Advertisement

The Journal of Real Estate Finance and Economics

, Volume 49, Issue 3, pp 413–433 | Cite as

Operating Expenses and the Rent Premium of Energy Star and LEED Certified Buildings in the Central and Eastern U.S.

  • Alexander Reichardt
Article

Abstract

This paper investigates the relationship between operating expenses and rents of Energy Star and LEED certified buildings in the Central and Eastern United States. Several studies have shown that sustainable buildings command a rent premium compared to comparable conventional buildings. Lower operating expenses are expected to be a major source of the rent premium that sustainable buildings command. This is especially the case for buildings with triple-net leases, where tenants directly benefit from savings in operating costs. For a large dataset of U.S. office buildings this study finds significantly lower operating expenses in LEED certified buildings. However, savings in operating expenses only explain part of the rent premium. Additional factors must be at work. Surprisingly, we find significantly higher operating expenses in Energy Star rated buildings. Hence, intangible benefits appear to be the major source of rental premiums of Energy Star rated buildings.

Keywords

Rent premium Eco-certification Energy  Star LEED Operating expenses Triple-net lease Sustainable real estate 

JEL codes

M14 C23 D92 

Notes

Acknowledgments

The author would like to thank the CoStar Group for providing access to their database. He is grateful to Joachim Zietz and Nico B. Rottke for their comments and suggestions on an earlier version of this paper. The anonymous referees and the editor of this journal provided valuable comments and guidance that improved the quality of this article.

References

  1. Barrientos, J. L., Bhattacharjee, U., Martinez, T., & Duffy, J. J. (2007). Green buildings in Massachusetts: Comparison between actual and predicted energy performance. Proceedings of the American Solar Energy Society.Google Scholar
  2. Betterbricks, & Cushman & Wakefield, (2010). Green Building Opportunity Index: National Overview: Central Business Districts. http://betterbricks.com/images/gbi_pdf/GreenBuildingIndex-NationalOverview.pdf. Accessed 27 June 2011.
  3. Dixon, T., Ennis-Reynolds, G., Roberts, C., & Sims, S. (2009). Is there demand for sustainable offices? An analysis of UK business occupier moves (2006–2008). Journal of Property Research, 26(1), 61–85.CrossRefGoogle Scholar
  4. Eichholtz, P., Kok, N., & Quigley, J. M. (2010a). Doing well by doing good? Green office buildings. American Economic Review, 100(5), 2492–2509.CrossRefGoogle Scholar
  5. Eichholtz, P., Kok, N., & Quigley, J. M. (2010b). Sustainability and the dynamics of green building: New evidence on the financial performance of green office buildings in the USA. London, UK: RICS Research Report.Google Scholar
  6. Ekeland, I., Heckman, J. J., & Nesheim, L. (2002). Identifying hedonic models. American Economic Review, 92(2), 304–309.CrossRefGoogle Scholar
  7. Fowler, K. M., & Rauch, E. M. (2008). Assessing green building performance: A post occupancy evaluation of 12 GSA buildings. Richland, Washington: Pacific Northwest National Laboratorym Report number PNNL-17393.Google Scholar
  8. Frombrun, C., & Schanley, M. (1990). What’s in a name? Reputation building and corporate strategy. The Academy of Management Journal, 33(2), 233–258.CrossRefGoogle Scholar
  9. Fuerst, F., & McAllister, P. (2009). New evidence on the green building rent and price premium. Monterey, California: Paper presented at the Annual Meeting of the American Real Estate Society.Google Scholar
  10. Fuerst, F., & McAllister, P. (2011a). Green noise or green value? Measuring the effects of environmental certification on office values. Real Estate Economics, 39(1), 1–25.CrossRefGoogle Scholar
  11. Fuerst, F., & McAllister, P. (2011b). Eco-labeling in commercial office markets: do LEED and energy star offices obtain multiple premiums? Ecological Economics, 70(6), 1220–1230.CrossRefGoogle Scholar
  12. Hinnels, M., Bright, S., Langley, A., Woodford, L., Schiellerup, P., & Bosteels, T. (2008). The greening of commercial leases. Journal of Property Investment and Finance, 26(6), 541–551.CrossRefGoogle Scholar
  13. Hirano, K., Imbens, G. W., & Ridder, G. (2003). Efficient estimation of average treatment effects using the estimated propensity score. Econometrica, 71(4), 1161–1189.CrossRefGoogle Scholar
  14. Kats, G. (2003). The costs and financial benefits of green buildings. A Report to California’s Sustainable Building task Force.Google Scholar
  15. Kats, G., & Perlman, J. (2006). Summary of financial benefits of energy star labeled office buildings. http://www.energystar.gov/ia/partners/publications/pubdocs/ Summary_ of_the_Financial_Benefits_23June06_FINAL.pdf. Accessed 27 July 2011.
  16. Khandker, S. R., Koolwahl, G. B., & Samad, H. A. (2010). Handbook on impact evaluation—Quantitative methods and practice. Washington, DC: The World Bank.Google Scholar
  17. Kok, N., Eichholtz, P., Bauer, R., & Peneda, P. (2010). Environmental performance—A global perspective on commercial real estate. Maastricht: Maastricht University School of Business and Economics, The European Centre for Corporate Engagement.Google Scholar
  18. Leonardo Academy Inc. (2009). The economics of LEED for existing buildings. http://www.leonardoacademy.org/download/Economics%20of%20LEED-EB%2020090222.pdf. Accessed 10 August 2011.
  19. Matthiessen, L., & Morris, P. (2007). Cost of green revisited: Reexamining the feasibility and cost impact of sustainable design in the light of increased market adoption. Santa Monica: Davis Langdon.Google Scholar
  20. Miller, N., Spivey, J., & Florance, A. (2008). Does green pay off? Journal of Real Estate Portfolio Management, 14(4), 385–399.Google Scholar
  21. Miller, N., Pogue, D., Gough, Q. D., & Davis, S. M. (2009). Green building and productivity. Journal of Sustainable Real Estate, 1(1), 65–91.Google Scholar
  22. Miller, N., Pogue, D., Saville, J., & Tu, C. (2010). The operations and management of green buildings in the United States. Journal of Sustainable Real Estate, 2(1), 51–66.Google Scholar
  23. Mooradian, R. M., & Yang, S. X. (2002). Commercial real estate leasing, asymmetric information, and monopolistic competition. Real Estate Economics, 30(2), 293–315.CrossRefGoogle Scholar
  24. Muldavin, S. C. (2010). Value beyond cost saving: How to underwrite sustainable properties. San Rafael: Green Building Finance Consortium.Google Scholar
  25. Nelson, A. J. (2007). The greening of U.S. investment real estate—Market fundamentals, prospects and opportunities. San Francisco, CA: RREEF Research Report Number 57.Google Scholar
  26. Newsham, G. R., Mancini, S., & Birt, B. J. (2009). Do LEED-certified buildings save energy? Yes, but…. Energy and Buildings, 41(8), 897–905.CrossRefGoogle Scholar
  27. Pivo, G., & Fischer, J. D. (2010). Income, value and returns in socially responsible office properties. Journal of Real Estate Research, 32(3), 243–270.Google Scholar
  28. Reichardt, A., Fuerst, F., Rottke, N., & Zietz, J. (2011). Sustainability and the rent premium: a panel data approach. Journal of Real Estate Research, 34(1), 99–126.Google Scholar
  29. Romm, J., & Browning, W. D. (1998). Greening the building and the bottom line: Increasing productivity through energy-efficient design. Snowmass: Rocky Mountain Institute.Google Scholar
  30. Rosen, K. (1974). Hedonic prices and explicit markets: production differentiation in pure competition. Journal of Political Economy, 82(1), 34–55.CrossRefGoogle Scholar
  31. Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55.CrossRefGoogle Scholar
  32. Scofield, J. (2009). Do LEED-certified buildings save energy? Not really…. Energy and Buildings, 41(12), 1386–1390.CrossRefGoogle Scholar
  33. Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.CrossRefGoogle Scholar
  34. Turner, C., & Frankel, M. (2008). Energy performance of LEED for new construction buildings. Vancouver: New Buildings Institute.Google Scholar
  35. Wiley, J. A., Benefield, J. D., & Johnson, K. H. (2010). Green design and the market for commercial office design. Journal of Real Estate Finance and Economics, 41(2), 228–243.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Real Estate Management InstituteEBS Universität für Wirtschaft und RechtWiesbadenGermany

Personalised recommendations