Green Certification and Building Performance: Implications for Tangibles and Intangibles
- Published in Journal of Portfolio Management
- Sustainable Real Estate
Commercial buildings represent a significant share of global energy consumption. In the general absence of regulation, voluntary labeling and green building certification schemes have been introduced to reflect this externality to building owners and tenants. The implications of such schemes have previously been documented to affect building financial performance. However, existing studies mostly focus on the U.S. market, and more importantly, generally include a limited set of performance metrics only. Using a rich, proprietary dataset from one of the largest building owners/managers in North America, this study is the first to investigate the effects of green building certification on non-financial metrics, such as tenant satisfaction, incentives, and lease renewal. The empirical results show that buildings certified through voluntary labeling schemes generally have a higher probability of lease renewal, lower incentives, and more satisfied tenants. We then study the effects of green building certification on financial metrics, such as rents and occupancy levels. The findings for the U.S. sample unambiguously confirm previously documented results – LEED and ENERGY STAR certified buildings command a small rent premium and have a lower vacancy risk. For Canada, effects for LEED-certified buildings are consistent with U.S. results. The results show that the national green building scheme (BOMA BESt) is not priced in, these buildings still offer greater overall stability versus non-certified buildings through increased releasing rates, lower incentives and substantially higher tenant satisfaction levels. The findings in this study provide an important contribution to the understanding of underlying value drivers in more efficient, sustainable buildings, and provide some first evidence for the international validity of otherwise mostly U.S.-based studies on the financial performance of green buildings.