By the numbers: Green building certifications boost property value

A recent study of office buildings found a link between sustainability practices and higher occupancy, tenant satisfaction and retention rate, as well as lower inducements — all of which lead to higher value for office assets held within real estate investment portfolios.

In the past five years, there have been a number of studies that present evidence on the linkage between so-called green building certification and financial performance. While the results of these studies are remarkably consistent, skepticism still exists among asset owners and managers alike. The validity of these studies, which have claimed to measure the financial benefit of green-certified office buildings, has been questioned.

Recently published findings of a study commissioned by Bentall Kennedy validate two key points. First, sustainable office buildings deliver higher income and value. Second, tenants' “stickiness” is higher in office buildings with green certifications.

To conduct the research in partnership with its clients, Bentall Kennedy brought on board two highly regarded global academics, Nils Kok and Avis Devine, sharing a data pool of nearly 300 office buildings, including 24 million square feet of Canadian properties and 34 million square feet of U.S. properties.

(Mr. Kok is assistant professor of finance at Maastricht University, Maastricht, Netherlands, and is widely known in the institutional real estate sector as an expert on financial implications of sustainability in buildings. Ms. Devine is assistant professor of real estate finance with the marketing and consumer studies department of the University of Guelph's College of Business and Economics, Guelph, Ontario, and has a background in private-sector commercial real estate underwriting and valuation in the U.S.)

The research team had access to a decade of historical portfolio data, facilitating apples-to-apples comparisons of assets. The study is unique in that, in addition to financial metrics, it looks at the implications of sustainability labels on less tangible, more indirect determinants of building performance, such as the likelihood of lease renewal and tenant satisfaction. A wide array of variables was rigorously controlled, including building age, class, size, city, walk score and renovations.

The findings of the research show how green certifications improve financial performance for portfolio-held office assets.

LEED — In the U.S., properties with a Leadership in Energy and Environmental Design certification enjoy an average 3.7% rent premium and a 4% gain in occupancy over comparable non-certified properties. In Canada, LEED-certified properties saw 10.2% higher rental rates and 8.5% higher occupancy than other properties in Bentall Kennedy's portfolio.

BOMA BEST — A Canadian program that focuses on sustainable management and tenant engagement, the Building Owners and Managers Association of Canada's Building Environmental Standards was associated with 4% lower rent concessions and on intangible measures: 7% higher tenant satisfaction scores in buildings with Level 3 and 4 certifications, and 5.6% higher lease renewal rates in Level 3 properties. These metrics are noteworthy as the cost to fill vacated spaces is far more than to keep tenants in place.

ENERGY STAR — Within Bentall Kennedy's North American portfolio, Energy Star-rated office buildings averaged 2.7% higher rents and 9.5% higher occupancy than non-certified buildings.

To illustrate a hypothetical change in value using a discounted cash flow approach, consider the following example and underlying assumptions for a commercial office asset:

This research is the most compelling evidence to date that office buildings with green credentials earn higher income and value. These findings and their application point to the potential for an overall improved valuation for certified office assets relative to their non-certified counterparts.

Using the study's statistically significant U.S. and Canadian findings on a combined basis, a green-certified North American office asset would enjoy, on average:

• 3.7% higher rental rates;


• 4% higher occupancy levels; and


• 5.6% higher tenant renewal probabilities.

These metrics could translate into an 8% to 10% increase in asset value over an identical non-certified office asset.

Giselle Gagnon is senior vice president at Bentall Kennedy, Toronto.