Green Design and the Market for Commercial Office Space

Abstract

This paper considers the relationship between energy-efficient design and the leasing/sales markets for commercial real estate. An economic model is provided that considers lease rates and occupancy in simultaneous equilibrium. The behavior of both is predicted to be influenced by efficient design attributes. Selling price is determined by both rents and occupancy; therefore the impact of efficient design on commercial sales activity should be distributed through the leasing market. The model is tested empirically using a national sample of sales and leasing data for class A office buildings. The evidence indicates that “green” buildings achieve superior rents and sustain significantly higher occupancy. The improved performance in the rental market is reflected in a significant premium for the selling price of Energy Star-labeled and LEED-certified properties.

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Notes

  1. 1.

    EPA press release, Feb. 12, 2008 “Green Choices Grow with Energy Star Qualified Buildings.”

  2. 2.

    In two reports prepared as guidelines for appraisers considering the contribution of energy costs, Chao et al. (1999) and Chao and Parker (2000) use data from Building Owners and Managers Association 1998 Experience Exchange Report to illustrate that median energy costs contribute between 23 to 30% of total operating costs in four major downtown California office markets and between 31 to 37% in four major downtown New York office markets.

  3. 3.

    EPA press release, Feb. 12, 2008 “Green Choices Grow with Energy Star Qualified Buildings.”

  4. 4.

    See, for instance, Evolution Partners press release, Dec. 6, 2005 “Meeting Notes: LEEDÒ and Energy StarÒ Building Finance Summit.”

  5. 5.

    Leasing markets include Atlanta, Austin, Boise City/Nampa, Boston, Charlotte, Chicago, Cincinnati/Dayton, Cleveland, Colorado Springs, Columbus, Dallas/Ft Worth, Denver, Detroit, East Bay/Oakland, Hampton Roads, Hartford, Hawaii, Houston, Indianapolis, Inland Empire (CA), Jacksonville (FL), Kansas City, Los Angeles, Louisville, Milwaukee/Madison, Minneapolis/St Paul, Nashville, New York City, Northern New Jersey, Orange (CA), Orlando, Philadelphia, Phoenix, Portland, Raleigh/Durham, Sacramento, Salt Lake City, San Diego, San Francisco, Seattle/Puget Sound, South Bay/San Jose, South Florida, St Louis, Tampa/St Petersburg, Toledo, Washington DC.

  6. 6.

    Lease types include Full Service Gross, Modified Gross, Negotiable, Net, Plus All Utilities, Plus Cleaning, Plus Electric, Tenant Electric, Triple Net, Utilities and Char.

  7. 7.

    Sales markets include Atlanta, Boston, Charlotte, Chicago, Columbus, Dallas/Ft Worth, Denver, East Bay/Oakland, Houston, Jacksonville (FL), Los Angeles, Milwaukee/Madison, Minneapolis/St Paul, Northern New Jersey, Orange (CA), Philadelphia, Phoenix, Portland, Sacramento, San Diego, San Francisco, Seattle/Puget Sound, South Florida, St Louis, Washington DC.

  8. 8.

    Model 2 uses the 45 market indicators along with the 11 lease type indicators as instrumental variables in the first-stage estimation to collect predicted values for Occupancy. In the second stage, the market indicator for “Los Angeles” along with the lease type indicator for “Double Net” are omitted so that the model is full rank resulting in second-stage parameter estimates that are unique, consistent and unbiased. Model 4 uses the 45 market indicators as instrumental variables in the first-stage estimation to collect predicted values for ln(Avg_rent). The market indicator for “Kansas City” is omitted in the second stage.

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Correspondence to Jonathan A. Wiley.

Appendices

Appendix 1

Table 5 Description of markets

Appendix 2

Table 6 Description of lease types

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Wiley, J.A., Benefield, J.D. & Johnson, K.H. Green Design and the Market for Commercial Office Space. J Real Estate Finan Econ 41, 228–243 (2010). https://doi.org/10.1007/s11146-008-9142-2

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Keywords

  • Green design
  • Office
  • Leasing
  • Pricing