Repetition is the master of learning. Or so they say. In 2010, I analyzed the uptake of “green” certification in the US commercial property market, explaining the differences in diffusion across markets and over time (the short version of that paper is here). But during the past four years, much has happened. The economy started to recover (in most places), and construction has picked up again. Also, the appetite for energy efficiency and sustainability in the real estate sector hasn’t abated (Google now gives 344,000,000 hits for a simple search on “green” “building”).
The EPA recently published their ranking of “Top 25 cities with most Energy Star certified buildings,” (including nearly 7,000 Energy Star rated buildings), while the USGBC has released an annual list of “Top 10 States in Nation for LEED Green Building” (Illinois is leading). But these rankings are mostly determined by city and state size, rather than reflecting true “greenness” of real estate markets.
I therefore revisited the uptake of green building certification in the commercial office sector, this time in collaboration with my colleague Rogier Holtermans and CBRE (with help from the USGBC and the EPA). We picked the top-30 largest markets (by floor area), geocoded their boundaries, and filtered out all Energy Star and LEED-certified office buildings from the USGBC’s GBIG database (a pretty cool tool by the way). For the denominator, CBRE Research provided the stock of space (number of buildings and square footage) for each of the markets. We then took particular care to make sure that non-competitive space (e.g., single-tenant, owner-occupied buildings) was excluded from the sample, as not to inflate the numerator. Also, we assume that labels depreciate: an Energy Star label is valid for 2 years, while a LEED label is valid for five years. (In fact, we found in previous research that the financial value of an Energy Star label seems to last a little longer, some 5 years.)
This is neither statistical wizardry, nor rocket science, but the findings are interesting nonetheless. To download the full report, please visit the RGRC website. Interestingly, “green” seems to be overtaking the market by force in most cities, but is also at a saturation point in many places:
- Adoption of green standards in the U.S. has increased significantly since 2005. During that time, the adoption of Energy Star for office buildings increased to more than 10% of the market and the proportion of buildings that are LEED (Leadership in Energy and Environmental Design) certified increased from less than 0.5% in 2005 to 5%;
- Measured by floor area, numbers are even higher: LEED-certified space now totals 19.4% of the total building stock in the 30 office markets reviewed in the project. Energy Star buildings represent about 30% of the commercial office market;
- After Minneapolis, where 77.0% of the commercial real estate space is certified as green, the cities with the highest percentage of green space are San Francisco (67.2%), Chicago (62.1%), Houston (54.8%) and Atlanta (54.1%)
Importantly, we find that many, if not most cities are at their “saturation” point, especially when it comes to Energy Star. Adoption curves are flat, and for LEED the growth has been slowing significantly as compared to the astounding growth between 2008 and 2011. This is not necessarily bad news: by default, Energy Star is designed to cover no more than 25% of the market. Given that the CBECS benchmark on which Energy Star ratings is based is now 10 years old, some expect that too many buildings are now eligible for certification. I don’t believe that the benchmark shifts in a period of 10 years, but the 2014 CBECS will certainly be anxiously awaited. Of course, this assumes that building owners will recertify their asset on a regular basis. But with the many building energy performance disclosure laws, building owners in many places will annually use Energy Star to assess their building performance, and obtaining a certificate for high-performing buildings is then a small step.
As for LEED, the growth will continue, but at a lower pace: new buildings are LEED-certified by law in many cities, and no developer should defer from obtaining a label (constraining the pool of buyers, which would happen with developing non-certified space, is never a good idea). And owners of existing buildings will continue to aspire for LEED certification, where they are, of course, dependent on the ability of the building to achieve an Energy Star score of at least 75.
Green building has overtaken the commercial market by storm – in less than a decade. Who knew that would be possible in the otherwise traditional and slow-moving real estate market. With different uses of space (think about sharing concepts like AirBnB), it will only be a matter of time until the next innovation will blossom, again taking the market by surprise. In the meantime, the implications of better, greener building will increasingly be felt in the real estate market. It will be interesting to see how fast the sector will respond.