Research Says Energy Star Pays: LEED Not so Much

In “Doing Well by Doing Good? Green Office Buildings,” Professor JohnQuigley at the University of California, Berkeley – Haas School of Business
and coauthors Piet Eichholtz and Nils Kok of Maastricht University, Netherlands, determined that investments in proven green building practices

lead to sizable increases in a property’s market value and effective rent, or the average per square foot rent paid. Energy Star certified buildings produced an 8.5 percent increase in effective rent. The additional annual rent for going green amounts to almost $309,000, based on the average size building. Likewise, the incremental value of a green structure is an estimated $5.1 million more than an ordinary building. The study did not
calculate the incremental cost of investing in green building practices.

Quigley said, “Finding there is a linkage between energy and profitability of rental properties is potentially significant and leads to more extensive
uses of this information.” This research offers quantitative evidence for builders and investors who value the social responsibility factors of green
buildings but have lacked data about the financial performance of these investments.

This research focused solely on commercial property. Quigley, Eichholtz, and Kok first identified 694 buildings in a number of major U.S. cities
including San Francisco, Boston, Chicago, Atlanta, Dallas, Washington D.C. and Los Angeles. All are green certified by the federal government’s Energy
Star program or the private LEED (“Leadership in Energy and EnvironmentalDesign”) standard.

While the three researchers documented higher asset values for Energy Star rated buildings, they did not find a similar increase associated with
LEED Certification. “It is claimed that LEED-certified buildings have lower operating costs and increased asset values,” the authors claimed, but
not a single LEED-certified building included in the study produced higher effective rent as a result of its green integrity. Only the Energy Star
buildings produced higher rents, Quigley said. The control group consisted of nearly 7,500 other office buildings within a quarter mile of the
certified buildings. In many cases, the green buildings were taller, newer and larger than the control group of buildings but those characteristics
were adjusted in statistical models.

Quigley claims his study is the first systematic analysis of environmentally-sustainable construction and its economic impact on the real
estate market. He said he undertook the research to see if the touted economic advantages of green building were "hype or real.” While Quigley’s
work concludes that the resulting profitability is real, he is continuing to research why green commercial buildings produce higher rents and market
value by using engineering data from the Environmental Protection Agency (EPA).

Quigley and his coauthors also suggested that companies with well-defined and aggressive corporate social responsibility policies may be able to
outperform competitors in other ways: enhancing the corporate image, improving profitability and productivity, and reducing exposure to
regulation and unwelcome activism.

Prof. Quigley is the I. Donald Terner Distinguished Professor in Affordable Housing and Urban Policy, Haas Real Estate Group at the University of
California, Berkeley. He is also the Chancellor’s Professor of Economics at the Department of Economics and a Professor of Public Policy at the Goldman
School of Public Policy.

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