Sept. 12, 2016
It’s been more than a decade since owners of commercial real estate started focusing more on the need to become energy efficient and environmentally sustainable. From the start, buildings proved their green bona fides to prospective tenants by gaining third-party certifications such as LEED, Energy Star and Boma Best.
But even with certifications in place, many question the ROI of green investments, James Gray-Donald writes on the website TriplePundit.
Although studies show a correlation between green building certification and higher rent and occupancy, their methodologies typically lacked rigor — in part because there was not enough history to make a fair comparison. Past studies have also compared average rental rates of green and non-green buildings without taking into account the cost of tenant concessions, which can be substantial. Having access to that usually-private information enabled the researchers to better measure green ROI.
Now, green ROI has been quantified. In partnership with its clients, real estate investment advisory firm Bentall Kennedy teamed with global academics and is sharing a 10-year data pool of nearly 300 office buildings, including 58 million square feet of properties across North America. The study determined that green certifications bring direct benefits — higher rent and occupancy — as well as indirect benefits such as higher lease renewal rates and tenant satisfaction scores.
The numbers are in: Different certifications, different ROI
LEED: In the U.S., properties with a Leadership in Energy and Environmental Design certification enjoy an average 3.7 percent rent premium and a 4 percent gain in occupancy over comparable non-certified properties. In Canada, LEED-certified properties saw 10.2 percent higher rental rates and 8.5 percent higher occupancy than other properties in Bentall Kennedy’s portfolio.
Boma Best: A Canadian program that focuses on sustainable management and tenant engagement, the Building Owners and Managers Association of Canada’s Building Environmental Standards was associated with 4 percent lower rent concessions and on intangible measures: 7 percent higher tenant satisfaction scores in buildings with Level 3 and 4 certifications, and 5.6 percent higher lease renewal rates in Level 3 properties. These metrics are noteworthy as the cost to fill vacated spaces is far more than to keep tenants in place.
Energy Star: Within Bentall Kennedy’s North American portfolio, Energy Star-rated office buildings averaged 2.7 percent higher rents and 9.5 percent higher occupancy than non-certified buildings.
Using the study’s statistically significant U.S. and Canadian findings on a combined basis, a green-certified North American office asset would enjoy, on average:
- 3.7 percent higher rental rates;
- 4 percent higher occupancy levels; and
- 5.6 percent higher tenant renewal probabilities.
These metrics could translate into an 8 to 10 percent increase in asset value over an identical non-certified office asset.
There is no assurance that an investment in green certification would have a similar impact on an actual building. Market conditions vary by geographic area and could differ significantly. The increase of value shown is at a point in time based on changes to assumptions in the valuation model, and it does not represent a rate of return. The model further does not reflect fees, transaction costs and other expenses that might decrease the return on an actual investment.
Among the research’s authors are Dr. Nils Kok, associate professor of finance and real estate at Maastricht University in the Netherlands, who is widely known in the institutional real estate sector as an expert on financial implications of sustainability in buildings, and one the most published authors in this emerging field. Dr. Avis Devine, assistant professor in real estate and housing at Guelph University in Canada, also has a background in private-sector commercial real estate underwriting and valuation.