Price Premiums and the Risk-Return of Green Buildings in the US

Abstract

The inception of green labels in the nineties has ignited a controversial conversation about green buildings with both strong proponents and opponents, and the research has only recently picked up in pace. Although most institutional investors begin to understand the social impact their investment decisions have, respectively their real estate assets, they seem to lack enough reliable information about the financial effect and dynamics of green labelled buildings. This study presents a new green building model based on the repeat-sales regression methodology applied to a national sample of US office buildings that have transacted in the time period of 2000-2016. As a first of its kind the model was set up to make use of the methodological advantages the repeat-sales technique comprises and adds on to the current status quo in systemic research about green labelled property prices expanding on price dynamics and investment returns. For this purpose, access to the Real Capital Analytics repeat-sales database as well as the United States Green Buildings Councils LEED database is granted. The matching of approximately 11,500 repeat-sales data with approximately 15,500 LEED projects leads to a sample set of 519 buildings, that is, buildings that have been awarded a label at a known point in time. A total of three yearly index sets for the years 2008-2014 is computed with the help of the software package R. Each set is composed of one green and one non-green index. Prices of LEED rated real estate seem to be a little less volatile, if not equally volatile, and their returns tend to be minimally lower. This is offset by an estimated 9.5% to 14.4% increase in price. The findings compare well with previous research about green property premiums. The model was analogously applied to occupancy rates and finds a discrepancy in the range of 1.6-4.4%. Overall, this study delivers reasonable results for the current information state in the US about LEED certified properties and the fundamental grounds for further investigations are laid.