Are Green Buildings More Valuable in Blue States?
Build a building at the corner of West 42nd Street and Sixth Avenue in Manhattan – like Bank of America just did – and you’ve got a pretty valuable piece of real estate, whether it’s LEED- or Energy Star-rated or not. That, essentially, has been the critique of most studies attempting to analyze the market and/or occupancy premium – if any – for certified green buildings. But David Harrison of Texas Tech and Michael Seiler take a different track in a new paper titled The Political Economy of Green Industrial Warehouses. Calling it “the first direct study of the economic effects of political ideology on environmental certification and the valuation effects of industrial warehouses,” the authors conclude that LEED- or Energy Star-rated industrial properties in Republican-leaning areas of the country lease at a nearly 20-percent discount and have vacancy rates 25 percent higher compared with non-rated properties. In Blue counties (determined by county-wide vote totals in the 2008 presidential election), LEED- and Energy Star-rated properties lease at 10 percent premium, but have a vacancy rate 5 percent higher. The paper is forthcoming in the Journal of Property Investment and Finance.
Focusing on industrial – rather than commercial – properties allows Harrison and Steiler to bypass many of the intangible benefits of green building that have underpinned conclusions in many prior studies. Indeed, as the authors explain, “most previous studies of the valuation effects of environmental certification have focused on commercial office buildings. While these facilities serve as a useful laboratory for answering many questions, the interactive nature of [office] space leads to a potential confounding attribution of the root cause of observed rental premiums. Are higher rents on certified properties due to enhanced energy efficiency, branding effects, or something else entirely? . . . [I]f green rental premiums are attributable to the branding of space, why would industrial warehouse facilities (which typically only exhibit limited public interaction) benefit? Alternatively, if energy efficiency drives green premia, such effects may well be more pronounced within the industrial sector.”
Using data obtained from CoStar, the study concluded that industrial warehouse properties in Blue counties are 2.5 times more likely (0.35 percent to 0.14 percent) to be either LEED- or Energy Star-rated than those in Red counties. “This finding is entirely consistent with the notion that political ideology materially influences environmental decision-making,” the authors write. The study also controlled for regulatory requirements (i.e., state- and local-level programs requiring or promoting energy efficiency or other sustainability efforts). Not surprisingly, it found that Blue counties are “characterized by an increased likelihood of both grant programs and property tax incentives available to incentivize green initiatives.”
But as some studies have suggested previously, the authors do caution that results of the study could be a function of the relatively young age of most LEED- and Energy Star-rated properties. “As a result, such facilities may well have disproportionately entered their lease-up phases during periods of economic turmoil and financial hardship,” they write with respect to the higher vacancy rates. The paper concludes with the authors suggesting that the study’s findings “are strongly supportive of the notion that non-pecuniary factors, including but potentially not limited to the political ideology of the local market, may materially influence the market valuation of environmental amenities within industrial property markets.” Most importantly, they “urge extreme caution to real estate professionals, government policy makers, and academic researchers when generalizing the results of environmental valuation studies to new property type sectors, geographic markets, or chronological time periods.”
Harrison and Seiler’s abstract of the paper is below, and a copy is available for download here from SSRN.
“Empirical evidence on the effect of environmental certification on commercial real estate properties routinely finds evidence of both significant rental rate and occupancy rate premiums accruing to owners of LEED and/or Energy Star certified properties. Interestingly, however, the underlying determinants and drivers of such premia remain largely unexplored. Building upon this literature, the current investigation expands our understanding of environmental certification and valuation effects by examining a previously unexplored property type- industrial warehouse facilities. Using a sample of 20,172 industrial properties, we find “green” certification plays an important, but contingent, role within this property type sector. Specifically, “green” warehouses in politically conservative areas rent at a significant discount relatively to their non-certified counterparts, while similar properties in politically liberal areas rent at a significant premium. These results provide evidence on the importance of political ideology to real estate decision-making, and offer the first insight into the importance of environmental certification within the industrial warehouse property type sector.”