Existing buildings are responsible for over one-third of all resource consumption, greenhouse gas emissions, and energy consumption globally. 85% of US commercial buildings are over 10 years old, and new construction represents only a small fraction of the existing stock, therefore retrofitting commercial buildings is extremely important for sustainability within the built environment.
Geltner, Moser and Van de Minne quantify the magnitude of value enhancement created by green retrofit of US office properties. They conduct an analysis by creating a repeat sales price index, and quantifying the bump in value generated after a property is certified LEED.
Green buildings achieve higher rents per square foot and have lower vacancy rates because there is a demand for high quality spaces. Green buildings are favorable primarily because of the measurable benefits from improved indoor air quality, reduced operating costs, reduced energy consumption and an increase in employee productivity and satisfaction.
Green buildings are gaining popularity among developers. LEED Certified Buildings as a percentage of all properties grew from 0.5% to 3.5% between 2009-2014 in the US.
There are four levels of LEED Certifications, and the Price Premium and Occupancy Premium differs depending on which certification the property is awarded.
Overall Findings – Price Premiums, Occupancy Rate Premiums and Demand Elasticity
There have been lots of research on the value premium of green buildings, and the image above shows a summary of all the findings of the major research conducted. All show positive price premiums and occupancy rate premiums, with an average of 17% asset price premium and 1% occupancy rate premium.
Price Premiums and Occupancy Rate Premiums During the Financial Crisis of 2008
The graphs above illustrate the overall price premium and occupancy premium for green retrofitted properties between 2008 and 2012 . When times are good and incomes are high, people may care more about sustainability and the environment. You can see premiums falls to zero during the financial crisis, suggesting that demand for green buildings is income elastic. Put simply, if income falls, demand for green buildings will fall more.
Geltner et al. (2017) found that properties that have been retrofitted to a green building experience a bump in asset value by 17% and a 1.5% increase in occupancy rate. More specifically, the value of the property increases by 14.8% if the property is Certified Silver, and 18.3% if the property is Certified Gold/Platinum. The same trend is apparent in occupancy rates, increasing by 0.5% if the property gets Certified Silver and 4% for Gold/Platinum.
Evidence is clear that green buildings experience less volatility, and achieve asset price/occupancy premiums in favorable market conditions. These buildings achieve lower occupancy costs, achieve higher rents and fetch higher asset prices per dollar of net operating income (NOI).
Developers and landlords should consider the demand side benefits of green retrofitting. Not only can a landlord earn a return on their investment, they can reduce the strain on our planets resources and work towards a more sustainable future.
Geltner, David and Moser, Lucas and Van de Minne, Alex, The Effect of Green Retrofitting on US Office Properties: An Investment Perspective (August 28, 2017). Available at SSRN: https://ssrn.com/abstract=3028183 or http://dx.doi.org/10.2139/ssrn.3028183