. Awareness of this fact is growing. The increasing emphasis on “green rating” systems for buildings—initiated by both government and industry—gives witness to this development. In general, these ratings assess the energy footprint of buildings, and they may provide owners and occupants with a solid yardstick for measuring the energy efficiency and sustainability of properties. However, the use of these ratings has so far been limited, and the global diffusion of rating systems is relatively slow. Moreover, both real estate developers and institutional investors are understandably uncertain about how far to go in implementing environmental investments, since the economic rationale for the development of sustainable buildings is based almost entirely on anecdotal evidence. This paper provides the first systematic analysis of the impact of environmentally sustainable building practices upon economic outcomes as measured in the marketplace. We concentrate on commercial property, and we investigate the relationship between investments in energy efficiency in design and construction and the rents, the effective rents (that is, rents adjusted for building occupancy levels), and the selling prices commanded by these properties. We analyze a large sample of buildings, some of which have been certified as more energy efficient by independent and impartial rating services. We assemble a national sample of US office buildings which have been evaluated for energy efficiency by one of two leading agencies. For each building, we identify a control sample of nearby office buildings. For some 10,000 subject and control buildings, we relate contract rents, effective rents and selling prices to a set of objective hedonic characteristics of buildings, holding constant the locational characteristics of properties. We find that buildings with a “green rating” command rental rates that are roughly 3 percent higher per square foot than otherwise identical buildings— controlling for the quality and the specific location of office buildings. Premiums in effective rents are even higher—above 7 percent. Selling prices of green buildings are higher by about 16 percent. Doing Well by Doing Good? Green Office Buildings