REIT Research Desk

REIT magazine: March/April 2017

Being Green Earns Green

SOURCE:  “Certification Matters: Is Green Talk Cheap Talk?,” Journal of Real Estate Finance and Economics, Volume 52, Issue 2, pp. 114-140, February 2016.

AUTHORS:  Shaun A. Bond (University of Cincinnati) and Avis Devine (University of Guelph). 

SYNOPSIS:  Bond and Devine add to a growing literature on the impact of sustainability, or “green buildings,” on investment returns on commercial properties. The authors build on prior research by Devine and Nils Kok that found “significantly higher levels of tenant satisfaction, increased probability of lease renewals, and decreased tenant rent concessions for certified buildings” (“Green Certification and Building Performance: Implications for Tangibles and Intangibles,” Journal of Portfolio Management, Special Real Estate Issue, 2015). The current study examines a set of LEED-certified apartment buildings that are matched with similar buildings that do not have such certification,  finding that LEED-certified buildings command a rent premium of 8.9 percent over buildings with no certification. Buildings that promote themselves as being green but lack LEED certification also earn a smaller rent premium, roughly half as large as those that are LEED certified. 

“When both certification and puffery are controlled for, we find LEED-certified properties command almost double the rental premium of that experienced by the green, non-certified properties. … sensitivity analysis shows that the LEED premium exists both in high and low walkability properties (urban and suburban markets) and in the existing stock of apartment units, indicating that it is not simply the newness of green that is garnering the higher rents.”

Sustainable Cash Flows

SOURCE:  “Decomposing the Value Effects of Sustainable Investment,” working paper, January 2017.

AUTHORS: Avis Devine (University of Guelph), Eva Steiner (Cornell University) and Erkan Yönder (Ozyegin University).

SYNOPSIS: Can sustainable or “green” buildings have a positive impact on overall cash flows to investors? Yes. Building on prior studies that focused on lease renewals and rent premiums, this research examines not only the possibility of higher rental rates on green buildings, but also whether sustainable investment has any effect on operating expenses. As such, the researchers investigate if there is an overall financial benefit to the owners of green buildings in both the United States and in the United Kingdom. Green buildings do command higher rents, but also may raise operating expenses for U.S. firms. The rental premium dominates, however, yielding higher and more stable cash flows. The authors find similar results for firms in the UK.

“We find evidence that rental value premiums of sustainable properties carry over to the rental revenue of U.S. REITs, holding assets, liabilities and unobservable firm and time effects constant. On that basis, we also find that sustainable investment is associated with higher operating costs for U.S. firms, as green buildings often feature more sophisticated technology and utilize more electricity in exchange for greater ambient control. In sum, we find that the rental premium fully compensates for any increase in operating expenses, resulting in stable net operating income for the U.S. sample.”

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