Green Certification and Building Performance:Implications for Tangibles and Intangibles

Abstract

Commercial buildings represent a significant share of global energy consumption. In the general absence of regulation, voluntary labeling and green building certification schemes have been introduced to reflect this externality to building owners and tenants. The implications of such schemes have previously been documented to affect building financial performance. However, existing studies have focused mostly on the U.S. market and, more importantly, generally include only a limited set of performance metrics. Using a rich, proprietary dataset from one of the largest building owners/managers in North America, the authors investigate the effects of green building certification on non-financial metrics, such as tenant satisfaction, incentives, and lease renewal. Their empirical results show that buildings certified through voluntary labeling schemes generally have a higher probability of lease renewal, offer lower incentives, and have more satisfied tenants. They then study the effects of green building certification on financial metrics, such as rents and occupancy levels. The findings for the U.S. sample unambiguously confirm previously documented results—LEED and ENERGY STAR certified buildings command a small rent premium and have a lower vacancy risk. For Canada, the effects for LEED certified buildings are consistent with U.S. results. The results show that the national green building scheme is not priced in, but that these buildings still offer greater overall stability versus non-certified buildings through increased releasing rates, lower incentives, and substantially higher tenant satisfaction levels. The findings reported in this article provide an important contribution to the understanding of underlying value drivers in more efficient, sustainable buildings and offer some first evidence for the international validity of otherwise mostly U.S.-based studies on the financial performance of more efficient, “green” commercial buildings.