Green or not: Disentangle the Value Determinants and Externalities of Green Building

The global call for reducing greenhouse gas emissions has highlighted the importance of sustainable transitions in buildings as an effective means to optimize energy, waste, and other resources utilization. However, balancing environmental impact and green retrofit costs still need to be justified carefully. Though various studies have identified price and rental premiums for green buildings (GB), there is a lack of research delving into the dynamics behind the supply of green buildings. This research aims to investigate the underlying mechanisms and peer effects on green building supply. Thus, the research questions are as follows: (1) What value determinants contribute to green building premia? (2) How does the entry of a green building affect the possibility of nearby buildings turning into green?By using a sample of 59079 office property transactions spanning the period of 2013 to 2022 in Hong Kong, we found that certified office properties command a rental premium of approximately 9.8% compared to non-certified properties. The sample consisted of transactions involving green buildings certified by HKBEAM, BEAM-Plus, and LEED, which accounted for 15% of the total sample.To understand the mechanisms and externalities of GB, we constructed a hedonic model-based rental index. We compared the responsiveness and volatility between GB and non-GB. The provisional results showed that the rental level of certified office properties is more responsive and volatile than non-certified properties and varies across different areas. In the next phase, we plan to use local Moran’s I and Getis-Ord Gi* statistic, which measure the local spatial autocorrelation and hot spots of green buildings. Then by employing Google’s geocoding and distance matrix APIs, we will define neighborhoods flexibly, e.g. we can classify buildings located within k-meter walking distance from a green building as peers. A difference-in-difference method will be used to detect the externalities, where a dummy variable was introduced measuring whether there is an entry of newly certified green buildings into an area within 100 meters of property i over a one-year window before time t (100 meters and 1 year here are arbitrary and subject to robustness checks). Confirming a positive coefficient for this variable would support the hypothesis of urban externalities.This study aims to enhance our understanding of the market mechanism of commercial property and the decision-making of stakeholders. It provides empirical evidence regarding green commercial real estate while offering valuable insights for investors and tenants who are concerned about climate change and energy uncertainty."