miller, norm, jay spivey, and andrew florance (2008)

Does Green Pay Off?

Executive Summary. This study provides some com-parison data on Energy Star and Leadership in Energyand Environmental Design (LEED)-certified buildingsversus non-Energy Star or non-LEED-certified officeproperty in the United States using the CoStar database.These results are promising for the benefits of investmentin sustainable real estate, energy savings, and for thegreen movement now sweeping our society. The payofffrom wise green investment is easy to justify even if it isbased on purely profit motivations.

'University of San Diego, San Diego, CA 92110 [email protected].

** CoStar Group Inc., Bethesda, MD 20814 or jspivey®costar.com.

***CoStar Group Inc., Bethesda, MD 20814 or aflorance®costar.com.

by Norm Miller*Jay Spivey**Andrew Florance***

This systematic study addresses questions on thebenefits of investments in energy savings and en-vironmental design. It compares all U.S.-basedEnergy Star office buildings as one measure of"green" building along with Leadership in Energyand Environmental Design (LEED)-certified officebuildings as another measure of "green" with alarge sample of non-Energy Star and non-LEED-rated buildings. Essentially, Energy Star buildingsare those within the 25% most efficient buildingsfor energy conservation. LEED-certified buildingsare based on the standards provided by the U.S.Green Building Council (USGBC). A parallel effortundertaken by Fuerst and McAllister (2008) findssimilar results to those presented here and usingthe same data source, while Eichholtz, Kok, andQuigley (2008) also find modest yet positive resultsfor controlled rent differentials.

There is not enough date to break down LEED cer-tification into various levels (certified, silver, gold,platinum) or even to provide extensive descriptivestatistics, but there is sufficient data to try andprovide a preliminary indication as to the valueadded by the general LEED rating. While otherratings exist both in the United States and glob-ally, and better measures of building efficiency,productivity, and operation adaptability areneeded, such discussions are left to future re-search.^ Definitions of the terms used here arefound in Appendix 1.

To date, most studies on the benefits of green in-vestment are case studies {see, for example, RICS,2005; Kohlhepp, 2007; and Scheer and Woods,2007). From such case studies, strong opinions can

Journal of Real Estate Portfolio Management 385

Norm Miller, Jay Spivey, and Andrew Florance

be formed about the costs and benefits of green in-vestment, yet a single case is seldom the prototyp-ical mean and there exists much local variationthat adds to or reduces the marginal costs of goinggreen. The current study goes well beyond casestudies by starting with a database of over 2.4 mil-lion properties and paring it down to a comparableset for the office market.

With respect to the all-important question of addedcosts, most available surveys on the costs are fromthe USGBC and, as such, some developers areskeptical of potential downward bias. Developerspoint out the direct cost of certification and thehigh indirect costs of dealing with inflexible, un-informed, and uncooperative local building coderegulators or the lack of local experts and re-sources. Clearly the costs of going green vary bylocal market, the number of vendors and experi-ence in the local market, developer/owner experi-ence, and project or portfolio scale.^ The indirectcosts of green efforts, manifested in frustration andmental wear and tear, are more difficult to esti-mate; yet such costs are clearly coming down, andwill likely continue to decline. This work usesavailable resources and data to outline wbat isknown.

Note that many of the benefits of green and high-performance buildings may not yet be refiected inhigher base rents in some local markets.'^ The rea-son is simple. Most of the benefits accrue to ten-ants and tenants require proof before they are will-ing to share in the cost of investments thattheoretically will help them be more productive orsave money. Only in very recent years have tenantsstarted to fully appreciate the benefits of cleanerair, more natural lighting, and easier to modifyspaces. A survey of 500 corporations completed byGrant Thornton in the summer of 2007 indicatedthat 75% of executives said that their companieswould be spending more on environmental pro-grams in the future. Of those surveyed, 68% ex-pected environmental responsibility reporting tobecome mandatory within three to five years.'*

Supporting investments in environmentally re-sponsible facilities, a study by Greg Kats of CapitalE Analytics in early 2007 provided the following

summary of benefits from going green, as shownin Exhibit A-1 of Appendix 2. Productivity benefitsare estimated to be as much as 10 times the energysavings from green efforts. These benefits come inthe form of lower absenteeism, fewer headachesat work, greater retail sales, and easier re-configuration of space resulting in less downtimeand lower costs. Kats' cost estimates based on asample of 33 office and school buildings suggestedonly 0.6% greater costs for LEED certification,1.9% for silver, 2.2% for gold, and 6.8% for plati-num certification. These estimates are obviouslydirect costs but they are quite close to those pro-vided by the USGBC. Earlier, a book published bythe Aardex Corporation (2004) suggested that ef-fective buildings could increase tenant productiv-ity by at least 30%. Aardex considered lighting, airquality, layout, and much more in its building sys-tems with many criteria that are not part of theLEED scoring system. More studies on productiv-ity are needed to be sure that such claims of higherproductivity are not just short term or the placeboeffect of new environments.

If tenants are not willing to pay higher base rentsfor greener buildings, is it still worth going green?^The answer is likely positive if: (1) you acceptclaims of faster absorption; and/or (2} you expectto hold the building for several years and you be-lieve the value impact results that derive from notonly rents, but also lower operating expenses andlower cap rates.

This study focuses only on the direct real estatebenefits using a sample that includes most of thefor-rent office data available for the entire UnitedStates.

Existing "Preliminary" Studies

While all similar studies are still preliminary andin working paper form, this study provides a com-parison of the results from Fuerst and McAllister(2008) and Eichholtz, Kok, and Quigley (2008) tothose in this study. Note that the general rent andoccupancy figures in the current study are threequarters later than the data used by the other twostudies.

386 Vol. 14, No. 4. 2008

Does Green Pay Off?

Exhibit 1 shows that all three studies have gen-erally higher rents and occupancy rates. The re-sults of the current study's general value resultsare quite high and in line with Fuerst and McAl-lister but the regression controlled results arelower yet still quite positive.

Data Used in this Study

CoStar is the leading collector of property data. Afew years ago, CoStar started to note whetherbuildings were Energy Star-rated or LEED-certified. As of early 2008, there were over 1,200Energy Star-rated buildings in the database andmore than 900 office buildings, over 220 retail, 25industrial, 53 hospitality, and 12 others. Five hun-dred and eighty buildings in the database wereLEED-certified but the sample available for com-paring occupancy, rents, and values was muchsmaller than for Energy Star buildings. The En-ergy Star-rated buildings included 322 millionsquare feet. The typical Energy Star office buildingis Class A with 353,000 square feet, 15 floors, builtin 1985 or later, multi-tenanted, and 91.7% leased.The following filters were used to develop the com-parison sample studied here: (1) only Class A officebuildings; (2) 200,000 square feet or more; (3) fivestories or more; (4) built since 1970; and (5) multi-

tenanted. Seventy-two percent of the Energy Starbuildings met all these criteria, which resulted ina sample of 643 buildings. The non-Energy Starbuildings meeting these criteria numbered over2,000 with nearly a billion square feet.

General Descriptive Results

Data comparison results are provided in Exhibits1-7. Data on absorption rates was not availablebut casual surveys suggest much faster absorptionrates for LEED-certified buildings. Operating ex-penses based on energy costs also varied with En-ergy Star-rated buildings running $1.27 per squarefoot per year for energy in 2006 compared to non-Energy Star-rated buildings running $1.81 persquare foot. These 50-cent or so differences con-tinue to be reported in 2007.

The sample of properties where cap rates wereknown is modest but there is a differential interms of lower cap rates by about 55 basis points,suggesting higher values by just under 10%. To-gether, the higher occupancy rates, higher rents,and lower operating expenses logically translate tohigher values but not necessarily by the rent dif-ferential shown in Exhibits 3 and 7. One mightsuggest that the LEED and Energy Star-rated

Exhibit 1General Result Comparisons of Three Studies to Date on Rents, Occupancy, and Values

Miller, Spivey. S. Florance Fuerst and McAllister Eichholt2, Kok, & Qutgley

RentGreen BuildingsEnergy StarLEEDControl Sample

Occupancy RateGreen BuildingsEnergy StarLEEDControl Sample

Regression model controlled Logof Effective Rent Per Sq FtLEED Rent Differential %Energy Star Rent Differential %

Value Per Sq Ft (regression result)LEEDEnergy Star

530.50$42.15$28.00

91.5%92.0%87.8%

9.9%5.3%

$29.80$29.34$27.07$24.68 (all sample)

88.40% (median)88.40% (median)86.06% (all median)

9.2%11.6%

31.4%10.3%

$28.16

88.99%

81.35%

4.4%8.9%



Exhibit 2Occupancy Rates By Quarter Through 2008:Q1

93.0Energy StarNon-Energy Star

82.0% 1 1 1 [ 1 1 1 1 1 1 T r

2004:3Q 2005:1Q 2005:3Q 2006:1Q 2006:3Q 2007:1Q 2007:3Q 2008:1Q

$32.00

$27.00

$26.00

$25.00

$24.00

Exhibit 3Direct Rental Rates Through 2008:Q1

Energy StarNon-Energy Star

t 1 1 1 1 1 r 1 1 1 1 1 T 1

2004:3Q 2005:1Q 2005:3Q 2006:1 Q 2006:3Q 2007:1Q 2007:3Q 2008:1Q

388 Vol. 14. No. 4. 2008

Does Green Pay Off?

Exhibit 4Sales Prices Per Sq Ft

$400.00

$350.00

$300.00

$250.00

$200.00

$150.00

D Energy Star

• Non-Energy Star

m

1fe2005 2006 2007 2008:Q1

Exhibit 5Lease Structures

D Energy Star • Non-Energy Star

ll ServiceGross

Triple Net

All Other

buildings are newer or more recently retrofittedand thus the general statistical results would nothold for a more controlled comparison. Below is amore controlled comparison using standard regres-sion analysis.

Price Impact with Age, Location, andTime of Sale Controlled

Several hedonic models were tested to try and un-derstand if the differentials ohserved ahove arevalid or spurious and correlated with newer build-ings in more expensive cities. With sales price persquare foot as the dependent variable, the follow-ing model was tested:

0% 20% 40% 60% 80%

Sales Price/Sq Ft = a + ß^iAge) +

+ ß^lLEED) + ß^Size)

+ ß^CBD) + ße(Yr dummy)

+ ßjiCity Dummy) + e. (1)

Where a is the constant, ß is the regression coef-ficient for each variable and e is the error or resid-ual term. Several forms of this model were used to



86.0%

Exhibit 6Occupancy Rates Through 2008:Q1

2005: 2006: 2006; 2006: 2006: 2007: 2007: 2007: 2007: 2008:4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Exhibit 7Direct Rental Rates Through 2008:Q1

$48.00

$46.00

$44.00

$42.00

$40.00

$38.00

$36.00

$34.00

$32.00

$30.00

$28.00

$26.00

\

2005: 2006: 2006: 2006: 2006: 2007: 2007: 2007: 2007: 2008:4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

390 Vol. 14, ISÍO. 4. 2008

Does Green Pay Off?

examine the efîects with only Energy Star or onlyLEED certification in the model, as well as withseveral different location controls. The general re-sults are as follows;

Variable Coeff. f-Stat

InterceptAge

ES

LEED

Size

CBD

2003

2004

2005

2006

2007

Boston

t>\

NYC

Wash DC

San Fran

201.39

-4.66

13.99

24.14

064.05

-6.92

20.97

51.73

75.82

103.04

161.26

95.17

259.14

160.39

121.51

] ] . O 3 * "

- n . 8 8 " *

1.68-

1.79'

0.835

8.52-**

18.59'**

17.87'-*

17.52"*

17.10'*'

17.98'**

18.17'**

13.31***

21.70**'

11.22'*'

19.19'*'

Notes: R-̂ = .478; Adj. R̂ = .468; Std. Error = 105.42; Number ofObservations = 927.•Significant at the 85% level.'"Significant at the 95% level or above.

The mean price per square foot is $242.75; there-fore, the average LEED impact on sales price persquare foot is a positive 9.94% or roughly 10%. TheEnergy Star impact on selling price is 5.76% on thepositive side. Interestingly and very surprisingly,the correlation between LEED and Energy Star inthis datahase is —0.064, so these effects likely donot contain any multicollinearity. When the vari-ables were tested independently, the coefficientsbarely moved. Thus, it appears in this data set andbased on 2003-2007 data that the benefits fromLEED certification and Energy Star investmentare cumulative, despite the fact that there shouldbe a correlation between the two variables.

What Does it Cost to Go Green?A large sample of cost data on achieving EnergyStar ratings is not available nor is there neutrallysupplied data on LEED certification, say from con-tractor samples, but data as supplied by the

USGBC (Exhibits 8 and 9) and anecdotal surveysare available. According to surveys of those meet-ing the minimum LEED certification, the averagecosts are reported to be about 3% extra versus thezero figure provided by the USGBC.̂ With silverat 2.5% extra, plus the 3% as reported by developersurveys, it is still only at 5.5%. The reason for adeveloper premium is that there are still certifi-cation costs to go green. This includes fees to theUSGBC and third parties, who certify the buildingat various levels, as well as the time necessary toawait certification. Many local building codes arenot flexible nor in tune with LEED standards sothis education process adds to the costs. In somecities like Portland, Oregon, the adoption of inte-grated building codes has taken place. In Portlandthis is called PDX LEED, which puts the city on

Exhibit 8Extra Costs to Become LEED Certified as of

2007 Excluding Certification Fees

Extra Costs in Percentage to Build Green

Certified Silver

Source: USGBC

Gold Platinum

Exhibit 9Extra Costs to Go Green Vary by Region

Market

USGBC Ave.

San Francisco

Merced

Denver

Boston

Houston

Platinum

7.8%

7.8%

10.3%

7.6%

8.8%

9.1%

Gold

2.7%

2.7%

5.3%

2.8%

4.2%

6.3%

Silver

1.0%

1.0%

3.7%

1.2%

2.6%

17%



board with sustainable objectives and makes theprocess easier.^

Mandates and Incentives AffectingCosts to Go Green

Mandates and incentives provided by local govern-ments, utilities, and other non-profits, trusts andfoundations affect the cost to go green (Exhibit 8).If a city such as San Francisco requires gold cer-tification as of 2012 on office projects larger than50,000 square feet, the marginal costs of achievingLEED certification up through the gold level he-comes zero since there will be no alternative (Ex-hibit 9). This is the case for many cities with reg-ulations slated to become effective over the nextseveral years.^

Over time, more cities will be adopting mandatesto require LEED certification. Some cities willlikely provide incentives; Cincinnati, for example,offers a property tax rebate on LEED-certifiedbuildings for up to $500,000 over 15 years for newbuildings and 10 years for existing buildings.® Oth-ers will provide mandates whereby there is nochoice but to become LEED-certified.

The increasing number of mandates creates con-cerns among developers and owners about depend-ency on third-party inspectors and reviewers fromthe USGBC. Never before in the history of the realestate industry have so many local governmentsbeen so dependent on a third party for certificationof a huiiding requirement, with the exception ofthird-party appraisers who may render opinions onvalue that government boards and review commit-tees accept, reject, or revise. While USGBC seemsup to the task of handling third-party certification,it has unprecedented authority to delegate to athird party.

According to a survey by the American Institute ofArchitects (ALA), the incentives that are most ef-fective at stimulating green building include:^° (1)tax incentives, credits or rebates; (2) density bo-nuses; and (3) faster building permits.

Only minor efforts are required to hit LEED cer-tification at the minimum level once the developer

or owner become familiar with the process. In fact,using the system in place in 2007 and 2008, manypoints are achievable with very modest cost.

Green Point Strategies

Talk to several developers successful at securingLEED certification and they will tell you that witha little planning it is neither that hard nor costlyto hit the minimum point total for certification,which is 26 out of 69 possible points.^^ Many pointsare easy, such as designating minimal parking forlow emission vehicles and facilitating bike racks.Others, such as teaching construction workers totoss waste into three different bins, are harder butfeasible. Some points are relatively low cost orcostless with a little planning and education, ascan be seen below.

Sustainable Sites

Water Efficiency

Energy and Atmosphere

Materials and Resources

Indoor Environmental Quality

Innovation and Design

Total

Points Possible

14

5

17

13

15

5

69

Easy Points

6-7

4-5

0-1

6-8

5-7

1-2

22-30

Sources: Trevor Jensen. USD Master of Science in Real Estate Student.Working Paper on LEED Strategies, 2008, Burnham-Moores Center forReal Estate.

The proposed 100-point system for 2009 is an im-provement in that local differences are consideredand innovation is treated as a bonus, with thesetwo adding up to 10 more bonus points. Ownersand developers will still be able to game the systemin that some points are lower cost than others, butthe minimum standards will continue to be raisedand many local governments will impose LEEDcertification requirements on developers of newbuildings.

Leaders in Green Development,Ownership, and Occupancy

While it may look like Los Angeles is the leaderamong all cities in greening office property, the

392 Vol. 14. No- 4. 2008

Does Green Pay Off?

Exhibit 10Leading Metro Areas for Green as of Second

Quarter 2007

1

2

3

4

5

6

7

8

9

10

Metro Area

Los Angeles

Houston

Washington DC

New York City

San Francisco

Minneapolis/St Paul

Denver

Seattle/Puget Sound

Chicago

Dallas/Ft Worth

# BIdgs

100

46

61

11

30

20

34

16

13

20

Square Feet

26.167,038

21.101.378

19,796.646

12,328.784

11.862.367

n.381.738

10.285.745

7.616.710

6.326.489

6.058.892

% Of Total

13.3%

10.8%

10.1 %

6.3%

6.0%

5.8%

5.2%

3.9%

3.2%

3.1%

Exhibit 11Leading States for Green as of Second Quarter

2007

I

2

3

4

5

6

7

8

9

10

State

California

Texas

New York

Minnesota

Colorado

Virginia

Wash. DC

Washington

Florida

Illinois

# BIdgs

219

91

13

20

39

27

24

17

28

13

Square Feet

51.952.382

27.942.442

12,580.084

1 1.381.738

M.244.380

8,468,423

7.803.610

7.649.214

7,209,186

6.326.489

% of Total

26.5%

14.2%

6.4%

5.8%

5.7%

4.3%

4.0%

3.9%

3.7%

3.2%

proportion of green buildings is still less than 1%of the existing stock. Cities like Seattle and Port-land are coming on strong as green leaders andeven Chicago hosts over 100 buildings with greenroofs as of 2008 (Exhibits 10 and 11). San Fran-cisco is requiring all new office buildings that are50,000 sq. ft. and larger to he Gold LEED-certifiedstarting in 2012 and many other cities are likelyto follow suit.

Will Tenants Pay More?The Government Services Administration (GSA)has no choice but to embrace Energy Star andLEED-certified buildings and has required asmuch. By 2010, all GSA-procured space will be En-ergy Star-rated. Many other public and privatecompanies have proclaimed intentions to go greenbut have found it difficult to do so. Among theseare PNC, Cisco, Toyota, IBM, DHL, PepsiCo, andothers. A green building is defined here as eitherEnergy Star-rated or LEED-certified at any level.All of the tenants listed in Exhibit 12 have hadsustainable business mission statements sincemid-2005, yet not all have been able to securegreen space or have been willing to pay for it. Onevicious cycle is that developers (Exhibit 13) claimthey cannot get rent premiums and tenants(Exhibit 14) don't demand green space while ten-ants claim it does not exist or they would demandit. ̂ 2

When asked at a NAIOP 2008 Green Conferencein Phoenix if they would pay more for a green

Exhibit 12Leading Owners for Green Office Buildings as of Second Quarter 2007

Owner tt BIdgs Square Feet % of Total

1

2

3

4

5

6

7

8

9

10

HinesTIAA-CREF

Vornado/Charles E. Smith Comm. Realty

Silverstein Properties Inc.

Beacon Capital Partners Inc.

The Blackstone Group

Manulife Financial

The Durst Organization

GE Capital

Maguire Properties

22

17

12

2

5

8

7

4

IS

4

12.878,2135,719,217

4.207.716

3.680.076

3.603.736

3.566,612

3,509,420

3,278,267

3.093.947

3.046,648

8.5%

3.8%

2.8%

2.4%

2.4%

2.4%

2.3%

2.2%

2.0%

2.0%



Exhibit 13Leading Developers of Green Office Buildings as of Second Quarter 2007

Developer » BIdgs Squ¿ire Feet % of Total

1

2

3

4

5

6

7

8

9

10

Hines

Vornado/Charles E. Smith Commercial Realty

The Durst Organization

Shorenstein Company LLC

Opus Northwest Corporation LLC

John Hancock Real Estate Finance Group

The Durst Organization/Bank of America

Trammell Crow Company

Texas Eastern Corporation

Maguire Properties

39

14

3

3

4

2

1

7

2

3

26,374,642

4,750,018

2,444,0J0

2,346,632

2,171.881

2.1 18,441

2,092,713

2,086,307

2,019,629

17.7%

3.2%

1 OOA.

1 ,0%

1,6%

1,6%

1.5%

1.4%

1,4%

1.4%

1.4%

Exhibit 14Leading Types of Tenants by Industry in Energy Star Office Buildings ^s of

Second Quarter 2007

1

2

3

4

5

6

7

8

9

10

1 1

12

13

14

15

16

Tenant Type

Financial Institutions

Law Firms

Retai Iers /Wholesalers

Manufacturing

Personal Services

Insurance

Agri / Mining/ Utilities

Business Services

Computers/Data Processing

Government

Accountants

Engineers/Architects

Real Estate

Communications

Medical

Transportation

Grand Total

# Tenants

968

822

694

240

588

305

205

560

245

127

196

148

367

98

178

70

5,811

Square Feet

20.228.058

18,407,157

12,275,254

9.704.599

7,969.667

7,012,850

6,271,296

5.478,659

5.218,630

5.161.872

4,003.835

3,876.718

2,215,196

1.603,219

1,516,067

1,465,971

112,409,048

% of Total

18,0%

16.4%

10.9%

8.6%

7.1%

6.2%

5,6%

4.9%

4.6%

4,6%

3,6%

3.4%

2.0%

1.4%

1.3%

1.3%

100,0%

building, the tenants uniformly said "No." But, this is obviously anecdotal, it does indicate how thewhen asked if they would pay the same for a non- framing of questions affects research conclusionsgreen building, all said they would pay less. While (Exhibit 15).

394 Vol. 14, No. 4, 2008

Does Green Pay Off?

Tenants with Sustainable

Tenant

CB Richard Ellis

Wells Fargo & Co-

BHP Billiton

Wachovia Corp,

U.S. General Ser Adm.

The Travelers Companies, Inc.

Goodrich Petroleum Corp.

Citigroup, Inc.

Citizens Financial Group, Inc,

StatOil

Calif, Transplant Donor Network

County of Los Angeles

State of California

Univ. of S. California

Principal Ufe Ins. Co,

TGS-Nopec Geophysical Co., LP

The Staubach Co.

Pay By Touch

Liberty Mutual Group, Inc.

Career Education Corp.

Jones Lang LaSalle Americas, Inc.

Source: CoStar.

BusinessMarch

Green Leases

13

9

7

66

6

5

5

5

4

4

•fr

4

•fr

4

-fr

44

4

-fr

4

Exhibit 1Goals and the2006 through

Green S F

123,188

69,378

454,381

99,895

345,469

285,695

8,031

89,249

112,746

124,798

21,512

78,978

86,463

39,757

25,504

35,211

39,903

92,936

57,705

126,608

24,259

5Percentage of GreenMarch 2008

Non-green Leases

42

66

0

65

50

7

0

93

17

0

0

6

22

0

4

0

7

1

31

4

14

Building Deals

Non-green SQ

421,528

844.821

0

770,198

2,691,310

43,103

0

948,606

119.248

0

0

106,888

31 5,1 10

0

56,713

0

149,1 19

23,984

333,488

87,130

142,769

from

% Green S F

23%

8%

100%

1 1 %

1 1 %

87%

100%

9%

49%

100%

100%

42%

22%

100%

3 1 %

100%

21%

79%

15%

59%

15%

ConclusionGreen does pay off. Tenant demand for green spaceis fairly new and not without its limits, but positiverent differentials do exist. Less skeptical tenantswilling to believe claims of potential benefits arebeginning to surface. Public and private companiesare starting to initiate and support resource andenergy conservation policies, and if they are seri-ous, they should be willing to seek out more en-vironmentally friendly buildings. In most localmarkets, green buildings remain a very smallproportion of total space, so finding green buildingscan be a challenge. Even without higher rents, inrecalcitrant markets there are higher occupancyrates and faster absorption, all of which translatesinto higher values that almost certainly exceed themarginal costs to go green. The findings indicatethat those buildings that do not reflect more effi-cient operating abilities as required by green build-ings will become obsolete much faster.

For those who have developed some experience inLEED certification and/or Energy Star ratings andplanned with experts early in the process of newconstruction or existing building conversion, thecosts to go green can be quite modest. As of 2008,there is still significant opportunity in terms of ex-isting building conversions and those investorswith portfolio strategies can take advantage of sev-eral economies of scale.

Contrary to popular opinion, the green movementis not purely public sector-driven, although a largenumber of cities are now mandating LEED certi-fication for certain sized buildings, usually 50,000square feet and up by the year 2012.̂ ^ Tenants likethe EPA and others within the federal governmentare important drivers but so is the typical publiccorporation today. The more typical tenants askingfor Energy Star ratings, LEED certification orhigh-performance building features are private



market-based firms. They may not admit to a will-ingness to pay more for green but they will pay lessfor non-green.

Private developers are leading the way in accom-modating this burgeoning demand. Some investorslike CALPERS have recently announced efforts toincrease their emphasis on green over the nextseveral years. Several cities, like Boston, Los An-geles or San Francisco, have mandated LEED cer-tification, while others, like Toronto, have providedincentives (i.e., rebates) for energy conservationmethods. A great local incentive that costs citiesvery little but saves developers significant moneyis the promise of faster entitlement and permitreviews and/or reduced permit fees or bonusdensities.̂ "*

More research is needed. Among the research mostneeded are new measures and tests of productivitychanges as a function of the building type andamenities. New measures are also needed forbuilding efficiency in terms of reconfiguration asinternal space needs change. None of the currentmeasures as used in Europe, the United States orAsia do a good job of capturing life cycle benefitsor reconfiguring savings from more sustainablebuildings.

Tbe USGBC has become a new world leader andstandard bearer. As such, it is hoped that LEEDstandards continue to evolve. The increasing reli-ance of cities on LEED certification systems andthe USGBC will likely cause backlogs and it maytake longer to become certified. The process of be-coming certified will evolve and could become moredifficult over time. Those who are risk averseshould consider going through the process beforethe scoring system changes and becomes more dif-ficult. It is not sufficient to be "certifiable."

There remain real economic barriers to progress.When property managers are paid extra adminis-trative fees on passed-through common area utilitycosts, they have fewer incentives to want to en-courage energy savings. Also problematic are typ-ical expense-pass-through net leases that do notbalance out the increased rent necessary to sup-port higher initial building and design costs withthe gains that will supposedly accrue but cannotbe guaranteed.

What is needed most is market transparency andbetter information along with measurement stan-dards that can be agreed upon domestically, if notglobally. LEED is a good start, but what is neededare more specific ratings on energy consumption,life cycle costing, and building productivity. Assuch rating systems evolve, the market's ability to"price" green will improve.

Appendix 1

Defining Green, Sustainable,Intelligent, and Secure Buildings

BREEAM: Started in the United Kingdom.BREEAM Buildings can be used to assess the en-vironmental performance of any type of building(new and existing). Standard versions exist forcommon building types and less common buildingtypes can be assessed against tailored criteria un-der the Bespoke BREEAM version. Buildings out-side the U.K. can also be assessed using BREEAMIntemational. For example, there are BREEAMassessment methods for schools, industrial build-ings, retail buildings, homes, offices, prisons, andmuch more. See http://www.breeam.org/index.jsp.

CABA: Continental Automated Buildings Associ-ation, based in Ottawa, Canada. CABA is a not-for-profit industry association that promotes ad-vanced technologies for the automation of homesand buildings in North America. CABA encouragesthe development, promotion, pursuit, and under-standing of integrated systems and automation inhomes and buildings.

CASBEE: To be nationally authorized in Japan,a cooperative academic, industrial, and govern-mental project has been to establish a new systemcalled the Comprehensive Assessment System forBuilding Environmental Efficiency (CASBEE). Seehttp://www.ibec.or.jp/CASBEE/english/index.htm.

Green: A term applied to practically everything inwhich energy savings and resources are conservedor re-used. More specifically, it is related to theLEED rating provided by the U.S. Green BuildingCouncil (USGBC) or the "Energy Star" ratingprovided by the U.S. Environmental ProtectionAgency (EPA). Many other measurements of green

396 Vol. 14. No. 4. 2008

Does Green Pay Off?

exist around the world, hut none measure buildingproductivity as of 2008.

Green Globes: The Green Globes system is abuilding environmental design and managementtool. It delivers an online assessment protocol, rat-ing system and guidance for green building design,operation and management. The genesis of the sys-tem was the Building Research Establishment'sEnvironmental Assessment Method (BREEAM.The Green Globes system is used in Canada andthe U.S. In the USA, Green Globes is owned andoperated by the Green Building Initiative (GBI). InCanada, the version for existing buildings is ownedand operated by BOMA Canada under the brandname 'Go Green' (Visez vert). The Green Globessystem has also been used by the ContinentalAssociation for Buiiding Automation (CABA) topower a building intelligence tool, called BuildingIntelligence Quotient (BiQ). In 2004, Green Globesfor Existing Buildings was adopted by the BuildingOwners and Manufacturers Association of Canada(BOMA), where it operates under the name GoGreen Plus. In addition, the Green Building Initia-tive (GBI) acquired the rights to distribute GreenGlobes in the U.S. In 2005, GBI became the firstgreen building organization to be accredited as astandards developer by the American NationalStandards Institute (ANSI), and began the processof establishing Green Globes as an official ANSIstandard. The GBI ANSI technical committee wasformed in early 2006. See http;//www.greenglobes.com.

Green Star: Started by the Green Building Coun-cil of Australia (GBCA) in 2002, it is a national,not-for-profit organization that is committed to de-veloping a sustainable property industry for Aus-tralia by encouraging the adoption of green build-ing practices. It is uniquely supported by bothindustry and governments across the country. Itskey objectives are to drive the transition of theAustralian property industry towards sustainabil-ity by promoting green building programs, tech-nologies, design practices, and operations, as wellas the integration of green building initiatives intomainstream design, construction, and operation ofbuildings. See http://www.gbca.org.au/

Energy Star: In 1992, the U.S. EnvironmentalProtection Agency (EPA) introduced Energy Star

as a voluntary labeling program designed to iden-tify and promote energy-efficient products to re-duce greenhouse gas emissions. A few years ago,the EPA extended the label to cover new homesand commercial and industrial buildings. Thoserated as among the most 25% energy efficient aregiven the Energy Star rating. Over time, this rat-ing should become more difficult to achieve sinceit is a relative score as opposed to an absolute scorelike the LEED ratings.

LEED: LEED is a product of the U.S. Green Build-ing Council. It stands for Leadership in Energyand Environmental Design and applies to the de-sign, building materials used, and operation of thebuilding. Points are awarded for sustainability, wa-ter efficiency, energy and atmosphere, materialsand resources, indoor environmental quality, anddesign innovation. It is intended as a hurdle thatonly 25% of existing buildings will pass at the cer-tified level with little additional cost. Higher pointscores can result in Silver, Gold, and Platinum rat-ings. Over time, LEED point systems will be re-vised. Categories that can achieve ratings includenew construction, existing buildings, commercialinteriors, core and shell, homes or even neighbor-hood developments.

Sustainable: A system that on a "net" basis doesnot deplete resources. With respect to sustainabledevelopment, the focus includes all those elementscommon to green buildings, as well as sites thatare sustainable with indigenous plantscaping, cap-turing "gray" water that has been used and rain-water, and designed to minimize transport costs.Mixed-use developments where people can work,live, go to school, and play are a natural exten-sion of sustainable development. Two good exam-ples are Stapleton, Colorado (see http://www.stapletondenver.com/) and Birkdale Village, innorth Charlotte, North Carolina {see http://www.birkdalevillage.net/welcome.htm).

Intelligent: The term for an adaptable buildingthat is likely green and also easy to retrofit or re-model for changing internal configurations anduses (also known as a High Performance Building).Such buildings have longer economic lives and costmuch less to occupy. Typical elements of an intel-ligent building are modular fioor units, removablewalls, under fioor venting and wiring for phones



and data, motion sensor cameras and much moreall on whips that are easy to re-configure. Back-upsystems may include several sources of power andgenerators with battery hack-ups and safe air/wa-ter storage systems. An example of an intelligentbuilding would be ABN AMRO in Chicago Seehttp: // www.hines.com /property / detail.aspx ? id ^156 or http://www.buildings.com/articles/detail.aspx?contentID^2128. See also http://www.intelligentbuildingstoday.com/ and http://www.caba.org/index.html.

Secure Buildings: After September 11, 2001, anumber of new security measures came to be inmany buildings. Some of these features include ac-cess control for visitors and maintenance staff.Other features include surveillance, back-uppower, air, water, and emergency plans. Securebuildings have several redundant systems. Securebuildings may be intelligent, but are not alwaysgreen.

USGBC: The U.S. Green Building Council(USGBC) is a non-profit composed of leaders fromevery sector of the building industry working topromote buildings that are environmentally re-sponsible, profitable, and healthy places to live andwork. More than 11,000 member organizations and75 regional chapters are united to advance themission of transforming the building industry tosustainability. See http://www.usgbc.org.

Appendix 2Exhibit A-1:

The FinancJal Benefits of Going Green AreMostly Related to Productivity

Financial Benefits of Green BuildingsSummary of Findings (per

Endnotes

CategoryEnergy Savings

Emissions Savings

Water Savings

Operations and MaintenanceSavingsProductivity and Health Value

Subtotal

Average Extra Cost of BuildingGreen

Total 20-year Net Benefit

20-year Net PresentValue

$5.80$1.20

$0.50

$8.50

$36.90 to $55.30

$52.90 to $71.30

(-3.00 to -$5.00)$50 to $65

1. See The Costs and Benefits of High Performance Buildings:Lessons Learned, published by Earth Day New York. 2007which includes a compilation of excellent articles on per-formance measures. See also "User Effective Buildings" byAardex Corporation, 2004.

2. Costs to upgrade existing huildings to various LEED cer-tification levels allow for great economies of scale when alarge number of similar buildings are heing retrofitted.This is the low hanging fruit that astute investors havealready been exploiting with extremely high payoffs.

3. Faster absorption is almost always mentioned hy develop-ers who have invested in LEED or Energy Star huildingseven if they do not observe higher rents. We have no datato support the absorption claim at this time hut have noreason to question its validity.

4. See "Top Executives Are Embracing Corporate Responsi-bility" by Anne Moore Odell from SocialFunds.com as re-ported in GreenBizxom. See http://www.greenbiz.com/news/reviews_third.cfm?NewsID=35955 Summer, 2007.

5. While anecdotal in nature, when several tenants includingCisco, PNC, IBM, Toyota, and PepsiCo where asked if theywould pay more rent for a green building uniformly said"No," hut added that they would pay less for a building thatwas not green, so part ofthe problem is one of framing andperspective.

6. These are surveys by the authors with a modest sample ofonly 26 respondents, so we do not suggest these aredefinitive.

7. See www.portlandonline.com/osd/index.cfm?c=4167&a=114662.

8. See www.dsire.org which lists incentives and many regu-lations by geographic area or state legislature sites likehttp://www.leginfo.ca.gov/index.html or AIA at http://www. ai a. org/susn_rc_ default

9. See Jerry Yudelson, "Green Building Incentives That Work:A Closer Look at How Local Governments Are Incentiviz-ing Green Development," for NAIOP Research Foundation,November 2007.

10. Survey by AJA and the Developers Roundtable at the endof 2007. Source: www.Metrogreenbusiness.com/news.

11. We note that the new system will likely he 100 points plus10 points for regional factors and innovation.

12. Nico Rottke, Ph.D. European Business School, San Diegopresentation, July 1, 2008.

13. For example, Los Angeles will require LEED certificationby 2012 while San Francisco will require Gold LEED cer-tification for office huildings of 50,000 square feet or more.

14. Costa Mesa, California and others have adopted such in-centives. See DSIRE, the Database of State Incentives forRenewables and Efficiency at http://www.dsireusa.org/library/includes/incentiveupdated.cfm?&CurrentPageID =

ReferencesSource: Capital E Analysis Aardex Corporation. User Effective Buildings, 2004.

398 Vol. M, No. 4, 2008

Does Green Pay Off?

Big and Green: Toward Sustainable Architecture in the 21"*Century, Edited by David Gissen, Princeton ArchitecturalPress, New York, NY, 2002.Eichholtz, P., N. Kok, and J, Quigley. Doing Well By DoingGood? Green Office Buildings. Working paper. Fisher Centerfor Real Estate and Urban Economics, UC Berkeley, April,2008.Fuerst, F, and P. McAllister, Pricing Sustainability: An Empir-ical Investigation of the Value Impacts of Green Building Cer-tification, working paper presented at ARES, April, 2008.Green Review. Building Design and Construction. White paper,November, 2006.Kats, G. The Costs and Benefits of Green. A Report to Galifor-nia's Sustainable Building Task Force, Capital E Analytics, Oc-tober, 2003,Kohlhepp, D. The Greening of One Potomac Yard, PowerPointpresentation. Crescent Resources LLC, 2006.

RICS. Green Value: Green Buildings, Growing Assets. London,2005.Scheer, R. and R. Woods. Is There Green in Going Green?,SBM, April, 2007.RICS, GLEEDS, and the Forum for the Future. Surveying Sus-tainability: A Short Guide for the Property Professional. New-north Printers, June, 2007.

The Costs and Benefits of High Performance Buildings: Les-sons Learned, Earth Day, New York, 2007.Yudelson, J. Green Building Incentives That Work: A CloserLook at How Local Governments Are Incentivizing Green De-velopment. NAIOP Research Foundation, November, 2007.

Assistance has been provided by Sean Hlavac andJeryldine Tully from the Burnham-Moores Center forReal Estate.


miller, norm, jay spivey, and andrew florance (2008)

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