By Cindy Zhu
Advocates for the development and investment of high-performing, energy efficient buildings understand the hurdles that come along with proving the business case to commercial real estate owners and investors. Fortunately, a strong and growing amount of research effectively shows the significant evidence that green buildings exhibit increased financial performance through decreased operating expenses and various non-energy benefits, such as workplace comfort and employee productivity. Building on that success, a nascent area of research is beginning to link high performance with other aspects of a building’s financial performance.
“We know energy efficient building technologies save energy and money, but we’re beginning to better understand how a high-performance building can also affect other very important financial indictors in commercial real estate, like lease-up rates, rent, and tenant retention,” said Jason Hartke, manager of DOE’s Commercial Buildings Integration (CBI) program.
Current Research on the Value of Green Buildings
DOE recently sponsored a workshop that brought together Lawrence Berkeley National Laboratory (LBNL) and a group of leading real estate sustainability and finance academics to discuss gaps in green building research, assess data challenges in their fields, and prioritize future research areas. The day and a half long workshop hosted by LBNL at University of North Carolina, Chapel Hill kicked off with an in-depth review of all the various research focused on the relationship between financial indicators and green buildings. This important literature review, conducted by LBNL, proved illuminating.
“As part of our work with CBI, our team reviewed nearly 40 relevant peer-reviewed and published papers pertaining to energy-related building attributes and real estate financial performance,” said Paul Mathew, staff scientist and department head of whole building systems at LBNL. “We found that the vast majority of papers in our review focused on newly constructed Class A office properties that achieved Leadership in Energy and Environmental Design (LEED) and ENERGY STAR® building certifications using data from CoStar, which all found a positive correlation between having a certification and increased rent premiums.”
During the workshop, LBNL facilitated an important discussion about prioritizing future research designed to both fill gaps in the current literature and overcome limitations in available data. While many studies address the potential benefits of green buildings, due to data limitations they are not able to analyze capital expenditures, or a firm’s cost of capital for green construction or energy efficiency renovations.
“Imperfect information in the market causes missed market opportunities, and we know from surveys that market participants can be uncertain about the economics of high-performance buildings,” says workshop attendee Gary Pivo, professor of real estate, urban planning, and natural resources at the University of Arizona. “That is why it is important to produce reliable, detailed, and practical research on the economic performance of high performance properties. Weak or confused market signals about them cause us to forego beneficial investments when there are many reasons why they are beneficial to business and society. Better research gives high-performance assets more credibility, and that should lead to increased capital flows to many notable market opportunities.”
Given that current literature predominantly addresses new construction and Class A, which are highly traded and prime market office properties, the impact of certifications, like LEED, has not been fully explored for existing buildings and different building classes. Researchers agreed this area of study would benefit from a panel data approach, looking at the longitudinal impact of energy and green building features on financial performance.
Workshop participants also brought up the issue of data endogeneity—are firms who make the decision to apply for green building certifications a self-selecting sample? Can the conclusions about this self-selected sample of buildings be applied to the entire industry?
Continuing the Conversation
The DOE, LBNL, and the academics started discussions around new targeted research in certain priority areas that can go a long way to provide value and understanding to investors and builders. Many of these same themes came up in a session last month that I moderated at the Greenbuild International Conference and Expo. The session – Get More Green: Research Links Energy Efficiency and Profits – featured a diverse group of practitioners who understand the need for more research and better data quality to further drive investment in high-performing buildings.
Professor Jacob Sagi from Kenan-Flagler Business School at University of North Carolina, Chapel Hill described the work he’s doing with the Commercial Real Estate Data Alliance (CREDA), an effort led by a network of academics to improve the quantity and quality of real estate data available for analysis. Mathew of LBNL shared an example of where real estate loan data is being used to understand the impacts of energy factors and commercial mortgage default risk. Jennifer McConkey, director of operations and sustainability at Principal Real Estate Investors, discussed how partnering with the DOE on a research effort to better understand the financial value of their high-performing buildings at the lease and investment fund level helped them better educate their investors on the value of green buildings.
Professor Sagi described why it is critical to improve the quality of real estate data. “In order to foster meaningful research around investment assets, data must be rich, diverse, and cyclical. Currently there is no single data source with complete coverage of all data categories. A scientific approach is necessary to develop a high-quality dataset for real estate.”
Jennifer McConkey remarked on the value of Principal participating in DOE pilot research around the value high-performing buildings. “As a leading manager in commercial real estate investing, we recognize the financial benefits of employing green strategies wherever feasible,” she says. “We also believe research is fundamental to everything we do. It defines our ability to assess the relative value of each investment opportunity, make informed investment decisions, and most importantly, help our investors achieve their target investment outcomes. Being involved in the [research study] was a natural extension of our unequivocal research focus, but also spoke to our commitment to real estate innovation and its power to add value for our clients. ”
As we move forward, new research driven by better access to more granular data will help fuel an even stronger business case for high-performance energy efficient buildings. The Department of Energy looks forward to helping advance these efforts by collaborating with partners and stakeholders from academia, leaders in commercial real estate and the national labs.