Green Is Good: The Enduring Rent Premium of LEED-Certified U.S. Office Buildings

Demand for green office buildings is growing. Tenants benefit from energy savings¹ and increased productivity,² while owners benefit from higher asset value.³ For real estate investors, green buildings offer lower mortgage default risk.⁴

Although there have been numerous studies of the green office rent premium,⁵ none have been completed since the COVID-19 pandemic began. Since then, there has been concern about the future of the office amid widespread hybrid work. Health and wellness amenities have grown in importance and more comprehensive indicators of “greenness” have emerged, such as the Net Zero Pledge and the Energy Usage Intensity (EUI) Monitor.

CBRE studied approximately 2,800 LEED-certified office buildings and 17,700 non-LEED-comparable⁶ office buildings in the U.S. Figure 1 highlights the differences in LEED vs. non-LEED buildings from a class, location, age, renovation history and size perspective. LEED-certified office buildings tend to be large, high-quality assets concentrated in downtowns with an average annual rent premium of 31% or $38 per square foot compared with $29 for non-LEED certified buildings.

Figure 1: LEED- vs. Non-LEED-Certified Office Buildings

Source: USGBC, CBRE EA, CBRE Research 2022.

LEED-certified buildings have other characteristics that could contribute to this rent premium. For example, a third of Manhattan’s office inventory is LEED-certified, compared with only one-tenth in Louisville (see Figure 2). The difference in average rent of these two cities has less to do with LEED certification and more to do with location. Building age, size and renovation history also play a significant role in rent premiums. To make our LEED and non-LEED office set comparable, we used regression analysis to account for building age, size, amenities, renovation history and location (e.g., downtown vs. suburban, gateway vs. tertiary markets).

Figure 2: LEED Penetration by Markets, Top & Bottom 10

Source: USGBC, CBRE EA, CBRE Research, 2022.
Note: Only office markets with more than 10 million SF of office inventory are considered in the ranking.

Our model (Figure 4, Model 1) suggests that LEED-certified buildings earn a 3.7% rent premium over their non-LEED-certified peers after controlling for age, size, renovation and location. Since the COVID pandemic, the LEED premium has been reduced to approximately 3% (Figure 4, Model 2). This likely is the result of the overall reduction in occupier demand and a migration to suburban locations with fewer LEED-certified buildings. This decline in the rent premium is probably temporary, reflecting disrupted office market conditions. The LEED premium we have found is consistent with other studies over a long period of time, which suggest an enduring benefit to rents from verifiable measures to reduce carbon emissions.

By building class, there is an uneven effect of LEED certification on rent. Our result (Figure 4, Model 3) suggests that LEED-certified Class B buildings have a rent premium twice that of Class A LEED-certified buildings (4% vs. 2%). This is probably because LEED-certified Grade B buildings are relatively scarce.

Among LEED-certified buildings, there is no statistically significant rent premium associated with higher levels of LEED (see Figure 3). The result implies that occupiers put monetary value on green labeling, but the degree of energy efficiency matters less. However, as energy performance standards become more prevalent, we could see more competition within the certified group. As of now, the premium only exists when comparing LEED to non-LEED; hence, some have used the “brown discount”⁷ to describe the rent discount of non-certified buildings.

Figure 3: No Statistical Significant Relationship between LEED Score and Rent

Source: USGBC, CBRE EA, CBRE Research, 2022.
Note: The graph depicts a binned scatter plot between LEED and rent after controlling for age, size, renovation history and location.

Our analysis (Figure 4, Model 1) reveals that office assets built after 2012 command a 14% rent premium over those that were built between 2002 and 2011. Each additional decade in age decreases the rent by approximately 5%. Major renovation work increases rent by 4% for at least 22 years. Additionally, each 10% increase in gross floor area equates to a 0.8% increase in rent.

To further test our model, we used Energy Star® certifications in lieu of LEED certifications to see if there was any difference. Energy Star®, like LEED, certifies buildings based on energy efficiency. Figure 5 shows the results, which largely align with the result we obtained from LEED.

Our analysis finds a significant rent premium for LEED-certified office buildings. After the upfront costs for certification, owners of LEED-certified buildings can increase the value of their assets by 4%. In suburban locations, where only 40% of the rentable square footage is LEED-certified, there is a big competitive advantage for owners to secure such a designation as tenants become more green conscious and relocate to the suburbs⁸ to reduce employee commute times.