Adaptive Spaces

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

Tenants benefit from energy savings and increased productivity, while owners benefit from higher asset value.

October 26, 2022 8 Minute Read

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Executive Summary

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  • A CBRE analysis of 20,000 U.S. office buildings found that average rent of those with LEED certification, which denotes a high degree of energy efficiency and environmental responsiveness, is 31% higher than that of non-LEED-certified buildings.
  • When the effects of building location, age and renovation history of a building are accounted for, LEED-certified buildings still command an average 4% rent premium; however, since the start of the COVID-19 pandemic, this premium has fallen to just 3%.
  • LEED designation provides a larger rent premium for Class B office buildings and allows them to avoid suffering from a “brown discount,” which could hamper lease-up efforts.
  • These rent premium averages also apply to Energy Star® certification. However, Gold-certified buildings do not command a higher premium than those earning only a Silver certification.

Overview

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.

Context, Data Description & Method

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 tend to be newer, larger, and more downtown than their non-LEED equivalents.

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.

Primary Results

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.

Among LEED-certified buildings, there is no statistically significant rent premium associated with higher levels of LEED.

Secondary Results

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.

Implications

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.

There is a big competitive advantage for owners to secure LEED certification as tenants and city governments become more green-conscious.

Figure 4: LEED Rent Premium Regression Analysis

Image of data table

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
Age 0-10 and Class A are the omitted category to interpret the Age and Class Variable.

Figure 5: Energy Star® Rent Premium Regression Analysis

Image of data table

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
Age 0-10 and Class A are the omitted category to interpret the Age and Class Variable.
All LEED-certified buildings are excluded from the sample.

1 Source: “The impact of renewable on-site energy production on property values,” Journal of European Energy Research March 2020.
2 Source: “Healthy Buildings: How Indoor Spaces Drive Performance and Productivity,” Harvard University Press, 2020.
3 Source: “Doing Well by Doing Good,” American Economic Review, December 2010.
4 Source: “Green Buildings in Commercial Mortgage-Backed Securities,” Real Estate Economics, 2020.
5 Source: “On the Value of Environmental Certification in the Commercial Real Estate Market” Real Estate Economics, 2017 ; “Operating Expenses and the Rent Premium of Energy Star® and LEED Certified Buildings in the Central and Eastern U.S.” The Journal of Real Estate Finance and Economics, 2014; “Green Design and the Market for Commercial Office Space” The Journal of Real Estate Finance and Economics, 2010; “Does Green Pay Off?” The Journal of Real Estate Portfolio Management, 2008.
6 Since there are no LEED-certified offices in Class C & D buildings, we removed Class C & D buildings from the comparison set. In addition, buildings under 5,000 SF are removed and buildings in zip codes with no LEED buildings are removed as well.
7 Source: “Value of Green Building Features” CBRE Research, 2022.
8 Source: “Suburban Office Markets Recovering Faster than Downtowns,” CBRE Research, June 2022.

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