Value Beyond Cost Savings - Green Building Finance Consortium

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Value Beyond Cost Savings: How to Underwrite Sustainable Propertiesprojects supported increased value conclusions and suggested trends of increased tenantand investor demand moving forward. As to the magnitude of potential value increases, thiswas not specifically quantified, but on average incremental value increases of around 10%was suggested.The working draft study by Dave Pogue and Norm Miller is particularly interesting in thatthey draw upon the results of a survey of over 750 occupiers from 154 of LEED or EnergyStar buildings. They supplemented their survey with a survey of CBRE property managersof the buildings who provided detailed operations and expense data for each of the subjectproperties. They found that green buildings were operated more intensively, and overalltotal operating expenses were not that different. Separate metering was found to be almostas important as a significantly improved EnergyStar score in saving energy. Greenbuildings had higher wage tenants who indicated they felt more productive, but were notyet willing to say they would pay more.In one important study of investors in Australia, the majority of investors indicated thatthey would pay more for a Green Star building. The improved marketability of Green Starbuildings is their main current competitive advantage: they are easier to sell and lease,which reduces vacancy times and hence income losses. Many investors andowners/managers believe Green Star buildings are ‘future proofed’ against the risk of risingenergy costs, market rejection of non-Green Star buildings and tightening regulations onbuilding sustainability performance.Another interesting analysis of 59 LEED Existing Building (EB) implementations showedthat returns were robust, with an average payback of 1.5 years and a simple return oninvestment of 69%. All of the 59 projects demonstrated positive returns, with a minimumreturn of 11% and maximum payback period of 9 years. Returns were strong acrossgeographies and for Certified, Silver and Gold LEED certifications. Implementation costper square foot averaged a minimal $0.23 and ranged from $0.08 to $0.95 per square foot.The office properties in the analysis averaged 406,000 square feet and were geographicallydispersed through much of the United States. Ownership was typically institutional or largeprivate investor. 57The results of the study of 59 buildings presented above are most likely influenced byselection bias, making the results more robust than the average results for a typical portfolioof buildings. Selection bias arises because service providers and owners are more likely toprioritize the properties they convert to LEED, with the easiest and most profitable the firstto convert. Offsetting the potential selection bias is improvement over time due toexperience.Another observation is that for these buildings, the decision to obtain LEED EB was not asignificant investment, suggesting more robust investment and sustainability goals might be57 Envision Realty, June 2009.82
Value Beyond Cost Savings: How to Underwrite Sustainable Propertieswarranted based on the high level of return that was achieved, even prior to considering anyrisk or revenue benefits.b. Statistics/Modeling-Based Financial AnalysesStatistics/Modeling-Based studies typically will involve a large number of sustainable andnon-sustainable properties, with statistical modeling focused on determining theincremental contribution of a sustainable certification or rating on rent levels, sales prices,occupancies, or other specific financial variables. These studies are typically completed byacademics with real estate and/or finance backgrounds. Six of the most important studies ofthis type are identified below:1. “The Investigation of the Effects of Eco-Labeling on Office Occupancy Rates”,Frank Furst and Patrick McCallister, Journal of Sustainable Real Estate, Fall 20092. “New Evidence on the Green Building Rent and Price Premium,” Frank Fuerst andPatrick McAllister, Presentation to ARES conference, April 3, 2009.3. “Doing Well by Doing Good? Green Office Buildings,” Piet Eichholtz, Nils Kok,and John M. Quigley, UC Berkeley Fisher Center for Real Estate & UrbanEconomics working paper, January 2009.4. “Does Green Pay Off?” Norm Miller, Jay Spivey, Andy Florance, Journal of RealEstate Portfolio Management, Fall 2008.5. “Green Design and the Market for Commercial Office Space,” Justin Benefield,Jonathan Wiley and Ken Johnson, Journal of Real Estate Finance and Economics,forthcoming.6. “The Greening of US Investment Real Estate—Market Fundamentals, Prospectsand Opportunities,” Andrew Nelson, RREEF Research, November 2007.Summary of Consortium Conclusions on Statistics/Modeling-Based Financial AnalysesThe statistics/modeling-based financial analyses cited above provide “general” support fora positive relationship between a green building certification (LEED or EnergyStar) andimproved rents and sales prices for commercial properties. However, all of the studies havesignificant methodological, data, and statistical limitations that limit the reliability/applicability of the numerical conclusions to specific property valuations.While the specific numerical results may be of limited reliability, it does not imply that therent and sales price premiums are necessarily overstated, just that methodological and datalimitations introduce substantial uncertainty in the specific numerical results.83
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Appendix FSustainable Property Fina
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Appendix GSustainable Property Cost
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Appendix HDiscounted Cash Flow Anal
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Property Type: CBD OfficeSquare Fee
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Value Beyond Cost Savings - Green Building Finance Consortium

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