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The effects of eco-certification on office properties: a cap rates-based analysis

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  • Karen M. McGrath

Abstract

Though the effects of eco-certification on individual property cash flows and valuations have been addressed in previous literature, the question has remained as to the worth investors place on eco-certification, and whether there is perceived value in the capital outlays often needed in order to achieve eco-certification. This paper is the first to provide credible empirical evidence through the analysis of excess capitalisation rates that investors place on increased value on the property-specific benefits of eco-certification. Based upon a data-set of Leadership in Energy and Environmental Design (LEED) and Energy Star-labelled commercial office properties and their non-certified counterparts, this paper investigates the effects of eco-certification on the excess capitalisation rates of commercial office properties. Hedonic regression analysis is used to determine whether premiums in rent and sales price associated with eco-certified properties translate into lower excess capitalisation rates vs. their non-certified counterparts. The results suggest that overall eco-certified properties have excess capitalisation rates that are 0.364 lower than their non-certified counterparts. Additionally, those properties with only the Energy Star label also exhibit lower average excess capitalisation rates, with properties achieving the Energy Star rating post-sale having lower excess capitalisation rates than those purchased with the Energy Star rating in place. However, due to the small sample size, the results surrounding properties that are LEED-only certified or that possess both the LEED and Energy Star labels are inconclusive.

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  • Karen M. McGrath, 2013. "The effects of eco-certification on office properties: a cap rates-based analysis," Journal of Property Research, Taylor & Francis Journals, vol. 30(4), pages 345-365, December.
    • Handle: RePEc:taf:jpropr:v:30:y:2013:i:4:p:345-365
    DOI: 10.1080/09599916.2012.762034
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    References listed on IDEAS

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    1. Piet Eichholtz & Nils Kok & John M. Quigley, 2013. "The Economics of Green Building," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 50-63, March.
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    Cited by:

    1. Prashant Das & Patrick Smith & Paul Gallimore, 2018. "Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions," The Journal of Real Estate Finance and Economics, Springer, vol. 57(2), pages 264-296, August.
    2. Deng, Yongheng & Wu, Jing, 2014. "Economic returns to residential green building investment: The developers' perspective," Regional Science and Urban Economics, Elsevier, vol. 47(C), pages 35-44.
    3. Mathew, Paul & Issler, Paulo & Wallace, Nancy, 2021. "Should commercial mortgage lenders care about energy efficiency? Lessons from a pilot study," Energy Policy, Elsevier, vol. 150(C).
    4. Constantin Kempf & Juerg Syz, 2022. "Why pay for sustainable housing? Decomposing the green premium of the residential property market in the Canton of Zurich, Switzerland," SN Business & Economics, Springer, vol. 2(11), pages 1-39, November.
    5. Ankamah-Yeboah, Isaac & Rehdanz, Katrin, 2014. "Explaining the variation in the value of building energy efficiency certificates: A quantitative meta-analysis," Kiel Working Papers 1949, Kiel Institute for the World Economy (IfW Kiel).
    6. Niina Leskinen & Jussi Vimpari & Seppo Junnila, 2020. "A Review of the Impact of Green Building Certification on the Cash Flows and Values of Commercial Properties," Sustainability, MDPI, vol. 12(7), pages 1-22, March.
    7. McGrath, Karen, 2014. "Does Increased Investment in Responsible Properties Lead to Better Corporate Performance?," MPRA Paper 57767, University Library of Munich, Germany, revised 05 Aug 2014.
    8. Manganelli Benedetto & Anelli Debora & Tajani Francesco & Morano Pierluigi, 2024. "Capitalization Rate and Real Estate Risk Factors: An Analysis of the Relationships for the Residential Market in the City of Rome (Italy)," Real Estate Management and Valuation, Sciendo, vol. 32(3), pages 101-115.

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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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