Nils Kok

How institutional investors invest in real estate (or: how they should invest...)

The Wall Street Journal featured an interesting article this week, titled "Big Investors Shun Pools and Swim on Their Own." The article discusses the recent trend of large institutional investors moving into real estate directly, rather than via pooled funds. The reason for getting closer to property, cutting out the middlemen, are the high fees and disappointing performance of external fund managers. Especially during the crisis, many investors were hard-hit by the use of leverage in pooled funds (and of course by the choice of opportunistic investments, such as speculative development and land, but that was mostly the decision of the investors...). The Harvard endowment, the Canada Pension Plan (CPP IB) and Abu Dhabi Investment Authority are mentioned as examples. But add to that other big players on the capital market, like GIC (Singapore) and NBIM (Norges). (Never heard of? Well, that's where the new money is. Continuous inflows and no or limited liabilities.)

Interestingly, I recently wrote a paper on real estate investments of public pension plans. In this paper, presented at the Real Estate Research Institute in Chicago, we document that fees paid by US pension plans are consistently higher than the fees of institutional investors in other countries, by about 40bp. (And that's not just in real estate, but in all asset classes.) If that were to lead to outperformance, fine, but in fact US pension plans underperform their benchmarks over the period 1990-2010. This is mostly driven by the massive losses over the past couple of years (more than 50% for some pension funds...including CalPERS and Harvard), and is not compensated by the "good years" that preceded the crisis. We conclude, amongst others, that large institutional investors should consider to get closer to real estate, by building an internal real estate department. Yes, this is difficult. Yes, it requires human capital (that should be paid a competitive salary, including performance bonus). And yes, it requires critical mass. But there are some good examples across the border: OMERS has Oxford Properties, their very successful real estate investment division, OTPP has Cadillac Fairview, etc. And, like Harvard and ADIA, more and more investors are partnering with property/fund managers rather than investing in "blind" pools. Of course, this will not work for the many small pension funds that are out there. But we make another recommendation: these funds should reconsider their allocation to REITs, or the lack of allocation, that is. For small investors, investing in property through listed property companies readily provides access to the global real estate market, with liquidity as one of the main advantages. I know, REITs are not real estate, at least not if you look at quarterly correlations. But if the holding period is long enhough (we're investing for the long run, right...?), correlations with direct real estate are high, and correlations with other asset classes are low. Moreover, fees are low (at about 40bp), especially compared to fund-of-funds (add 120bp...). So, it's time for institutional investors to reconsider their investment strategy in real estate, and not just for the big investors!

Slides on The Performance of Pension Funds Investments in Real Estate

View more presentations from nilskok.

In memory: John M. Quigley. Colleague, mentor and friend.

My dear colleague John M. Quigley passed away last Saturday. Working with John for the last five years, he became more than just a colleague. He was a mentor, an inspirator and a friend. I'm on my way to West Palm Beach for the Homer Hoyt meetings, where John was one of the main fellows. Then I'll go on to Berkeley, where I was planning to continue our work on land prices in the Bay Area, on energy consumption in commercial real estate (with matt Kahn), and to start a new project on the financial implications of energy efficiency in commercial buildings. It will be strange not to meet John in the office, drinking strong coffee and cracking some jokes. John was a symbol to me and many of my colleagues.

Below is a summary of John's work. Matt Kahn also wrote an obituary and Ed Glaeser posted a review on Bloomberg.

Quigley was Distinguished Professor of Public Policy, Business, and Economics at UC Berkeley

John M. Quigley, a leading scholar of housing markets, local public finance, energy efficient buildings, homelessness, and racial discrimination in housing, passed away in Berkeley on Saturday May 12. He was 70.

Quigley, the I. Donald Terner Distinguished Professor of Public Policy, Business, and Economics at UC Berkeley, was a campus leader, an inspirational mentor, and a leading figure in urban economics and housing policy.

During his career he produced fourteen books and over 150 scholarly articles. Quigley excelled at finding clever ways to use empirical data about housing and urban areas to answer important public policy questions such as the macro-economic impact of rising housing prices on consumption behavior, the impact of segregation on African Americans’ opportunities to accumulate wealth through investment in housing, the effect of governmental and voluntary energy standards on energy efficiency and the value of buildings, and the relationship between housing markets and homelessness.

He combined boundless energy with an infectious laugh, which he often followed with a sharp intellectual insight. When Quigley saw an issue that was important he immersed himself in research to figure it out.

In the 1970s, Quigley showed, with John F. Kain, that racial segregation not only ghettoized black families, it also reduced their chances of developing savings through home ownership. In later work, Quigley went on to show how segregation reduced job opportunities for minority youth. Kain and Quigley also pioneered the quantitative measurement of housing quality. Their work made it possible to study housing markets where the basic commodity, “housing,” is a bundle of structural and neighborhood characteristics that cannot be completely captured by one number such as the square footage of a home. In their 1975 book, Housing Markets and Racial Discrimination they demonstrated that statistical tools could be used effectively to value housing attributes and to control for differences in them across space and over time.   Using these techniques, they showed that in many cities blacks paid substantially more than whites for comparable housing.

In the 1980s, Quigley began to study how government building regulations and voluntary energy standards affected energy efficiency in residential and commercial real estate. In recent work he showed that buildings complying with voluntary Energy Star or LEED standards receive higher rents and higher selling prices — partially because of their energy savings but also because of intangible effects of the label itself due to beliefs about improved worker productivity and improved corporate image from “green” buildings.
Studied homelessness

In the 1990s, Quigley turned to the study of homelessness. Most scholars focused on the personal characteristics, the mental and physical disabilities and substance abuse problems, of the chronically homeless, but with co-authors Steve Raphael and Gene Smolensky, Quigley showed how housing markets, especially those with limited supplies of low quality and inexpensive rental housing, were part of the problem. In these markets, even the lowest priced housing was often too expensive for those in extreme poverty, and small reductions in its supply due to higher government housing standards or demolition greatly elevated the risk of homelessness.

Quigley also made fundamental contributions to the study of housing markets. A highly influential and prescient 2001 article withKarl Case and Robert Shiller anticipated the 2001-2006 economic expansion by showing that increases in housing wealth, just like increases in stock market wealth, increased consumer spending and fueled macro-economic growth. In recent years, when many questions arose about the efficacy of mortgage markets, Quigley wrote about how better government policy and mortgage products could protect homeowners.

Quigley also investigated the impact of regulations on housing prices, the economics of refuse collection, how university decentralization stimulated regional economies, the impact of rent control, public support for congestion pricing, the economics of rebuilding cities after disasters, and many other topics.
A love of Sweden

One other theme ran through Quigley’s life and research: his knowledge and love of Sweden. His first publication appeared in the Swedish Journal of Economics in 1966. He would go on to write many articles on all aspects of the Swedish economy. He was elected a foreign member of the Royal Swedish Academy of Engineering Sciences in 2006, and he received an honorary degree from Sweden’s Royal Institute of Technology in 2007.

Quigley’s wide-ranging and prolific scholarship was matched by his generous teaching and mentoring. He served as a committee member for over one hundred PhD dissertations during his career, chairing twenty-six since 1990. His was noted for his devotion to his students, his exceptionally high standards and expectations, his wide-ranging intellectual curiosity, his availability, his quick-turn-around of manuscripts and papers, his generosity and humor, and his ability to get graduate students to perform at levels beyond what they thought possible by treating them as peers and partners. His students have positions in universities, research institutes, and governmental agencies around the world.

Quigley was also a leader in service to the University and his profession. He was editor in chief of Regional Science and Urban Economics from 1986 to 2003, and he served on over two dozen editorial boards for scholarly journals during his career. He advised over twenty research and governmental agencies including the World Bank, General Accounting Office, Urban Institute, Federal Home Loan Bank Board, Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and institutions in Indonesia, Hungary, Germany, Sweden, and China. Quigley was Chair of the Department of Economics from 1992 to 1995, Chair of the Berkeley Division of the Senate of the University of California from 1996 to 1997, Director of the Berkeley Program on Housing and Urban Policy since 1999, and Interim Dean of the Goldman School of Public Policy in 2008.  He was elected a fellow of the Homer Hoyt Institute in 1992 and the Regional Science Association in 2004. He was president of the American Real Estate and Urban Economics Association from 1996 to 1998, President of the Western Regional Science Association from 1998 to 2000, and President of the North American Regional Science Council from 2009 to 2010.

Quigley was born in New York, New York in 1942. He graduated from the United States Air Force Academy with distinction in 1964, and he worked as an econometrician at the Pentagon from 1964 to 1968, leaving the Air Force with the rank of Captain and an Air Force Commendation Medal in 1968.  He earned his doctorate from Harvard University in 1971 and taught at Yale University from 1972 until he joined the faculty at the University of California, Berkeley in 1979.

He is survived by his wife of 36 years, Mary Curran, and his four children, Sam of San Francisco, Jane-Claire of New York, and Johanna and Benjamin of Stockholm, Sweden.

This obituary was written by John Quigley’s UC Berkeley colleagues, primarily Henry Brady, dean of Cal’s Goldman School of Public Policy.

What's Next in Real Estate? Reintegrating the Value Chain

I recently gave a talk in Sydney (well, it's almost two months ago now…), and the organization (the Australian Green Building Council) asked me to "think out of the box" and to come up with "provocative statements". In other words, they wanted me to change my slide deck. That was easily resolved, using the services of my friends at Mr Prezident (the most amazing Prezi's you've ever seen…). But the "new next" took some more effort. Ultimately, I came up with the following picture:

In the traditional real estate value chain, there has been a drive towards segmentation, with specialization in every layer. The ultimate building owner (on paper) is just that -- detached from his investments. He no longer has a direct portfolio of properties, but invests via external managers, be it listed property companies or private fund managers. Alignment between owner and manager can be achieved through co-investment, but mostly happens through performance-based compensation. But, as we well know, performance fees are not perfect remedies for principal-agent problems. And owners have to resort to focusing on quarterly performance results, which leads to short-terminism among both managers and owners (ultimately, the employees of owners are also paid based on performance relative to peers). The typical fund manager (or property company) acquires and disposes of assets, but leaves property management (including, most of the times, maintenance and capex planning) to external companies. Enter disconnect two. External property managers might be better at achieving economies of scale for systematic tasks, such as cleaning, and they might have a better network to attract tenants. But the fund manager loses direct control of the property, no longer has a good feel for the satisfaction of the tenant and the technical state of the building. And again, the objectives of the external property manager are not necessarily aligned with the objectives of the fund manager, or, the owner. Then, there is the tenant. After all, real estate should be about the tenant. But the tenant is not really the person that occupies the property, it's a "tenant rep," who is usually not directly connected to, let alone in, the C-suite. The tenant rep has to find space that satisfies a number of parameters: location, quality and price. (Service costs are usually not part of this equation.) The ultimate satisfaction of the employee with the space is assumed to be positively related to these parameters. But…maybe there are other factors that make the employee happy -- and ultimately more productive. Light, space, (lack of) noise, vertical integration. Etc.

I think the disintegration of the real estate value chain brings many benefits, as specialization usually does. But it also has many disadvantages and a backlash is on the way. There is a trend towards reintegration of the value chain. Build-to-own. In-house property management. And closer control of the ultimate owner, through club deals and JVs. Most importantly, smart building owners put the pyramid upside down: the employee on top. Or the consumer in the shopping centre. Or the patient in the hospital. Real estate to serve the purpose of: increasing employee productivity, creating a shopping experience, enhancing patient recovery. That requires a better integration of tenant representatives in the average organization. Actually, real estate can play a much more fundamental role for business than is currently realized -- buildings should become more central to the business of the modern corporation, and they can be exploited to execute part of the corporate strategy. (Better buildings may assist in: attracting and retaining human capital, establishing and reaffirming a brand in the marketplace, and decreasing operational costs.) The upside-down pyramid also requires in-house property management, or better alignment between property managers and fund managers. And, fund managers should be compensated on a longer-term basis (not unlike the current discussion on compensation of executives in general corporations). That also requires paying analysts on a longer-term basis. Because the typical focus is a quarter, if not shorter.

There was a great article recently in the NY Times on "new office designs" and the impact on employees. (In New Office Designs, Room to Roam and to Think.) It talks about the modern office, and how employees perceive such offices. Thinking back of Sydney: you can see the move towards activity-based working happening in real time. Putting tenant satisfaction first will have many benefits. It will also result in more employees on the same floor plate. Something that should be in the equation of a tenant rep as well.

Global Consortium of Institutional Investors Integrate ESG Factors Into Real Estate Investments

 GRESB to join forces with GRI to enhance disclosure on sustainability in real estate sector

Amsterdam, April 4, 2012 – Thirty of the world’s largest pension asset managers, the major real estate industry associations and a large group of stakeholders have put their weight behind the Global Real Estate Sustainability Benchmark (GRESB), which this week released its third annual sustainability survey. GRESB also announced a partnership with the Global Reporting Initiative (GRI), to enhance disclosure on Sustainability Reporting.

GRESB has become an important tool in creating more transparency in the environmental and social performance of real estate investment managers. In 2011, more than 350 real estate fund managers and property companies responded to the GRESB Survey. The annual benchmark produced by the consortium is now actively used by more than 30 institutional investors to engage with their investments. Nils Kok, co-founder of GRESB: “It is our belief that benchmarking can help generate and strengthen market forces needed for more efficient use of energy and other resources by the real estate sector, lowering operational costs.” Sander Paul van Tongeren, APG Asset Management, a founding member of GRESB: “For investors, benchmarking sustainability performance provides the opportunity to take into account directly the risks of higher (and more volatile) energy prices, stricter legislation targeted directly at the real estate sector and changing preferences of (corporate) tenants.”

The overall goal of the collaboration between the GRESB and GRI is to advance the uptake of responsible business practices and making reporting on economic, environmental, and social performance in the global real estate sector standard practice. The aim of the partnership is to make the real estate sector among the top-three industries with the highest disclosure on sustainability performance, within a time period of three years. This will be enabled by the Construction and Real Estate Sector Supplement, GRI’s industry-specific reporting guidelines.

Real estate funds and companies can participate in the 2012 GRESB Survey free of charge, allowing them to benchmark their portfolio against peers in the industry. Participants will receive an individual scorecard, offering a unique insight into their relative sustainability performance against peers and leaders in their region. More information about GRESB and the Benchmark can be found at www.gresb.com.

Energy dependence and the electrification of our society

I'm in Boston for the Pension Real Estate Association (PREA) meetings, which have been torpedoed by a power outage that has now lasted for more than 16hrs. I have to commend PREA for their focus on energy efficiency -- this is certainly the most efficient hotel I've stayed in. And it's quite cosy to have candlelights in an otherwise sterile hotel like the Westin (even the bathrooms look like they're from some romantic movie...). But from a practical perspective, no electricity is killing. No electricity = no hot water, no heating, no lifts (not nice if you have a room on the 30th floor), no projector (not nice if you have to give a talk), etc. Then there's being disconnected from the world, which is a strange experience -- it almost seems like my tweet about Au Bon Pain having power and internet has backlashed. This place is now filled with internet junkies that collectively slow down the internet to pre-2000 speeds.

This experience is a good wake-up call though: our society crucially depends on electricity, and this dependence is bound to increase going forward. The era of electrification is fueled by the advent of electric cars, energy-guzzling appliances and increasing urbanization. Buildings remain critical, because that is where we spend our time (remember: 75% of electricity consumption happens in buildings). We should start to think more about local energy generation, so we're not just relying on an old grid. We need much better integration between demand (i.e., buildings) and supply (i.e., central or decentral generation), which can only be achieved by "bringing buildings online." Renewables could solve part of the capacity problems that we're currently facing (especially with nuclear plants going offline in many countries), but balancing their volatile supply with peaks in demand will be challenging. The fact that more than 15 tri-generation plants are ready to roll, but are currently not being used in Sydney still blows my mind (I just tried to explain the concept of tri-generation to a big real estate investor, and I failed miserably. Which tells us something about the importance of sharing learning experiences in order to speed up the diffusion of new technologies beyond national borders). Governments should act much more forcefully to deregulate energy markets and allow for competition. The vested interests of traditional utilities are just too high.

The focus on energy is now broadened from just "efficiency" to "reliability" and "dependence." It all comes down to better understanding energy demand from buildings, and putting buildings to use rather than letting them standing passively. Something to think about when my battery runs out...

Green Cities (Sydney) Prezi: A Primer on Finance, Sustainability, and Buildings

I'm currently in Sydney for a conference called "Green Cities." I love this place (if only Sydney were closer to Europe or the U.S.), especially the forward thinking on energy efficiency in buildings. I was picked up from the airport in a Prius, and while talking about the weather (there are some flooding issues due to heavy rainfall), my cab driver mentioned that he was making about AUD900/quarter on his solar panels (as with all cab driver stories, let's discount this by 50 percent, but that's still a serious net cash flow). Apparently, the government promised a feed-in tariff of some 70 cents/kWh when they first started promoting solar. They quickly learned that every ray of sunshine would cost the government dearly, as retail and commercial investors rushed to cash in (Spain did something similar in the early days). Now the feed-in tariff is back to "normal" levels. With current prices of solar, it's cost-competitive anyway -- if only the sun would shine a little more.

This is my new Prezi, with some slides on IEQ. It features One Bligh Street in Sydney, which is almost as cool a building as 101 California in San Francisco (the streamed version of the talk is here):

A Primer on: Finance, Sustainability, and Buildings on Prezi

 

 

 

Retrofit ("Green") Financing Takes Off

The New Year is off to a good start for energy efficiency financing:

Sustainable Development Capital, a London-based corporate finance and advisory business specializing in sustainable infrastructure assets and services including energy, water, waste, transport, healthcare and education, received a capital infusion from First Eastern, a Hong Kong-based investment group (Download Press release). Over the past few years, SDC has been trying to work out a sound business model to profit from energy efficiency retrofits, and has been moderately successful in pulling off deals. I strongly believe there is a massive market opportunity in China, where even buildings built as recent as 5 years ago can be improved substantially. If the speed in getting properties to market is paramount, building quality may suffer. So basic building optimization (including commissioning of the existing equipment) is a good start, followed by more rigorous retrofits. A (slightly) dated presentation here (Download APG presentation retrofit fund) gives a preview of an institutional investors' view on investment opportunities in retrofits of (commercial) buildings in China (credits to Michael Friedman).

In the US, it seems like PACE is finally taking off. In this recent article in the Huffington Post, Scott Henderson, Finance Director of the buildings program of the CCI/C40, lays out the fundamental challenges in financing energy efficiency retrofits, and, more importantly, the solutions to these problems. Scott is arguably the most knowledgeable person in this field, and his work has been instrumental in many business models that have popped up to profit from the potential of energy efficiency (including the model mentioned above). Scott visited Amsterdam last week, after a C40/CCI meeting on financing infrastructure projects in Basel and it was good to hear what's happening around the world. Australia seems to be the first (again) to have tax-lien financing up and running: the Sustainable Melbourne Fund and Low Carbon Australia are two parties offering low-cost financing for energy efficiency projects, with the possibility of tying a municupal tax lien on a property to the interest and principal repayment. If financing were to be a barrier (I believe it is, but not for the top of the market, rather for the smaller, private investors), this should resolve the market efficiency and lead to many more existing building retrofits.

At a large conference in Istanbul last week, the "International Green Building Summit," I learned more about what happens in green building financing around the world. Romania, of all places, has succeeded in setting up a "green mortgage," backed by the national central bank (for what it's worth...). This mortgage incorporates the lower outgoings for energy, allowing for a higher debt/income ratio, and accounts for the more stable (or even higher) value of energy-efficient homes, allowing for a higher loan-to-value ratio. Now that's forward looking (and ultimately rational, if you believe that energy efficiency is capitalized in home prices, which has been shown previously for a large sample of homes in Europe (see this paper). I was also inspired by a presentation of the Department of Energy's Roland Pfisser, who was previously at PG&E (one of the largest utilities in the US), and has taken an evidence-based approach towards implementing energy efficiency solutions in buildings. Interestingly, DOE now throws in some bait to challenge the industry: $5mln for the manufacturer that can come up with rooftop HVAC systems that at 50% (!) more efficient than current market standards (Carrier and another vendor both came up with models that are price-competitive), $5mln. for the manufacturer that comes up with 50% more efficient lighting, keeping constant lighting quality (my Dutch friends, Philips, won this contest, not surprisingly). These examples reinforce my believe that the market can innovate its way out of the current challenges, provided that demand is really there…. The Massachusetts Green Retrofit Program is another example of a (local) government initiative that is very much market-oriented, and yet so simple.

Yes: it's about benchmarking! That's also what many cities and countries across the world have introduced over the past few years. (NABERS in Australia, the EPCs in Europe, etc). I'm impressed by the work in New York, where all buildings larger than 50,000sq.ft. have to report on (standardized) energy consumption through the Energy Star portfolio manager. Last year's data will remain a well-kept secret (even to academics, other than a selected few at NYU and Penn, shame on you NY!), but this year's data will be made public. Yes, naming and shaming. Full transparency in the energy performance of all (large) buildings should, presumably, inform the market, and trigger landlords to improve the performance of their properties. I made a compilation of some of the slides (credits to the presenters...)

Selection of Slides Green Building Summit, Istanbul

 

More on the demand side: an increasing number of large building managers and owners are revisiting the energy efficiency of their real estate portfolio. In a recent conversation with Bill Mitchell of Microsoft, he showcased the work done at the Puget Sound campus (one of the largest campuses in the world!). As always, lots of no-brainers, low-hanging fruit, and all the exclamations that you tend to hear when owners/managers finally get to work… More interestingly, good-old Microsoft seems to get into the energy game as well. Shift away from the Windows anchor, and now think cloud-based storage and computing. Exactly: the challenge of the next 20 years is connecting buildings (residential and commercial) with building management ("smart") software, sources of energy generation (that includes the traditional utilities, but also local generation from renewables) and new forms of energy demand (most importantly, electric cars). Food for thought...

Some new, high-quality (academic) papers on energy and energy efficiency

I recently gave a talk at the annual convention of Economics for Energy, a Madrid-based energy think-tank. Some interesting numbers on the growth of renewables were presented by Bloomberg New Energy Finance -- massive growth in China (and of course solar in Europe. We'll pay later through our energy bills, but nobdoy seems to realize that...). Resi PV is now at parity at many countries, which may lead to even faster diffusion. My Berkeley "colleague" Max Aufhammer presented some very interesting stats on the effects of increasing temperatures on energy demand in California -- expect an exponential increase in energy consumption from cooling residential and commercial buildings. (Being from Europe, I have no doubts about the heat-up of the earth.)

The most recent Journal of Economic Perspectives has a whole section on energy. Papers can be downloaded for free, certainly worth reading some. Ok, it's academic, but the abstract usually tells the story... Last, this is a very cool paper on economic development and night lights -- using aerial pictures the authors relate the intensity of night light to economic prosperity, quite innovative (Download Henderson et al. - Bright Lights).

Of course, writing about other people's work is a smart way to cover up my own lack of productivity... Well, Matt Kahn and I have finally finished our project on commercial building electricity consumption (results are quite interesting indeed), but we're waiting for a sign-off from the data provider. I also revised a couple of existing papers on energy literacy of private consumers, the economic implications of energy efficiency labels in the European office market, and the value of the BREEAM label in the UK.

Value Added From Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate

with Aleksandar Andonov and Piet Eichholtz (2012)

Download

Real estate is the most significant alternative asset class for pension funds, representing more than five percent of total holdings, on average. This paper employs a previously unexplored database to examine the investments of some 880 pension funds in direct real estate and real estate investment trusts (REITs) over the 1990-2009 period. Regarding allocation choice, we document that larger pension funds are more likely to invest in real estate internally, have lower costs, and higher net returns. Smaller funds are more likely to invest in direct real estate through external managers and fund-of-funds, but largely ignore REITs. The additional investment layers significantly increase their costs and disproportionally reduce returns. Moreover, U.S. pension funds’ investment costs are twice as high as those of their foreign peers, and both gross and net performance are lower. The underperformance of U.S. pension funds in real estate investments is most striking in the last two years of the sample period, which may be due to opportunistic investment behavior pre-crisis. The Performance of Pension Funds Investments in Real Estate View more presentations from nilskok

After the silence: new research on energy literacy and green building competition

In the posts below, there are two new working papers -- just in time to allow for killing some time during the food-filled Christmas days (I know, this year Christman is just like a regular weekend, but...Europe not only celebrates Dec 24 and 25, but also SECOND Christmas Day, the 26th. Well, we better enjoy it as long as these perks last...). The first paper is a long-awaited piece on the "value of green" in the UK, using BREEAM certification as a proxy for environmental performance. To be honest: all such studies outside of the US suffer from the crappy data syndrome, including this paper. It's incredible, but we could not find a consistent, widespread indicator of building quality in the UK. Yes, there is the anecdotal "prime," "institutional," or "Grade A," but there is no such quality rating as BOMA's standard in the US and Canada. As a result, we end up comparing apples to oranges, even though we try hard to make the green buildings as non-green as possible (think: propensity score weights, an overload of locational and hedonic controls, and decent models). We end up with a "green premium" that's a bit too high to my taste, but I'm hoping the reader takes away more than just that: we also find that green buildings lead to gentrification of neighbourhoods, raising locational value for all surrounding properties. That's quite a novel result. We also document that once the number of certified buildings in an area increases, the "green premium" becomes smaller, and zero once the number of green buildings in an area is larger than eight or nine (remember: this is statistics, so it's just an average). Worth reading (comments welcome).

The second paper is with Dirk Brounen (Tilburg University) and extends our work on residential energy consumption, energy labels, and capitalization of energy efficiency by private homeowners. In this (slightly premature) paper, we explore the results of a large survey that we sent to homeowners, asking them nasty questions about their energy consumption, their ideology and attitudes towards the environment, lifestyle, and their ability to make rational decisions when it comes to investments in energy efficiency. We dub awareness and ability: "energy literacy." Not surprising, but only fifty percent of our respondents has some idea about their energy bill -- and the variation is unrelated to education. Intelligence does not increase awareness of residential energy consumption. But, lifestyle and attitude does: well-organized, older people tend to score better on energy literacy. We then study the behavior of households as it relates to thermal comfort, i.e., their thermostat setting during the evening and at night. Our study is executed in Holland, and remember: in Northwestern Europe it's cold in winter, so heating  matters! Our results show that older respondents with higher incomes choose higher comfort levels, and age is negatively related to lowering the temperature at night. We also find that setting the evening temperature higher than average increases the gas bill quite substantially. The behavior of the household in “turning the knob” results in statistically significant effects. We then add a night switching dummy that indicates whether the household lowers the home temperature at night. The results confirm that switching to lower night temperatures significantly lowers the gas bill. Household behavior matters strongly for residential energy consumption, but a large group of households doesn't seem to care (or is rather unaware). We refer to this group of consumers as “sleepers,” comparable to the “woodheads” of Quigley and Deng (2002) that just forego substantial savings on mortgage payments through refinancing. Many households forego savings on energy payments through ignoring temperature control: a clear case for switching to a default that installs pre-programmed smart meters that safe energy at night. Using this "opt-out" approach would swiftly reduce the energy bill without the explicit consent of the household. (Sounds familiar? Think about "opt-out" pension saving schemes or "opt-out" organ donation systems. These nudges have been shown to be quite effective and I assume you've read Thaler and Sunstein's classic on this topic.)

Ok, on a lighter topic: I've been on a road show for the Global Real Estate Sustainability Benchmark during the past month(s), visiting for example Australia. I keep on being impressed by the state of sustainability Down Under, with all market participants striving to be the environmental leader. The most recent recognition was for Stockland, the 2011 Sector Leader in the DJSI Index, which, arguably, is mostly about organizational sustainability. Colonial First State topped the Carbon Disclosure Project. Etc.

I also visited a slightly less sustainable area: the Emirates. I was hosted by Carrier (a United Technologies company) and we visited Oman, Abu Dhabi and Dubai (in 2.5 days, that is). In a climate where the temperature reaches 50 Celsius (approximately 130F) for a large part of the year, combined with a high humidity, HVAC energy consumption should be a big issue. Alas, when energy is cheap and (otherwise expensive, desalinated) water is subsidized, nobody cares. But that has started to change: district cooling is integrated in most new developments, and these outfits are commercial enterprises, charging market prices. Landlords have already started to complain that operating costs in their buildings are getting out of hand. That's what happens when you build fancy-looking office/residential towers and fill them with crappy equipment. I see business opportunities...