Energy Factors, Leasing Structure and the Market Price of Office Buildings in the U.S.

Abstract

This paper presents an empirical analysis of the relation between energy factor markets, leasing structures, and the transaction prices of office buildings in the U.S. We employ a large sample of 15,133 office building transactions between 2001 and 2010. In addition to building characteristics, we also include information on the operating expenses, net operating income, and market capitalization rates at sale to estimate an asset-pricing model for commercial office real estate assets. A further set of important controls in our analysis is the forward/futures contract prices for electricity and natural gas. We also include weather metrics for each building’s location and sale date. Our final set of controls includes information on the dominant contractual leasing structure of the buildings. Our empirical results suggest that Energy Star labels do not explain additional variance in property prices once the key asset-pricing factors of expenses, income and market capitalization rates are included. By contrast, energy-factor market prices, the shape of the energy forward price curves, and weather metrics are consistently significant determinants of office building transaction prices, suggesting that commercial office building prices are exposed to shocks in these markets.