Green Still Pays

Norm G. Miller on why no one would build a Class A office building today that wasn’t LEED-certified.

July 18, 2012

Even in a slow economy, giving your existing office building an environmentally focused retrofit could yield a rent premium, says Norm G. Miller, a professor at the Burnham-Moores Center for Real Estate at the University of San Diego and co-author of the paper The Economics of Green Retrofits.

How much will a green retrofit of an office building yield in additional revenue?

Our research looked at 374 Class A and Class B office buildings that held a LEED Existing Building: Operations and Maintenance certification from the U.S. Green Building Council. We found that these EBOM-certified buildings averaged 7.1 percent higher rents than comparable buildings that weren’t certified. If the building also had an Energy Star rating from the U.S. Department of Energy, that rent premium rose to 10 percent.

Of course, there are differences in the rent premium depending on the market and the type of tenant. For example, larger public companies and financial firms are more likely to choose a green building. Federal offices are now required to choose green buildings.

New York and Boston have the biggest increases in rent after green retrofits, perhaps because they don't have enough new LEED-certified office buildings relative to demand. Dallas-Ft. Worth and Washington, D.C., also saw significant premiums for green development. Cities like Cleveland, which were particularly hard-hit by the recession, saw the smallest rent differential, probably because tenants in these areas were more sensitive to rental price.

Has the economic slowdown reduced the rent premium tenants will pay?

We have seen a slight drop in the rent differential for green buildings since our original study in 2008. But I think the decline has less to do with the economy than with the tremendous growth in the number of LEED-certified and Energy Star buildings. In 2005, only 5 percent of office square footage was green. It was 12.5 percent in 2010, and I expect it will reach 15 percent by the end of 2012.

Why are tenants willing to pay more for green?

Operating expenses and thus pass-throughs are lower in most green buildings so tenants can afford to pay higher rents without increasing overall occupancy costs. In our survey, 59 percent of owners saw a drop in operating expenses after a retrofit. There is also the perception that workers are more productive in green buildings because of more natural light and better air quality.

Are green buildings becoming essential to attract tenants?

I can’t imagine that anyone would build a Class A office building today that wasn’t LEED-certified. And green construction and retrofits are also gaining traction in retail and industrial. The economic decision to do a green retrofit has also become easier because of the drop in the prices of many energy-efficient products. An LED light­bulb that cost $60 three years ago now costs half that.

With all these positives, why aren’t even more building owners and managers undertaking green retrofits?

In part, technology is changing so fast and the cost of many green products is falling so rapidly that owners and managers are hesitating because they think prices will fall even further. But prices are beginning to stabilize now, so more owners may decide now is the time to get up to speed and go green. 

Mariwyn Evans

Mariwyn Evans is a former REALTOR® Magazine writer and editor, covering both residential brokerage and commercial real estate topics.