Value Beyond Cost Savings - Green Building Finance Consortium

Value Beyond Cost Savings: How to Underwrite Sustainable PropertiesIn reviewing and applying the information from the six studies cited above, it is critical toknow what they are, and what they are not. The methodologies in the studies do not reflectindustry practice for assessing rent and price premiums in individual properties, andmethodology and data limitations are significant, and in most cases acknowledged by theauthors in their work. Use of the statistics without appropriate understanding of the caveatsand the coverage of the studies is not appropriate. In most cases, the studies cover onlyoffice buildings in the United States, so any application to other property types or regionsneeds to be carefully considered.Small sample size, problems in controlling for time, and numerous other statisticalproblems are particularly relevant for the sales price premium analysis, but also apply to therent premium analysis in the cited studies. For example, one of the limitations of the studiesis that they tend to focus on rents, while many other important value increasing attributes,like faster absorption, better lease terms, higher tenant retention rates, and lower risks(discount and cap rates) are also possible indicators of tenant preference, but these variablesare not evaluated in the existing studiesKeeping the caveats and application cautions in mind, what do the four statistical studiesactually show? 58 As shown in Exhibit IV-6 below, with the exception of the Wiley andJohnson paper, which we were not able to review in detail, rent premiums from LEEDproperties were shown to be from 0% to 6%, and EnergyStar premiums ranged from 3.3%to 5%. The Fall 2009 study by Fuerst and McCallister reported occupancy rates in LEEDbuildings 8% higher, and in EnergyStar buildings 3% higher.These rent and occupancy results, while subject to significant statistical and methodologicalissues, at least appear plausible, based on the Consortium’s assessment of scores of tenantsurveys and discussions with many more tenants and investors. It should be noted thatmany types of tenants, in different markets and property types, have reported that theywould not pay more, suggesting caution in applying any average figures to any particularbuilding. The Consortium’s research to date suggests that the increasing space user demandfor sustainable properties is more likely to be reflected in absorption rates, tenant retention,and adjustments to risk, rather than a direct rental price premium.58 The analysis in “The Greening of US Investment Real Estate—Market Fundamentals, Prospects and Opportunities,”by RREEF Research in November of 2007 does not do a controlled statistical study, but rather compares occupanciesand rents between certified and non-certified properties, and thus does not meet the statistical rigor that is attempted bythe other four studies listed above.84