Supply, Demand, and the Value of Green Buildings

Attention to “sustainability” and energy efficiency rating schemes in the commercial property market has increased rapidly during the past decade. In the UK, commercial properties have been certified under the BREEAM rating scheme since 1999, offering fertile ground to investigate the economic dynamics of “green” certification on the commercial real estate sector. In this paper, we document that over the 2000-2009 period, the expanding supply of “green” buildings within a given London neighborhood had a positive impact on rents and prices in general, but reduced rents and prices for environmentally-certified real estate. The results suggest that there is a gentrification effect from “green” buildings. However, each additional “green” building decreases premiums for a certified building in the rental and transaction markets by one percent and four percent, respectively. In addition, controls for lease contract features like contract length and rent-free period have a modifying impact a certified rental premiums and should be taken into consideration in further research.