In the summer of 2008, a study I authored with two colleagues (Jonathan A. Wiley and Ken H. Johnson) was published by the Journal of Real Estate Finance and Economics in their Online First section. It appeared in their print version sometime later.
The title of the study was “Green Design and the Market for Commercial Office Space.” The main finding of the study was that sustainable (or efficient or “green”) design features had an impact on market rents for office space. Since values for commercial property are based on rents, “green” design features also had an impact on sales prices for those office properties.
This was an academic study that used a lot of high-powered economic modeling, which resulted in a lot of statistics. The rent premium and the sales premium were robust and economically meaningful. In other words, these premia were big, and they did not go away with different models or data. How big? The rent premium associated with LEED certified properties was about 16%, the LEED certified properties enjoyed occupancy levels about 17% higher than average, and the sales premium for LEED certified properties was about $129 per square foot.
At the time of the study, “green” design was not really on the radar screen for most market participants. There were relatively few sustainable properties in any given sample market. What we took from the analysis was that additional sustainable space was likely to be delivered to the marketplace, given the premia we identified. As that space became available, the premia associated with rents and sales prices would decrease.
However, the important part of our discussion was that the premia we found could not be fully explained away by reduced operating costs related to resource efficiency. In other words, something else was driving at least part of that rental premium.
Fast forward a bit more than a decade, and the “something else” has become clear: tenants desire to rent space in sustainable buildings to recognize the associated cost savings and to bolster their reputation as a “green” company. Customers have become increasingly conscious about doing business with sustainable firms. It is hard to claim sustainability when your company’s headquarters has a carbon footprint the size of a small country and was built using environmentally disruptive building practices.
Beyond that, certain large groups of investors now demand a certain level of sustainability in order to invest in a company. Over a quarter of the funds flowing into open-end mutual funds and exchange-traded funds (ETFs) in 2020 flowed into environmental, social and governance (ESG) related funds. Refusing to consider how the space a firm owns or rents impacts the environmental component of their ESG score can alienate an increasingly large swath of investors, and reduced demand for any good, including stocks, results in lower prices.
“Green” building is necessary these days to help maximize stock prices, and Corporate America has
taken note.
Justin D. Benefield
Faculty Director
Leadership Program
‘Green’ Building Helps Keep Companies in the Black
