Why Do Companies Rent Green?Why Do Companies Rent Green?Real Property and Corporate Real Property and Corporate

Social ResponsibilitySocial Responsibility

ERES ConferenceERES ConferenceStockholmStockholmJune 2009June 2009

Piet EichholtzPiet EichholtzUniversity of University of MaastrichtMaastricht

John QuigleyJohn QuigleyUniversity of CaliforniaUniversity of California

BerkeleyBerkeley

Nils KokNils KokUniversity of University of MaastrichtMaastricht

Why Do Commercial Tenants Choose to Rent in Green

Buildings?1.1. Well-publicized announcements by large Well-publicized announcements by large

firms firms

TNT GroupTNT Group

2.2. No attention from students of management No attention from students of management and real estateand real estate

3.3. Important reasons to knowImportant reasons to know

Economic Value of Green Buildings

1.1. Higher rentsHigher rents

2.2. Higher occupancy levelsHigher occupancy levels

3.3. Less volatility in rentsLess volatility in rents

Some firms have a “preference” for green spaceSome firms have a “preference” for green space

Why understand those preferences?Why understand those preferences?

1.1. To undertake green development, understand potential To undertake green development, understand potential demanddemand

2.2. To understand scope for voluntary measures to To understand scope for voluntary measures to promote green investmentspromote green investments

CSR and Real Property

1.1. Direct Economic BenefitsDirect Economic BenefitsA.A. Reduced energy costsReduced energy costs

B.B. Higher productivity (?)Higher productivity (?)

2.2. Indirect BenefitsIndirect BenefitsA.A. Corporate reputationCorporate reputation

B.B. Reduced stakeholder pressureReduced stakeholder pressure

C.C. Attract investors, lower ratesAttract investors, lower rates

D.D. Attract customersAttract customers

3.3. Risk AvoidanceRisk AvoidanceLitigation, regulationLitigation, regulation

4.4. Ethical BehaviorEthical Behavior

Six PropositionsProposition IProposition I:: Firms in the tertiary sector, i.e. the service industry, profit Firms in the tertiary sector, i.e. the service industry, profit most from the cost savings and the improved working environment of most from the cost savings and the improved working environment of green office buildings. Therefore, they will have a higher likelihood of green office buildings. Therefore, they will have a higher likelihood of renting green office space.renting green office space.

Proposition IIProposition II:: As stakeholder pressure regarding CSR is mainly As stakeholder pressure regarding CSR is mainly directed at the largest and most visible firms in an industry, these are directed at the largest and most visible firms in an industry, these are more likely to act in a social and environmentally “responsible” manner more likely to act in a social and environmentally “responsible” manner and will therefore have a higher likelihood of leasing green office space.and will therefore have a higher likelihood of leasing green office space.

Proposition IIIProposition III:: Firms with environmentally sensitivie operations will be Firms with environmentally sensitivie operations will be more likely to leasing green office space, as this can help to offset more likely to leasing green office space, as this can help to offset otherwise more negative corporate images.otherwise more negative corporate images.

Six PropositionsProposition IVProposition IV:: Firms in industries that are dependent on Firms in industries that are dependent on high levels of human capital and high wage workers are high levels of human capital and high wage workers are more likely to rent office space in green buildings.more likely to rent office space in green buildings.

Proposition VProposition V:: Government, government-related Government, government-related organizations, and non-profit institutions are more likely to organizations, and non-profit institutions are more likely to act in socially-responsible ways, and thus to lease to green act in socially-responsible ways, and thus to lease to green space, as monetary factors are of less importance. The space, as monetary factors are of less importance. The possibly higher cost of leasing green space can be more possibly higher cost of leasing green space can be more easily passed on to the taxpayer or sponsors.easily passed on to the taxpayer or sponsors.

Proposition VIProposition VI:: Firms that are concerned about customer Firms that are concerned about customer responses will adjust their CSR actions to their industry responses will adjust their CSR actions to their industry peers.peers.

Data Analysis

Rated Buildings

Conventional Buildings

NearbyTenants

4,3908,000

LEEDSEnergyStarTenants

2861,0453,179

Figure 1Distribution of Green Office Buildings by State

(percent of the stock of office space)2008

Chicago, IL Houston, TX Columbus, OH

Clusters of Greenand Control Buildings

Conclusions

1.1. Occupancy of Green BuildingsOccupancy of Green Buildings

Oil, gas IndustriesOil, gas Industries

Proposition IIIProposition III

Legal & Financial ServicesLegal & Financial Services

Proposition I, IVProposition I, IV

2.2. Tenant Composition in Green BuildingsTenant Composition in Green Buildings

Tenants more concentratedTenants more concentrated

Large firms more concentratedLarge firms more concentrated

Proposition IIProposition II

Public Sector ConcentratedPublic Sector Concentrated

Proposition VProposition V