Doing Well by Doing Good? An analysis of the financial performance of green office buildings in the USA.

Buildings in the US with a high Energy Star rating are attracting rental premiums of three percent per square foot compared with non-green buildings of the same size, location and function, according to new research commissioned by RICS (Royal Institution of Chartered Surveyors).

The research “Doing Well by Doing Good?” provides the first credible evidence on the economic value of the certification of “green buildings” in the commercial sector and concludes that there is a premium of three percent for the rents that ‘green’ buildings with the Energy Star rating can command. In addition when looking at effective rents (the true rent of a property, considering rental concessions, spread over the life of the lease) the premium is higher still, above six percent.

The researchers were also able to look at the impact on the selling prices of green buildings, and here the premium is even higher, in the order of 16 percent. This implies that upgrading the average non-‘green’ building to a ‘green’ one would increase its capital value by some $5.5 million.

The results suggest that tenants and investors at this point are willing to pay more for an energy-efficient building, but not for buildings that are “sustainable” in a broader sense.

Simon Rubinsohn, RICS Chief Economist comments:

“This piece of research is an important first step in building an evidence base on the topic of the value of “green” buildings. Previously with only anecdotal evidence available on which to base decisions surrounding development of energy efficient buildings, it is understandable that the uptake of some measures has been frustratingly slow.

“With more comprehensive evidence based research, such as this paper, the economic argument for having an energy efficient building will be strong. Any businesses wishing to maximise profits will have to start looking at increasing the energy efficiency of the buildings in order to remain competitive. By proving that green buildings are economically beneficial due to the savings they can make and the higher rental yields they attract, non-green buildings will eventually become an outdated model.”

Notes for editors:
This report has been carried out by Piet Eichholtz and Nils Kok of Maastricht University, the Netherlands, and John Quigley of the University of California, Berkeley, United States of America. This is the first study that they have undertaken in this research programme, which explores the financial performance of ‘green’ office buildings in the United States of America.

Of the total of 1,360 possible buildings that could be analysed, the researchers could find all the required matching data from CoStar on 893, comprising 694 for which the researchers have rental data as of September 2007, and 199 that were sold between 2004 and 2007.

The approach that they took was to identify every building in the CoStar dataset that was within a radius of a quarter of a mile of the sample of 893 buildings – this resulted in a sample of 9,998 buildings for which financial data could be obtained.

For a copy of the full report please use the following link:
http://www.rics.org/RICSWEB/getpage.aspx?p=EftHTXEDY0SW9VO_UVCwsg

Piet Eichholtz is Professor of Real Estate and Finance and chair of the Finance Department at Maastricht University in the Netherlands. He teaches courses in Finance, and in Real Estate Finance and Investments. His academic work has resulted in a great number of publications, both in the Netherlands and internationally. Most of his work examines real estate markets, with a focus on international investment, portfolio management and housing markets

Nils Kok currently works as an assistant professor in Finance and Real Estate at Maastricht University, the Netherlands. He recently finished his PhD at Maastricht University, for which he received the 2009 Best Thesis Award of the French Social Investment Forum. His main research focus is on sustainability issues in the real estate sector, concentrating on the economics of “green” buildings.

John Quigley is the I. Donald Terner Distinguished Professor at the University of California, Berkeley, where he holds professorial appointments in the Department of Economics, the Haas School of Business, and the Goldman School of Public Policy. He has served as Chairman of Berkeley’s Department of Economics and as Chair of Berkeley’s Academic Senate. He is an expert on issues in public finance and taxation, and on real estate, mortgage and financial markets.

About RICS
RICS (Royal Institution of Chartered Surveyors) is the mark of property professionalism worldwide. It covers all aspects of property, construction and associated environmental issues. RICS has 86,000 chartered members (FRICS and MRICS) and 55,000 members in other categories of membership (TechRICS, trainees and students) globally. It represents, regulates and promotes the work of these property professionals throughout 146 countries. RICS is governed by a Royal Charter approved by Parliament which requires it to act in the public interest. It is also a professional regulatory body approved by Government (HM Treasury).

For more information:

Laura Lindberg
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