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Sustainability and the Dynamics of Green Building Nils Kok Piet Eichholtz Maastricht University UC Berkeley Maastricht University John M. Quigley UC Berkeley European C to C Network, July 2010 Green real estate is hot Visitors at the U.S. “Greenbuild” conference 30.000 25.000 20.000 15.000 10.000 5.000 0 “Green” building in the marketplace? Top-10 “green” commercial office markets Economic significance of “green” building Implications upon the market for commercial space Trends in “green” building may have economic implications A higher initial outlay… Not clear how much higher (0 – 20%) ‘Smarter’ building managers/software … may be compensated by “green” value drivers Cost savings Energy savings (up to 35%) Emission reduction Increased rents Reputation effects Improved indoor air quality Increased economic lives, reduced depreciation Case studies on the economic implications Focus often on new buildings Results are hard to generalize Do we still see economic effects of green label? 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 USGBC measures of “sustainability” EPAs measures of energy efficiency Example: 101 California St, San Francisco Energy Star certified, LEED Gold Example: 101 California St, San Francisco Energy Star certified, LEED Gold Findings and implications (I) Eco-investment real estate sector is not only “doing good” Ceteris Paribus, green buildings 1. Have Higher Rents by 2-5% 2. Have Higher Effective Rents by 6-7% 3. 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? Generalization of the model Unique premium for each “green” building The increment to rent or market value for the green building in cluster n, relative to the prices of other buildings in that cluster (i.e., controlled for location, climate, and quality): What is the relation between the variation in the “green” premium and the LEED-score or energy consumption? 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 and implications (II) LEED and Energy Star labels seem to be complimentary The green increment is systematically related to the underlying characteristics of energy efficiency or “sustainability” Market seems to be relatively efficient in pricing these aspects LEED and Energy Star measure somewhat different aspects of “sustainability” and complement each other Low correlation between LEED-score and EUI-score 2007 – 2009 office market dynamics Office rents, vacancy rate, and unemployment Office rents –30% Vacancy rate +40% Unemployment +115% 2007 – 2009 office market dynamics Office rents, vacancy rate, and unemployment Unemployment x2 Office rents –30% Vacancy rate +30% Short-run price dynamics of green buildings Substantial increase in rated space in a contracting economy 8,182 observations as of September 2007 694 rated buildings and 7,488 nearby control buildings Rents, occupancy rates, effective rents Same sample matched to financial information in October 2009 Drop buildings that were converted to “green” during the sample period We estimate developments in rents, occupancy rate, effective rents Conclusions and implications (III) “Green” is getting mainstream Increased awareness of global warming and the role of the real estate sector have increased attention upon “green” building Energy efficient and sustainable office space is now a large share of the commercial property sector -- getting mainstream This may have economic implications for investors, tenants, and policymakers Buildings certified by Energy Star or LEED command higher rents and prices in the marketplace The “green premium” has slightly decreased during the period of volatility in property market… …but the returns to green buildings are not significantly lower relative to identical conventional buildings So what do property investors do? Property investors talk the talk, but hardly walk the walk Implementation & Measurement 100 80 Green Walk Green Stars 60 40 Green Laggards Green Talk 20 0 0 20 40 60 Management & Policy 80 100 Questions/remarks? [email protected] [email protected] www.corporate-engagement.com