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Studium Generale, October
Piet EichholtzMaastricht University
Sustainable Buildings:Performance, Users, Investors
“Green” building in the marketplace?Top-10 “green” commercial office markets
Commercial property and “green” investmentsIndustry can play crucial role in reducing carbon emissions
• Property industry consumes resources and pollutes• 40% of global consumption raw materials (even 55% of wood)• At least 30% of global CO2 emissions• Energy represents 7–9% of total occupancy cost
• Many energy-efficiency investments in property have positive net present value …
• Better insulation, technology, and building management all create shareholder value at current energy prices (McKinsey, 2009)
• First evidence shows very high IRR’s for energy investments• Academic studies show indirect returns on “green” or energy efficiency
• … so “green” property investments often do not conflict with financial goals of (institutional) investors
Do we still see economic effects of green labels?Investment dynamics and the source of green increments
Sample of 28,000 office buildings (2009 cross section), 3,000 of which are certified by EPA or USGBC
1. New evidence on the 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 leading building-level sustainability labels
LEED and Energy Star
How do we measure greenness?LEED and Energy Star
LEED The program has been initiated by the US Green Building
Council (USGBC). LEED covers six different components of sustainability, including
energy performance and material selection. Lower operating costs and healthier and safer working
environments for occupants.
Energy Star Founded in 1992 by the U.S. Environment Protection Agency
(EPA) and the U.S. Department of Energy (DOE). Energy star evaluates the efficiency of buildings‘ energy use with
respect to a base building of similar size and quality. 35 percent less energy consumption and 35 percent less carbon
dioxide emission than average uncertified building.
Example: 101 California St, San FranciscoEnergy Star certified, LEED Gold
Example: 101 California St, San FranciscoEnergy Star certified, LEED Gold
MethodologyHow to further correct for differences in location and quality?
Standard real estate valuation framework
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
Findings and implicationsEco-investment real estate sector is not only “doing good”
Ceteris paribus, green buildings1. Have higher rents by 2-5%2. Have higher, and more stable, occupancy3. Have higher effective rents by 6-7%4. 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.
This 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?
Further regression results There seems to be an optimal LEED rating
Information on Energy Star-rated buildingsEmissions are substantial, and energy savings create value
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 A $1 saving in energy costs is associated with an increase in
effective rent of 95 cents 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 on building performanceLEED and Energy Star labels seem to be complimentary
Effects on rent and value still present despite economic crisis and increased supply of green office space
The green value effects are systematically related to the underlying characteristics of energy efficiency or “sustainability”
Market seems to be relatively efficient in pricing these aspects
LEED and Energy Star measure somewhat different aspects of “sustainability” and complement each other
Low correlation between LEED-score and EUI-score Low correlation between LEED score and energy consumption
Why would users rent green (and pay more)?Theoretical framework
1. Direct economic benefits Lower service costs of housing by reduced energy costs Higher employee productivity
2. Indirect economic benefits: Improved reputation and image Investors – cost of capital Employees – labor market Customers – sales and prices
3. Ethical behavior “Do the right thing” Non-profit, government, and governmental organizations
Incidence of Green Space Utilization by Major Tenants Fraction of Firm’s Office Space Housed in Green Buildings
Space Occupied (1) (2) (3)
Tenant Name Green Office
Space
Total Space CoStar
Green as
Fraction of Total Space CoStar
x 1000 sq. ft. x 1000 sq. ft. % Wells Fargo Bank 2,741 7,343 37.33% United States Government 2,415 14,631 16.50% Bank of America 2,124 18,695 11.36% ABN AMRO 1,724 2,993 57.60% State of California 1,568 5,706 27.49% Deloitte & Touche 1,554 5,131 30.28% Best Buy 1,500 2,104 71.31% U.S. Dept. of Health & Human Sc. 1,442 1,662 86.72% Shell 1,362 3,989 34.14% Chevron 1,229 6,181 19.88% Blue Cross & Blue Shield 1,211 12,251 9.89% Adobe Systems 1,158 1,388 83.43% Compuware Corporation 1,094 1,300 84.18% American Express 1,018 6,754 15.07% The Vanguard Group 990 1,569 63.07% Cal/EPA 950 950 100.00% Mitre Corporation 944 1,293 73.02% JP Morgan Chase 907 10,670 8.50% Skadden 889 1,751 50.77% Ernst & Young 864 4,149 20.83%
Green space utilization of major tenantsFraction of firm’s office space housed in green buildings
Incidence of Green Space Utilization by Industry Fraction of Office Space Housed in Green Buildings by Four-Digit SIC
Space Occupied (1) (2) (3)
SIC Code Industry Description Green Office
Space
Total Office Space CoStar
Green as Fraction of Total Space
CoStar x 1000 sq. ft. x 1000 sq. ft. % 8111 Legal Services 25,593 217,097 11.79% 6021 National Commercial Banks 9,436 86,782 10.87% 9199 Executive, Legislative and General Office 9,035 67,081 13.47% 1311 Crude Petroleum and Gas 7,076 11,304 62.60% 6282 Investment Advice 6,532 100,939 6.47% 8721 Accounting, Auditing, and Bookkeeping Services 5,158 136,766 3.77% 5731 Radio, Television, and Consumer Electronics Stores 1,531 3,888 39.37% 9311 Public Finance, Taxation, and Monetary Policy 822 14,491 5.67% 7373 Computer Integrated Systems Design 816 19,487 4.19% 3812 Search, Detection, Navigation, Guidance, … 291 4,869 5.97% 2759 Commercial Printing, NEC 287 3,996 7.17% 3069 Fabricated Rubber Products, NEC 285 769 37.08% 4731 Arrangement Transportation of Freight and Cargo 282 8,348 3.38% 9621 Regulations and Adm. of Transportation Programs 280 9,115 3.07% 7997 Membership Sports and Recreation Clubs 274 1,696 16.15% 8641 Civic, Social, and Fraternal Associations 274 14,362 1.91% 2086 Bottled and Canned Soft Drinks, Carbonated Waters 261 5,037 5.19% 5411 Grocery Stores 253 8,363 3.03% 4724 Travel Agencies 252 7,539 3.34% 6552 Land Subdividers and Developers, 250 9,676 2.58%
Green space utilization per industryFraction of office space located in green buildings
And what do property investors do?Portfolio greenness and the financial performance of REITs
The aim of the paper is twofold:
1. Identify the green properties owned by Real Estate Investment Trusts (REITs) The first study that identifies the portfolio greenness of REITs
2. Investigate the effect of portfolio greenness on the financial performance of REITs Dynamic measure of portfolio greenness Two channels
Benefits at property level Benefits from making CSR investments
Causality issues
Green buildings in the portfolios of US REITsincreasing number of green properties
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
100
200
300
400
500
600
700
800
0
10
20
30
40
50
60
70
80
# of REITs owning Leed Certified Properties # of REITs owning Leed Registered Properties
# of Leed Certified Properties # of Leed Registered Properties
# of
Pro
pert
ies
# of
RE
ITs
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
100
200
300
400
500
600
700
800
900
1000
0
10
20
30
40
50
60
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# of REITs owning Energy Star Certified Properties # of Energystar Certified Properties
# of
Pro
pert
ies
# of
RE
ITs
Energy Star
LEED
Model
We estimate the following set of equations:
where i stands for REIT i, and t stands for year t.
Greenness stands for Number of Certified and Sqft of Certified properties for both LEED and Energy Star certifications.
2 instruments in the first stage: The weighted locational greenness (WLG) The weighted locational green policy (WLGPL)
Financial Performance stands for ROA, ROE, Funds from Operations (FFO)/Total Revenue, Alpha and Beta
Operating performance – ROA (1) (2) (3) (4)
VARIABLES LEED LEED Energy Star
Energy Star
Number_Certified 3.42*** 0.90
(Predicted) [1.26] [0.61]
Sqft_Certified 3.46* 0.31*
(Predicted) [1.78] [0.18]
Total Assets -0.33** -0.95** -0.73* -0.73
(in log) [0.15] [0.46] [0.40] [0.45]
Price-Book Ratio -0.01 0.01 0.00 0.01
[0.01] [0.01] [0.01] [0.01]
RE Investment Growth 0.01*** 0.01*** 0.01*** 0.01**
[0.00] [0.00] [0.00] [0.00]
Age 0.06*** 0.05** 0.07*** 0.06***
(years, in log) [0.02] [0.02] [0.02] [0.01]
Year-Fixed Effects Y Y Y YProperty Type Y Y Y YConstant Y Y Y YObservations 972 887 972 887
Operating performance – ROE (1) (2) (3) (4)
VARIABLES LEED LEED Energy Star
Energy Star
Number_Certified 7.92*** 2.05
(Predicted) [2.99] [1.40]
Sqft_Certified 7.39* 0.66*
(Predicted) [3.83] [0.35]
Total Assets -0.32 -1.05 -1.23 -0.56
(in log) [0.53] [0.72] [1.02] [0.62]
Price-Book Ratio -0.02 0.00 -0.01 0.00
[0.03] [0.03] [0.03] [0.03]
RE Investment Growth 0.02*** 0.03*** 0.04*** 0.03***
[0.01] [0.01] [0.01] [0.01]
Age 0.09* 0.06 0.10** 0.08**
(years, in log) [0.05] [0.06] [0.04] [0.04]
Year-Fixed Effects Y Y Y YProperty Type Y Y Y YConstant Y Y Y YObservations 972 887 972 887
Stock performance – Alpha (1) (2) (3) (4)
VARIABLES LEED LEED Energy Star
Energy Star
Number_Certified 0.043 0.031
(Predicted) [0.095] [0.028]
Sqft_Certified 0.107 0.007
(Predicted) [0.144] [0.010]
Total Assets -0.022* -0.046* -0.049* -0.035**
(in log) [0.012] [0.027] [0.026] [0.017]
Price-Book Ratio 0.000 0.001** 0.001* 0.001**
[0.000] [0.000] [0.000] [0.001]
RE Investment Growth 0.001*** 0.001*** 0.001*** 0.001***
[0.000] [0.000] [0.000] [0.000]
Age -0.000 -0.001 -0.000 -0.001
(years, in log) [0.001] [0.002] [0.001] [0.001]
Year-Fixed Effects Y Y Y YProperty Type Y Y Y YConstant Y Y Y YObservations 716 637 716 637
Stock performance – Beta (1) (2) (3) (4)
VARIABLES LEED LEED Energy Star
Energy Star
Number_Certified -0.140** -0.034*
(Predicted) [0.063] [0.019]
Sqft_Certified -0.173 -0.011**
(Predicted) [0.111] [0.006]
Total Assets 0.194*** 0.207*** 0.217*** 0.189***
(in log) [0.009] [0.019] [0.018] [0.009]
Price-Book Ratio -0.001** -0.001*** -0.001*** -0.001***
[0.000] [0.000] [0.000] [0.000]
RE Investment Growth 0.000*** 0.000 -0.000 0.000***
[0.000] [0.000] [0.000] [0.000]
Age 0.001 0.002 0.001 0.001
(years, in log) [0.001] [0.002] [0.001] [0.001]
Year-Fixed Effects Y Y Y YProperty Type Y Y Y YConstant Y Y Y YObservations 716 637 716 637
Main Findings 1% and 6% of the REIT property portfolios are green-certified in
2010 for LEED and Energy Star, respectively.
Portfolio greenness enhances operating performance proxied by ROA, ROE and FFO/Total Revenue. Different from analysis of financial performance of green
properties, these measures are net of costs.
No effect of greenness on abnormal stock returns, indicating that market already corrects for portfolio greenness.
Portfolio greenness decreases market risk. More, and more stable, occupancy of green buildings Green properties less exposed to energy price fluctuations
For questions and remarks:
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