Institute of
Business and
Economic Research
Fisher Center for
Real Estate and
Urban Economics
PROGRAM ON HOUSING
AND URBAN POLICY
WORKING PAPER SERIES
UNIVERSITY OF CALIFORNIA, BERKELEY
These papers are preliminary in
nature: their purpose is to stimulate
discussion and comment. Therefore,
they are not to be cited or quoted in
any publication without the express
permission of the author.
WORKING PAPER NO. W10-003
THE ECONOMICS OF GREEN BUILDING
By
Piet Eichholtz
Nils Kok
John M. Quigley
April 2011
The Economics of Green Building
Piet Eichholtz
Maastricht University
Netherlands
p.eichholtz@maastrichtuniversity.nl
Nils Kok
Maastricht University
Netherlands
n.kok@maastrichtuniversity.nl
John M. Quigley
University of California
Berkeley, CA
quigley@econ.berkeley.edu
Abstract
Research on climate change suggests that small improvements in the
“sustainability” of buildings can have large effects on greenhouse gas emissions and on
energy efficiency in the economy. This paper analyzes the economics of “green”
building. First, we analyze a panel of office buildings certified by independent rating
agencies, finding that large recent increases in the supply of green buildings and the
unprecedented volatility in property markets have not significantly affected the relative
returns to green buildings. Second, we analyze a large cross section of office buildings,
demonstrating that economic premiums in rent and asset values of buildings certified for
energy efficiency are substantial. Third, we relate the economic premiums for green
buildings to their relative efficiency in energy use, documenting that the attributes rated
for both thermal efficiency and sustainability contribute to premiums in rents and asset
values. Even among green buildings, increased energy efficiency is fully capitalized into
rents and asset values.
JEL codes: G51, M14, D92
April 2011
The Royal Institution for Chartered Surveyors, the European Center for Corporate
Engagement, and the University of California Energy Institute provided financial support
for this research. Kok is supported by a VENI grant from the Dutch Science Foundation
(NWO). We are grateful to Anthony Guma of the U.S. Green Building Council (USGBC)
and Alexandra Sullivan of the U.S. Environmental Protection Agency (EPA), for help in
assembling, interpreting, and verifying the USGBC and EPA data used in this analysis.
We are grateful for the comments of Severin Borenstein, Lucas Davis, Lynn Fisher,
Richard Green, Dwight Jaffee, Alan Sanstad, Nancy Wallace, two anonymous reviewers,
participants at the 2010 ASSA Meetings, and at seminars at Berkeley, NYU Stern, USC,
and Yale. Manaswini Rao and Lian Dalhuisen provided excellent research assistance.
I. Introduction
“Sustainability” has become an increasingly important attribute of economic
activities describing methods of production, but also qualities of consumption and
attributes of capital investment. In part, this reflects popular concern with environmental
preservation, but it may also reflect changes in tastes among consumers and investors.
Sustainability may also be a marketing device which can be employed successfully by
large corporations and small businesses alike.
The built environment and sustainability are closely intertwined, and popular
attention to “green” building has greatly increased over the past decade. This reflects the
potential importance of real property in matters of environmental conservation. For
example, the Energy Information Agency predicts that the construction and operation of
buildings will account for about forty percent of US energy consumption and almost
three-quarters of US electricity consumption in 2011.
1
Influential analyses of climate
mitigation policies have emphasized that the built environment offers a great potential for
greenhouse gas abatement (Per-Anders Enkvist, Thomas Naucler and Jerker Rosander,
2007, IPCC, 2007, Nicholas Stern, 2008). Thus, small increases in the sustainability of
buildings, or more specifically in the energy efficiency of their operation, can have large
effects on their current use of energy and on their life-cycle energy consumption.
Projected trends in urban growth in developed countries (Matthew E. Kahn, 2009) and in
the urbanization of developing economies (Edward L. Glaeser and Matthew E. Kahn,
2010, Siqi Zheng et al., 2009) suggest that the importance of energy efficiency in
building will increase further in the coming decades.
But the impact of energy costs directly affects occupants and investors as well.
Energy costs represent about thirty percent of operating expenses in the typical office
1
EIA Annual Energy Outlook 2011, see: http://www.eia.gov/forecasts/aeo/index.cfm.
2
building in the U.S. This is the single largest and most manageable expense in the
provision of office space. Rising energy costs will only increase the salience of this issue
for the private profitability of investment in real capital.
As noted, the increase in attention to green building by planners, developers, and
investors has been remarkable. Figure 1 provides some evidence on the popular
importance of the issue. It reports on the occurrence of the term “green building” in the
U.S. popular press. Usage of this term almost tripled between 2005 and 2010. The figure
also reports a tripling during the past three years of the number of participants at the
major international conference devoted to green building (“Greenbuild”).
Appendix Table A1 confirms the growing importance of “green building” in the
marketplace. It reports the fraction of commercial office space that is certified as green in
the twenty-five largest core-based statistical areas (CBSAs) in the U.S. These buildings
are certified for energy efficiency by the U.S. Environmental Protection Agency, EPA
(“EnergyStar”), or certified for sustainability by the U.S. Green Building Council,
USGBC (Leadership in Energy and Environmental Design, “LEED”). The Appendix
shows that the inventory of certified green office space in the U.S. has increased
dramatically between 2007 and 2009.
2
In some metropolitan areas, the availability of
certified office buildings has more than doubled. There are a few metropolitan areas
where green office space now accounts for more than a quarter of the total office stock.
3
In this paper, we analyze the economic significance of these trends in green
building upon the private market for commercial office space. Investments improving the
energy efficiency or sustainability of real capital may have implications for competition
2
Newly-constructed green buildings explain part of the increase, but a large share of newly-certified
buildings consists of existing buildings that recently qualified for an Energy Star or LEED certificate. Data
on the size of commercial property markets is supplied by the CoStar Group and includes “liquid”
commercial office space only. Thus owner-occupied headquarters buildings and other “trophy” office
properties are underreported, and the fraction of green space per CBSA may be overestimated.
3
See Nils Kok, Marquise McGraw and John M. Quigley (2011) for a more detailed discussion on the
diffusion and growth of “green” office space.
3
in the market for commercial space. Tenants may enjoy pecuniary and non-pecuniary
benefits (e.g., lower utility bills, higher employee satisfaction), and there may be
economic benefits to investors (e.g., higher rents, lower risk premiums). This paper
builds on earlier research (Piet M.A. Eichholtz, Nils Kok and John M. Quigley, 2010), in
which we provided a first exploration of the then-recent phenomenon of “green”
buildings in the commercial property sector, and it extends the quite limited body of
existing work on the topic in three distinct ways.
First, we investigate the price dynamics of energy efficient and sustainable
commercial buildings during the recent period of turmoil and of unprecedented decline in
U.S. property markets. We gather and analyze a panel of certified green buildings and
nearby control buildings observed in 2007 and again in 2009. The results show that large
increases in the supply of green buildings during 2007-2009, and the recent downturns in
property markets, have not significantly affected the rents of green buildings relative to
those of comparable high quality property investments; the economic premium to green
building has decreased slightly, but rents and occupancy rates are still higher than those
of comparable properties.
Second, we exploit the growth of “green” buildings in the marketplace and
analyze a large cross section of green buildings certified as of October 2009 -- some
21,000 rental buildings and 6,000 buildings which have been sold. This sample facilitates
an extensive analysis of the relationships between energy efficiency and sustainability, on
the one hand, and the rents, effective rents (i.e., rent multiplied by the occupancy rate),
and the selling prices commanded by these properties, on the other hand. Importantly, we
rigorously control for quality differences between rated buildings and non-rated
buildings, thereby addressing concerns about the comparability of these two groups.
