the economics of green building
TRANSCRIPT
The Economics of Green Building
Transatlantic Evidence
Nils Kok UC Berkeley
Maastricht University
Connecticut Green Building Council October 2010
Energy and buildings Property sector consumes and pollutes
Carbon emissions and buildings are closely related 30% of global CO2 emissions 70% of U.S. electricity consumption
Impact of energy costs directly affects tenants and investors Energy costs are single largest expense in provision of office space
30% of operating expenses Energy represents 10% of total occupancy cost
Salience can only increase with rising energy prices
Awareness is growing… Legislation
US: Waxman-Markey bill Europe: EPBD, CRC
Corporate real estate as part of CSR policy (e.g., Chevron, BoA, …) “Sustainable” property funds (e.g., Hines/CalPERS)
Usage of “green building” in the popular press…
…and visitors at the “Greenbuild” conference
“Green” building in the marketplace? Top-10 “green” commercial office markets
Economic significance of “green” building Implications upon the market for commercial space Trends in “green” building may have economic implications
A higher initial outlay… Not clear how much higher (0 – 20%) ‘Smarter’ building managers/software
… may be compensated by “green” value drivers Cost savings
Energy savings (up to 35%) Emission reduction
Increased rents Reputation effects Improved indoor air quality
Increased economic lives, reduced depreciation
Case studies on the economic implications Focus often on new buildings Results are hard to generalize
Economic value of “green” label? Academic research on Energy Star and LEED certification
Sample of 28,000 office buildings (2009 cross section), 3,000 of which are certified by EPA or USGBC
1. Evidence on economic premium for green office buildings Rigorous control for quality differences (PSM) Label vintage
2. Identify the sources of rent and value increments Explicit link to
EPAs measures of energy efficiency USGBC measures of “sustainability”
Sample of 8,000 office buildings (2007 – 2009 panel), 694 of which are certified by EPAs Energy Star or the U.S. Green Building Council
3. Short-run price dynamics of green office buildings Returns during turbulent 2007 – 2009 period
“Green” buildings Two programs: Energy Star (EPA) and LEED (USGBC)
Dataset of existing sustainable office properties (U.S.) EPAs Energy Star for Commercial Buildings (1995)
Efficiency in source energy use is in top quarter relative to CBECS Standardized for building use (occupancy, hours) and climate Certified by professional engineer Based on real energy consumption (at least one year of bills)
USGBCs Leadership in Energy and Environmental Design (1999) Scoring systems based on 6 components of “sustainability” Energy efficiency is just one component Various systems and versions (eg. NC, EB, O&M, ...) Based on design stage (and now verified after construction)
Similar programs exist in Australia, Japan, the UK, …
Example: 101 California St, San Francisco Energy Star certified, LEED Gold
Defining conventional comparables Systematic match on location Based upon longitude and latitude, we use GIS to identify all
conventional office buildings in a 0.25 mile radius
Example: 101 California St, San Francisco Energy Star certified, LEED Gold
Clusters of “green” and control buildings Minimum of one control building per cluster
Chicago, IL Houston, TX Columbus, OH
Evidence on the “green” premium Cross section of green buildings at the end of 2009
October 2009 sampling of green office buildings Rental sample
1,943 green buildings 18,858 control buildings
Transaction sample 744 green buildings 5,249 control buildings
To further control for differences in quality, we estimate a propensity score for each building (Rosenbaum and Rubin, 1983) The probability ρ that a building is certified, as a function of its hedonic
characteristics
Green buildings and conventional comparables Propensity score weighting substantially reduces differences
Methodology How to further correct for differences in location and quality? Standard real estate valuation framework
(1)
Rin is the rent, effective rent, or transaction price per sq.ft. Xi is a vector of hedonic characteristics
Size, age, renovation, class, amenities, public transport, … Percent change in employment in service sector (CBSA) to control
for regional variation in demand for office space Cluster cn dummies to control for location – 1,943 (744) separate
dummies in the rental (transaction) sample gi = dummy variable if building i has green label Dummy variables for year of sale in transaction sample
Propensity-weighted regression results Market implications of Energy Star and LEED
Conclusions and implications (I) Eco-investment real estate sector is not only “doing good”
Ceteris Paribus, green buildings 1. Have Higher Rents by 2-6% 2. Have Higher Effective Rents by 6-8% 3. Have Higher Selling Prices by 11-13%
The average non-green building in the rental sample would be worth $5.6 M more if it were converted to green.
The average non-green building sold in 2004-2009 would have been worth $11.1 M more if it had been converted to green.
The implied cap rate (3%) suggests that property investors value the lower risk premium inherent in certified commercial office buildings
The missing piece…what are the costs of “greening” properties?
The greener the better? Unique premium for each “green” building What is the relation between the variation in the “green” premium
and the LEED-score or energy consumption?
The increment to rent or market value for green buildings varies:
Detailed information on LEED-rated buildings Standardized indices of buildings’ sustainability
For 209 (103) LEED-rated buildings, we have information on:
The sources of economic premiums for “green” Relating the premium to LEED and Energy Star data
Relating increments in rent and market value to the characteristics of LEED and Energy Star-rated buildings:
(2)
Estimated by GLS (Hanushek 1974)
Regression results (I) The rental increment for LEED rated buildings
LEED-certified, score 40: effective rent of 2 percent higher than otherwise identical, registered building
LEED-certified, score 60: effective rent of 20 percent higher Energy Star and LEED are complementary
Interpretation of regression results The increment for LEED rated buildings
Information on Energy Star-rated buildings Emissions of efficient buildings are substantial…
For 1,719 Energy Star-rated buildings, we have information on:
Average emission of a building in our sample: 4,326 tons of CO2 750 cars, 9,000 barrels of oil, … Energy Star-rated buildings emit at least a quarter less carbon as
compared to conventional office buildings
Regression results (I) The rental increment for Energy Star rated buildings
A $1 saving in energy costs is associated with an increase in effective rent of 95 cents
Regression results (II) The transaction increment for Energy Star rated buildings Energy efficiency is reflected in “green” price increment
A $1 saving in energy costs is associated with a 4.9 percent premium in market capitalization, which is equivalent to $13/sq.ft.
This implies a cap rate of about 8 percent
Conclusions and implications (II) LEED and Energy Star labels seem to be complimentary
The green increment is systematically related to the underlying characteristics of energy efficiency or “sustainability” Market seems to be relatively efficient in pricing these aspects
Direct capitalization of energy efficiency important information for investments in building retrofits
LEED and Energy Star measure somewhat different aspects of “sustainability” and complement each other Low correlation between LEED-score and EUI-score
2007 – 2009 office market dynamics Office rents, vacancy rate, and unemployment
Office rents –30%
Vacancy rate +40%
Unemployment +115%
2007 – 2009 office market dynamics Office rents, vacancy rate, and unemployment
Unemployment x2
Office rents –30%
Vacancy rate +30%
(3)
Rint is the rent or effective rent per sq.ft. Xit is a vector of hedonic characteristics
Size, age, renovation, class, amenities, public transport, … Cluster cn dummies to control for location – 694 separate dummies git is a green dummy
Short-run price dynamics of green buildings Substantial increase in rated space in a contracting economy 8,182 observations as of September 2007
694 rated buildings and 7,488 nearby control buildings Rents, occupancy rates, effective rents
Same sample matched to financial information in October 2009 Drop buildings that were converted to “green” during the sample period
We estimate developments in rents, occupancy rate, effective rents:
€
logRint = α0 +αt + βiΧ it + γ ncn +δtgit +ε intn=1
N
∑
Results: rental levels and green ratings The “green” premium has slightly declined….
Regression results: logarithmic changes in rent Returns to “green” comparable to (high quality) buildings
Conclusions and implications (III) “Green” is getting mainstream Increased awareness of energy efficiency and the role of the real
estate sector have increased attention upon “green” building
Energy efficient and sustainable office space is now a large share of the commercial property sector -- getting mainstream
This may have economic implications for investors, tenants, and policymakers
Buildings certified by Energy Star or LEED command higher rents and prices in the marketplace The “green premium” has slightly decreased during a period of volatility
in property markets…
…but the relative rents of green buildings have remained unchanged compared to identical conventional buildings
Conclusions and implications LEED and Energy Star labels seem to be complimentary
Market seems to be relatively efficient in pricing aspects of “sustainability”
Implications for investors: These developments will affect the existing stock of non-certified office
buildings Environmental characteristics are a risk factor that should be priced in
Policy implications: Modest programs by government and non-profit institutes to provide
information are effective and incorporated by market participants Directly affects energy consumption (and emissions) More aggressive policies?
What happens in Europe… (?)
EU Energy Performance of Buildings Directive Originated January 2003, revised December 2009
“Member states shall ensure that, when buildings are constructed, sold or rented out, an energy performance certificate is made available by the owner to the prospective buyer or tenant”
Program evaluation of energy labels…Energy certificates, efficiency, and market pricing 1. The adoption process:
Adoption rate dynamics Adoption determinants
2. The influence of energy certificates on the transaction prices of dwellings Attempt to disentangle labeling effects in:
Quality of home Energy features
3. The real energy use (gas and electricity) for all individual dwellings What determines energy consumption? How strong is the link between EPC and usage? Is energy use capitalized? (for labeled versus non-labeled dwellings)
The laboratory The Netherlands introduced energy certificates in Jan 2008
Stylized facts:
Population: 16.5 mln. Homes: 7.2 mln. Ownership: 55% Temperature: 50 F
(34 F–64 F)
Average home price: $322,000 Net mortgage: $1,120/month Gas bill: $133/month Electricity bill: $74/month
Adoption rate Diffusion slows down, but higher in “weak” regions
Adoption rate Diffusion slows down, but higher in “weak” regions
Energy labels and home prices Energy efficiency is clearly reflected…
Energy labels are incorporated in prices Partial reflection of NPV energy savings
Labels will become mandatory (per EU regulation)
Private homebuyers take labels into account
What about tenants? Labels will become part of rental policies
Labels are “popular” in the commercial property market Green procurement GSAs (minimum label C, or two label steps) Pressure of corporate tenants
