Transcript Document

Sustainable Buildings:
Performance, Users, Investors
Piet Eichholtz
Maastricht University
Studium Generale, October
“Green” building in the marketplace?
Top-10 “green” commercial office markets
Commercial property and “green” investments
Industry can play crucial role in reducing carbon emissions
• Property industry consumes resources and pollutes
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40% of global consumption raw materials (even 55% of wood)
At least 30% of global CO2 emissions
Energy represents 7–9% of total occupancy cost
• Many energy-efficiency investments in property have positive net
present value …
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Better insulation, technology, and building management all create
shareholder value at current energy prices (McKinsey, 2009)
First evidence shows very high IRR’s for energy investments
Academic studies show indirect returns on “green” or energy efficiency
• … so “green” property investments often do not conflict with financial
goals of (institutional) investors
Do we still see economic effects of green labels?
Investment dynamics and the source of green increments
Sample of 28,000 office buildings (2009 cross section), 3,000 of which
are certified by EPA or USGBC
1. New evidence on the economic premium for green office
buildings
 Rigorous control for quality differences (PSM)
 Label vintage
2. Identify the sources of rent and value increments
 Explicit link to leading building-level sustainability labels
 LEED and Energy Star
How do we measure greenness?
LEED and Energy Star
 LEED
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The program has been initiated by the US Green Building Council
(USGBC).
LEED covers six different components of sustainability, including
energy performance and material selection.
Lower operating costs and healthier and safer working
environments for occupants.
 Energy Star
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Founded in 1992 by the U.S. Environment Protection Agency
(EPA) and the U.S. Department of Energy (DOE).
Energy star evaluates the efficiency of buildings‘ energy use with
respect to a base building of similar size and quality.
35 percent less energy consumption and 35 percent less carbon
dioxide emission than average uncertified building.
Example: 101 California St, San Francisco
Energy Star certified, LEED Gold
Example: 101 California St, San Francisco
Energy Star certified, LEED Gold
Methodology
How to further correct for differences in location and quality?
Standard real estate valuation framework
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Rin is the rent, effective rent, or transaction price per sq.ft.
Xi is a vector of hedonic characteristics
 Size, age, renovation, class, amenities, public transport, …
Percent change in employment in service sector (CBSA) to control for
regional variation in demand for office space
Cluster cn dummies to control for location – 1,943 (744) separate
dummies in the rental (transaction) sample
gi = dummy variable if building i has green label
Dummy variables for year of sale in transaction sample
Findings and implications
Eco-investment real estate sector is not only “doing good”
 Ceteris paribus, green buildings
1.
2.
3.
4.
Have higher rents by 2-5%
Have higher, and more stable, occupancy
Have higher effective rents by 6-7%
Have higher selling prices by 11-13%
 The average non-green building in the rental sample would be worth
$5.6 M more if it were converted to green.
 The average non-green building sold in 2004-2009 would have been
worth $11.1 M more if it had been converted to green.
 This suggests that property investors value the lower risk premium
inherent in certified commercial office buildings
 The missing piece…what are the costs of “greening” properties?
Further regression results
There seems to be an optimal LEED rating
Information on Energy Star-rated buildings
Emissions are substantial, and energy savings create value
 Average emission of a building in our sample: 4,326 tons of CO2
 750 cars, 9,000 barrels of oil, …
 Energy Star-rated buildings emit at least a quarter less carbon as
compared to conventional office buildings
 A $1 saving in energy costs is associated with an increase in
effective rent of 95 cents
 A $1 saving in energy costs is associated with a 4.9 percent
premium in market capitalization, which is equivalent to $13/sq.ft.
 This implies a cap rate of about 8 percent
Conclusions on building performance
LEED and Energy Star labels seem to be complimentary
 Effects on rent and value still present despite economic crisis and
increased supply of green office space
 The green value effects are systematically related to the underlying
characteristics of energy efficiency or “sustainability”
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Market seems to be relatively efficient in pricing these aspects
 LEED and Energy Star measure somewhat different aspects of
“sustainability” and complement each other
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Low correlation between LEED-score and EUI-score
Low correlation between LEED score and energy consumption
Why would users rent green (and pay more)?
Theoretical framework
1. Direct economic benefits
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Lower service costs of housing by reduced energy costs
Higher employee productivity
2. Indirect economic benefits: Improved reputation and image
 Investors – cost of capital
 Employees – labor market
 Customers – sales and prices
3. Ethical behavior
 “Do the right thing”
 Non-profit, government, and governmental organizations
Green space
utilization of major tenants
Incidence of Green Space Utilization by Major Tenants
Fraction office
of Firm’s space
Office Space
Housed inin
Green
Buildings
Fraction of firm’s
housed
green
buildings
Tenant Name
Wells Fargo Bank
United States Government
Bank of America
ABN AMRO
State of California
Deloitte & Touche
Best Buy
U.S. Dept. of Health & Human Sc.
Shell
Chevron
Blue Cross & Blue Shield
Adobe Systems
Compuware Corporation
American Express
The Vanguard Group
Cal/EPA
Mitre Corporation
JP Morgan Chase
Skadden
Ernst & Young
(1)
Space Occupied
(2)
Green Office
Space
Total Space
CoStar
Green as
Fraction of Total
Space CoStar
x 1000 sq. ft.
2,741
2,415
2,124
1,724
1,568
1,554
1,500
1,442
1,362
1,229
1,211
1,158
1,094
1,018
990
950
944
907
889
864
x 1000 sq. ft.
7,343
14,631
18,695
2,993
5,706
5,131
2,104
1,662
3,989
6,181
12,251
1,388
1,300
6,754
1,569
950
1,293
10,670
1,751
4,149
%
37.33%
16.50%
11.36%
57.60%
27.49%
30.28%
71.31%
86.72%
34.14%
19.88%
9.89%
83.43%
84.18%
15.07%
63.07%
100.00%
73.02%
8.50%
50.77%
20.83%
(3)
Green space utilization per industry
of Green
Space Utilization
by Industry
Fraction of officeIncidence
space
located
in green
buildings
Fraction of Office Space Housed in Green Buildings by Four-Digit SIC
SIC Code
Industry Description
8111
6021
9199
1311
6282
8721
5731
9311
7373
3812
2759
3069
4731
9621
7997
8641
2086
5411
4724
6552
Legal Services
National Commercial Banks
Executive, Legislative and General Office
Crude Petroleum and Gas
Investment Advice
Accounting, Auditing, and Bookkeeping Services
Radio, Television, and Consumer Electronics Stores
Public Finance, Taxation, and Monetary Policy
Computer Integrated Systems Design
Search, Detection, Navigation, Guidance, …
Commercial Printing, NEC
Fabricated Rubber Products, NEC
Arrangement Transportation of Freight and Cargo
Regulations and Adm. of Transportation Programs
Membership Sports and Recreation Clubs
Civic, Social, and Fraternal Associations
Bottled and Canned Soft Drinks, Carbonated Waters
Grocery Stores
Travel Agencies
Land Subdividers and Developers,
(1)
Space Occupied
(2)
Green Office
Space
Total Office
Space CoStar
x 1000 sq. ft.
25,593
9,436
9,035
7,076
6,532
5,158
1,531
822
816
291
287
285
282
280
274
274
261
253
252
250
x 1000 sq. ft.
217,097
86,782
67,081
11,304
100,939
136,766
3,888
14,491
19,487
4,869
3,996
769
8,348
9,115
1,696
14,362
5,037
8,363
7,539
9,676
(3)
Green as
Fraction of
Total Space
CoStar
%
11.79%
10.87%
13.47%
62.60%
6.47%
3.77%
39.37%
5.67%
4.19%
5.97%
7.17%
37.08%
3.38%
3.07%
16.15%
1.91%
5.19%
3.03%
3.34%
2.58%
And what do property investors do?
Portfolio greenness and the financial performance of REITs
The aim of the paper is twofold:
1. Identify the green properties owned by Real Estate Investment
Trusts (REITs)
 The first study that identifies the portfolio greenness of REITs
2. Investigate the effect of portfolio greenness on the financial
performance of REITs
 Dynamic measure of portfolio greenness
 Two channels
 Benefits at property level
 Benefits from making CSR investments
 Causality issues
Green buildings in the portfolios of US REITs
800
80
700
70
LEED
60
500
50
400
40
300
30
200
20
100
10
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
# of REITs owning Leed Certified Properties
# of REITs owning Leed Registered Properties
# of Leed Certified Properties
# of Leed Registered Properties
1000
80
900
70
Energy Star
800
# of Properties
# of REITs
600
700
60
600
50
500
40
400
30
300
20
200
10
100
0
0
2000
2001
2002
2003
2004
2005
# of REITs owning Energy Star Certified Properties
2006
2007
2008
2009
2010
2011
# of Energystar Certified Properties
# of REITs
# of Properties
increasing number of green properties
Model
 We estimate the following set of equations:
where i stands for REIT i, and t stands for year t.
 Greenness stands for Number of Certified and Sqft of Certified
properties for both LEED and Energy Star certifications.
 2 instruments in the first stage:
 The weighted locational greenness (WLG)
 The weighted locational green policy (WLGPL)
 Financial Performance stands for ROA, ROE, Funds from Operations
(FFO)/Total Revenue, Alpha and Beta
Operating performance – ROA
VARIABLES
(1)
(2)
LEED
LEED
(3)
Number_Certified
3.42***
Energy
Star
0.90
(Predicted)
[1.26]
[0.61]
(4)
Energy
Star
Sqft_Certified
3.46*
0.31*
(Predicted)
[1.78]
[0.18]
Total Assets
-0.33**
-0.95**
-0.73*
-0.73
(in log)
[0.15]
[0.46]
[0.40]
[0.45]
Price-Book Ratio
-0.01
0.01
0.00
0.01
[0.01]
[0.01]
[0.01]
[0.01]
0.01***
0.01***
0.01**
[0.00]
[0.00]
[0.00]
RE Investment Growth 0.01***
[0.00]
Age
0.06***
0.05**
0.07***
0.06***
(years, in log)
Year-Fixed Effects
Property Type
Constant
Observations
[0.02]
[0.02]
[0.02]
[0.01]
Y
Y
Y
972
Y
Y
Y
887
Y
Y
Y
972
Y
Y
Y
887
Operating performance – ROE
VARIABLES
(1)
(2)
LEED
LEED
(3)
Number_Certified
7.92***
Energy
Star
2.05
(Predicted)
[2.99]
[1.40]
(4)
Energy
Star
Sqft_Certified
7.39*
0.66*
(Predicted)
[3.83]
[0.35]
Total Assets
-0.32
-1.05
-1.23
-0.56
(in log)
[0.53]
[0.72]
[1.02]
[0.62]
Price-Book Ratio
-0.02
0.00
-0.01
0.00
[0.03]
[0.03]
[0.03]
[0.03]
0.03***
0.04***
0.03***
[0.01]
[0.01]
[0.01]
RE Investment Growth 0.02***
[0.01]
Age
0.09*
0.06
0.10**
0.08**
(years, in log)
Year-Fixed Effects
Property Type
Constant
Observations
[0.05]
[0.06]
[0.04]
[0.04]
Y
Y
Y
972
Y
Y
Y
887
Y
Y
Y
972
Y
Y
Y
887
Stock performance – Alpha
VARIABLES
(1)
(2)
LEED
LEED
(3)
Number_Certified
0.043
Energy
Star
0.031
(Predicted)
[0.095]
[0.028]
(4)
Energy
Star
Sqft_Certified
0.107
0.007
(Predicted)
[0.144]
[0.010]
Total Assets
-0.022*
-0.046*
-0.049*
-0.035**
(in log)
[0.012]
[0.027]
[0.026]
[0.017]
Price-Book Ratio
0.000
0.001**
0.001*
0.001**
[0.000]
[0.000]
[0.000]
[0.001]
0.001***
0.001***
0.001***
[0.000]
[0.000]
[0.000]
RE Investment Growth 0.001***
[0.000]
Age
-0.000
-0.001
-0.000
-0.001
(years, in log)
Year-Fixed Effects
Property Type
Constant
Observations
[0.001]
[0.002]
[0.001]
[0.001]
Y
Y
Y
716
Y
Y
Y
637
Y
Y
Y
716
Y
Y
Y
637
Stock performance – Beta
VARIABLES
(1)
(2)
LEED
LEED
(3)
Number_Certified
-0.140**
Energy
Star
-0.034*
(Predicted)
[0.063]
[0.019]
(4)
Energy
Star
Sqft_Certified
-0.173
-0.011**
(Predicted)
[0.111]
[0.006]
Total Assets
0.194***
0.207***
0.217***
0.189***
(in log)
[0.009]
[0.019]
[0.018]
[0.009]
Price-Book Ratio
-0.001**
-0.001***
-0.001***
-0.001***
[0.000]
[0.000]
[0.000]
[0.000]
0.000
-0.000
0.000***
[0.000]
[0.000]
[0.000]
RE Investment Growth 0.000***
[0.000]
Age
0.001
0.002
0.001
0.001
(years, in log)
Year-Fixed Effects
Property Type
Constant
Observations
[0.001]
[0.002]
[0.001]
[0.001]
Y
Y
Y
716
Y
Y
Y
637
Y
Y
Y
716
Y
Y
Y
637
Main Findings
 1% and 6% of the REIT property portfolios are green-certified in
2010 for LEED and Energy Star, respectively.
 Portfolio greenness enhances operating performance proxied by
ROA, ROE and FFO/Total Revenue.
 Different from analysis of financial performance of green
properties, these measures are net of costs.
 No effect of greenness on abnormal stock returns, indicating that
market already corrects for portfolio greenness.
 Portfolio greenness decreases market risk.
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More, and more stable, occupancy of green buildings
Green properties less exposed to energy price fluctuations
For questions and remarks:
[email protected]
For more research:
www.epri.eu
www.gresb.com