Two new reports on the investment value of green buildings raise some concerns about green hype. The first found that “rents for green offices are about 2% higher than rents for comparable buildings located nearby” and were even 6% higher when adjusted for occupancy levels.
The report, “Doing Well by Doing Good? Green Office Buildings,” stated further that, based on a 6% capitalization rate, “the incremental value of a green building is estimated to be about $5.1 million more than the value of a comparable unrated building nearby.”
The authors—John M. Quigley, the I. Donald Terner Distinguished Professor in Affordable Housing and Urban Policy at the University of California, Berkeley, and Piet Eichholtz and Nils Kok, of Maastricht University, the Netherlands—studied a mix of green office buildings: 286 LEED-certified buildings, 1,045 Energy Star buildings, and 29 that were dual-certified.
When they separated the LEED rentals from the Energy Star rentals, however, it turned out that “the LEED rating has no effect upon commercial rents, but the Energy Star rating is associated with rents higher by 2.8%.” That’s a lot different than implying, as some online reports have, that all “green buildings”—including LEED-rated ones—command a premium in the rental market.
The other study, “Does Green Pay Off?”, from real estate information provider CoStar, concluded that LEED buildings sold for $171/sf, or 64%, more than comparable non-LEED buildings and rented for $11.33/sf, or 36%, more than non-LEED buildings. Energy Star buildings in the study sold for $61/sf, or 27%, more than “comparable” buildings and commanded a $2.40/sf, or 9%, rental premium.
Whew! Heady numbers. However, as Scott Muldavin, executive director of the Green Building Finance Consortium, notes (in “Quantifying 'Green’ Value: Assessing the Applicability of the CoStar Studies”), the CoStar study has its shortcomings:
Many of the “peer” buildings in the study may not be true “comparables”—“a substantial number of the 991 Energy Star peer buildings and 164 LEED buildings were not even in the same submarket, with the majority of peers up to five miles away.”
• At the time of the study, there was a “tremendous increase in sales prices for commercial properties,” which may have skewed the sales prices of the LEED buildings.
• Only 15-20 LEED sales and a limited number of peer sales were recorded, with “substantial variability” in sales price.
• The LEED properties were compared to an average of only 2-4 peer sales; real estate people like to see 5-10 carefully selected comparables.
• The CoStar study did not “directly link the costs and risks undertaken to achieve the stated rent or value 'premiums.’”
Studies like these will only become more useful and valid as more data comes in. Until then, advocates of green buildings need to be cautious about making undue claims as to their perceived higher value, lest they raise false hopes.