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Green Buildings in Commercial Mortgage‐Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms

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  • Xudong An
  • Gary Pivo

Abstract

We study the impact of green building on loans in the CMBS market. A hazard model shows green buildings carry 34% less default risk, all else equal. A matched‐sample analysis gives similar results. We attribute the effect to a loan‐to‐value channel, where risk is lowered by a green price premium. The benefit comes at least partly from the level of green achievement, not only the label itself. Loans on buildings that were green at loan origination have slightly better terms than loans on nongreen buildings. That difference is growing over time, but the effect is economically small compared to default risk.

Suggested Citation

  • Xudong An & Gary Pivo, 2020. "Green Buildings in Commercial Mortgage‐Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(1), pages 7-42, March.
    • Handle: RePEc:bla:reesec:v:48:y:2020:i:1:p:7-42
    DOI: 10.1111/1540-6229.12228
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    Cited by:

    1. Billio, Monica & Costola, Michele & Pelizzon, Loriana & Riedel, Max, 2022. "Creditworthiness and buildings' energy efficiency in the Italian mortgage market," SAFE Working Paper Series 352, Leibniz Institute for Financial Research SAFE.
    2. Luca Caneparo, 2020. "Financing the (Environmental) Quality of Cities with Energy Efficiency Investments," Sustainability, MDPI, vol. 12(21), pages 1-25, October.
    3. Hafize Nurgul Durmus Senyapar & Bilal Duzgun & Fatih Emre Boran, 2024. "Energy Labels and Consumer Attitudes: A Study among University Staff," Sustainability, MDPI, vol. 16(5), pages 1-30, February.
    4. Fabian Alex, 2024. "Project risk neutrality in the context of asymmetric information," Working Papers 235, Bavarian Graduate Program in Economics (BGPE).
    5. Avis Devine & Andrew Sanderford & Chongyu Wang, 2024. "Sustainability and Private Equity Real Estate Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 68(2), pages 161-187, February.
    6. Monica Billio & Michele Costola & Loriana Pelizzon & Max Riedel, 2022. "Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 419-450, October.
    7. Hui-Ching Hsieh & Viona Claresta & Thi Minh Ngoc Bui, 2020. "Green Building, Cost of Equity Capital and Corporate Governance: Evidence from US Real Estate Investment Trusts," Sustainability, MDPI, vol. 12(9), pages 1-21, May.
    8. Neagu, Florian & Tatarici, Luminița & Dragu, Florin & Stamate, Amalia, 2024. "Are green loans less risky? Micro-evidence from a European Emerging Economy," Journal of Financial Stability, Elsevier, vol. 70(C).
    9. Bhavesh Kumar & Love Kumar & Avinash Kumar & Ramna Kumari & Uroosa Tagar & Claudio Sassanelli, 2024. "Green finance in circular economy: a literature review," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(7), pages 16419-16459, July.
    10. Helena Redondo & Elisa Aracil, 2024. "Climate‐related credit risk: Rethinking the credit risk framework," Global Policy, London School of Economics and Political Science, vol. 15(S1), pages 21-33, March.
    11. Zifeng Feng & Zhonghua Wu, 2023. "ESG Disclosure, REIT Debt Financing and Firm Value," The Journal of Real Estate Finance and Economics, Springer, vol. 67(3), pages 388-422, October.
    12. Ter Steege, Lucas & Vogel, Edgar, 2021. "German residential real estate valuation under NGFS climate scenarios," Technical Papers 09/2021, Deutsche Bundesbank.
    13. Lai, Yuan & Papadopoulos, Sokratis & Fuerst, Franz & Pivo, Gary & Sagi, Jacob & Kontokosta, Constantine E., 2022. "Building retrofit hurdle rates and risk aversion in energy efficiency investments," Applied Energy, Elsevier, vol. 306(PB).

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