Investing in sustainable buildings pays off in the form of higher rental rates, higher occupancy levels, and more interest among tenants in renewing their leases, according to a long-term study by Bentall Kennedy, a real estate investment advisory firm.
The 10-year study looked at information gathered from occupants of nearly 300 office buildings representing 58 million square feet of commercial space in the U.S. and Canada.
The company said that it used both tangible and intangible measures to study the impact of green certification. Tangible measures included rent and occupancy. The list of intangibles included the cost of rent concessions, lease renewal rates, and tenant satisfaction scores, according to a summary written by Bentall Kennedy sustainability vice president James Gray-Donald and published in Commercial Property Executive.
Gray-Donald said that a number of studies published in the last five years found a “remarkably consistent” link between green building certification and financial performance, but property owners and managers remained skeptical.
“A new study was designed to address this skepticism,” Gray-Donald wrote. “The recently published findings validate two key points. Firstly, making buildings more sustainable is a wise investment (it pays). Secondly, tenants care about certification (the badge matters).”
The full text of the report, written by Avis Devine of the University of Guelph in Canada and Nils Kok of Maastricht University in the Netherlands, is also available online.
Adding more data to previous studies
Past studies produced plenty of evidence that green certification led to higher rent and occupancy levels, but skeptics complained that results were skewed because green buildings were better managed and in better condition because they were newer. Earlier studies didn’t look closely at the intangibles because “consistent datasets for those metrics are hard to come by,” Gray-Donald wrote.
But Bentall Kennedy had more than a decade’s worth of data on energy and financial performance in buildings occupied by its clients and shared it with Devine and Kok. The study covered 24 million square feet of commercial space in Canada and another 34 million square feet in the U.S.
In the U.S., LEED-certified properties could command a rent premium of 3.7% and had 4% higher occupancy rates when compared with similar properties that were not certified. Rents in Energy Star certified buildings averaged 2.7% higher, with a 9.5% higher occupancy rates.
In Canada, results were even more positive: rents 10.2% higher and occupancy 8.5% higher in LEED-certified buildings. Buildings certified under LEED and a BOMA BEST, a certification program offered by the Building Owners and Managers Association of Canada, had occupancy rates 18.7% higher than non-certified buildings. Tenant satisfaction scores and renewal rates for those buildings were 7% and 5.6% higher respectively.
“The findings and their application are powerful as they point directly to overall improved valuations for certified office assets relative to their non-certified competitors,” Gray-Donald said.
Combining U.S. and Canadian results, he continued, a LEED and BOMA BEST level 3 certification would give office space 3.7% higher rental rates, 4% higher occupancy levels, and 5.6% higher tenant renewal probability.
“Credible data is extremely important to real estate investors and their advisors,” he said. “Decisions to buy, sell or commit capital to assets have to be based on solid numbers that show return. We can all agree that resource efficiency and sustainability are worthy goals. However, the findings of this study validate the financial case for prioritizing strategies that lead to green building certifications.”
Energy consumption in LEED-certified buildings has been a contentious issue in the past, but in this study LEED-certified properties in the U.S. showed 14% less energy consumption per square foot than non-certified buildings.
In Canadian buildings, the study found certified buildings used more energy than non-certified buildings.
“One explanation may be that newer buildings use and house more energy-centric technology,” the report says. “Also, higher people density in certified buildings may explain this finding.”
Incremental costs of certification not crystal clear
In a telephone interview, Gray-Donald said that the authors of the report had made an attempt to find out how much certification added to construction costs.
“The study was retrospective, so we tried to look at all the data we could find that was consistent and could be broken down month to month, and we did try to find the construction costs,” he said, “but it became very complicated to figure out what was truly incremental.”
In the end, they estimated the added costs typically ranged from zero to 4% or 5%, although it could be somewhat higher in cases where building owners tried to hit LEED Platinum standards and the market wasn’t well developed.
“Typically, in mature markets where you make a decision fairly early to pursue LEED, or in an existing building that has been fairly well maintained, the incremental cost is minimal,” he said.
Finally, the level of LEED certification (certified, silver, gold, or platinum) didn’t seem to change the results in any significant way. In other words, tenants seemed just as happy and rents were just as high no matter what the level of LEED certification might be. With the BOMA BEST standard, however, Gray-Donald said higher levels of certification seemed to nudge results upward.