Nils Kok

Doing Well by Doing Good: Green Office Buildings

with Piet Eichholtz and John Quigley, 2010, American Economic Review, 100(5)

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This paper provides the first credible evidence on the economic value of the certification of “green buildings” -- derived from impersonal market transactions rather than engineering estimates. Our analysis of clusters of certified green buildings and nearby comparables establishes that buildings with “green ratings” command ubstantially higher rents and selling prices than otherwise identical buildings. Moreover, variations in the premium for green office buildings are systematically related to their energy-saving characteristics. An increase in the energy efficiency of a green building is associated with a substantial increase in selling price – over and above the premium for a labeled building. Further evidence suggests that the intangible effects of the label itself may also play a role in determining the values of green buildings in the marketplace.

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Electricity consumption and commercial buildings (and some non-related news from Amsterdam)

I'm currently in Berkeley, working hard on new papers. (You can't make the same jokes forever.) I just posted a working paper on the financial implications of "greenness" in US REITs. Preliminary, but some interesting results (the fraction of Energy Star and LEED-rated buildings in a REIT portfolio is positively related to operating performance and market risk, but not to alpha).

In another paper, Matt Kahn, John Quigley and I have been able to get monthly energy data (bills and usage) for some 5,000 commercial building in Califonia. Merged with building-specific information from CoStar, we're looking at energy consumption dynamics in commercial buildings, distinguishing between the building, the tenants and the building manager ("human capital"). In the current debate on energy efficiency in buildings, not much attention is given to commercial buildings. Presumably, the sector will cure itself. However, out of the 74 percent of total US electricity consumption that is used in buildings, commercial space soaks up exactely half. So, all policies, subsidies, weatherization programs, etc. aimed at private homeowners are great, but what about starting with rational investors owning large swats of space first?



My hope is to expand our sample beyond northern California, to create our own CBECS. (Our current sample, at 5,000 buildings is already multiple times the size of CBECS.) Using our, pretty basic, building stats (occupancy, size, renovation, type of tenant, amenities, presence of on-site building manager, etc) we can already explain the variation in energy consumption better than EPAs Energy Star program...

Time for something not related to energy or "green" stuff. Well, there are some statistics in this absolutely great compilation of FOX's O'Reilly coverage of sin-city Amsterdam. I mentioned those stats after the state elections here last year (The US Elections: Cannabis and Climate Change.

Portfolio Greenness and the Financial Performance of REITs

with Erkan Yonder and Piet Eichholtz, Journal of International Money and Finance, 2012

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This paper investigates the effects of the energy efficiency and sustainability of commercial properties on the operating and stock performance of a sample of US REITs, providing insight into the net benefits of green buildings. We match data on LEED and Energy Star certified buildings with detailed information on REIT portfolios and calculate the share of green properties for each REIT over the 2000-2011 period. We estimate a two-stage regression model and document that the greenness of REITs is positively related to three measures of operating performance – return on assets, return on equity and the ratio of funds from operations to total revenue. We also document that there is no significant relationship between the greenness of property portfolios and abnormal stock returns, suggesting that stock prices already reflect the higher cash flows deriving from investments in more efficient properties. However, REITs with a higher fraction of green properties display significantly lower market betas.   Slideshow "Portfolio Greenness and the Financial Performance of REITs" View more presentations from nilskok

Some Greenbuild material (Prezi opening speech and PPT Green Retrofits)

Alright that was a cool first Greenbuild! Friedman's raving speech is still in my head ("...the green revolution will be a success when the word green no longer exists...!" I think he read my previous blogpost...). Here are some materials:

Opening Remarks on International Day (sponsored by Carrier) - Prezi

Education Session - The Economics of Green Retrofits (with Norm Miller and Peter Morris)

 

 

 

Supply, Demand, and the Value of Green Buildings

with Andrea Chegut and Piet Eichholtz, forthcoming in Urban Studies

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Download the (just-released) RICS Report here!   Attention to “sustainability” and energy efficiency rating schemes in the commercial property sector has increased rapidly during the past decade. In the UK, commercial properties have been certified under the BREEAM rating scheme since 1999, offering fertile ground to investigate the economic dynamics of “green” certification in the commercial property market. In this paper, we document that over the 2000-2009 period, the expanding supply of “green” buildings within a given London neighborhood had a positive impact on rents and prices in general, but reduced rents and prices for environmentally-certified real estate. The results suggest that there is a gentrification effect from “green” buildings. However, each additional “green” building decreases premiums for a certified building in the rental and transaction markets by one percent and four percent, respectively. In addition, controls for lease contract features, like contract length and the rent-free period, modify the impact of certification on rental prices.

Greenbuild and getting over green

I’m currently in Toronto, getting ready for what will be my first appearance at Greenbuild. Admittedly, I have joked about Greenbuild for years, but the scale of the operation dawned on me when I first used this graph:

Yes: more than 30,000 people convene to confer about energy efficiency, sustainability, architecture, construction and investments in commercial and residential buildings. (In a more academic setting, I usually compare this number to the just 10,000 or so economists that gather for the annual finance and economics meetings.) Maybe the word “green” is just not signaling the right message: in the investment community, green is still thought of as out–of–mainstream. And that’s an outdated thought. Talk about “green building” in the popular press may be receding (see graph above), but the number of commercial office buildings now certified by either the EPA (Energy Star) or the USGBC (LEED) is increasing rapidly. (And that’s an understatement.)  For commercial building investors, all elements related to “green” are increasingly important. But let’s just leave out the green. And focus on the aspects that are embedded: energy efficiency, water efficiency, accessibility. And indoor air quality. Whereas most markets are still struggling to come to terms with energy efficiency, advanced places like Australia are increasingly looking at “the next big thing.” Which is buildings and productivity. Not exactly new, but like energy efficiency, getting more mainstream now. For non-Aussies, this video is great:

 

Nice building for sure. But how to price this "exotic" element? Getting energy efficiency into valuation models is difficult enough, what about the productivity of a building? To me, the productivity of a building can only be reflected into prices through tenants. So the question should be: do tenants value the enhanced productivity that a “green” building might offer? Embedded in this question: is productivity really higher in a “green” building? And yes, I’m familiar with the many studies that addressed this topic, but as of yet there is no study that uses a large number of clean experiments (moving a company into a “green” building, measuring productivity pre and post, and that st least 100 times). The next step would then be to relate tenant productivity and satisfaction to rents. That should be feasible. Enough work for the rainy days this fall.

Energy Efficiency Finance 101 - from theory to practice

It’s been quiet for a while, but finally there’s some (good) news from the energy efficiency finance front. The hard-pushed PACE program (what’s in a name, let’s rebrand this tarnished initiative), almost up and running in Los Angeles, San Francisco and some other large cities (Sonoma has continued their residential PACE program, ignoring the heated national debate) forms the basis for a recently announced “deal.” But…don’t open the champagne yet…this is just an announcement. Let’s first explore the details (an open interpretation from this article in the NY Times):

A business consortium that includes Lockheed Martin and Barclays bank plans to invest as much as $650 million over the next few years to slash the energy consumption of buildings. The consortium is led by a company called Ygrene Energy Fund of Santa Rosa, Calif., which has already won an exclusive contract to manage a retrofit program for a half-dozen communities in the Miami area, with the city expected to join in a few weeks. It is in the late stages of completing a contract with Sacramento, and is seeking deals in other cities. Ygrene and its partners will gain exclusive rights for five years to offer this type of energy upgrade to businesses in a particular community. Lockheed Martin is expected to do the engineering work on many larger projects.

The retrofits might include new windows and doors, insulation, and more efficient lights and mechanical systems. In some cases, solar panels or other renewable power might be included. For factories, the retrofits might include new motors or other gear.

Short-term loans provided by Barclays Capital will be used to pay for the upgrades. Contractors will offer a warranty that the utility savings they have promised will actually materialize, and an insurance underwriter, Energi, of Peabody, Mass., will back up that warranty. Those insurance contracts, in turn, will be backed by Hannover Re, one of the world's largest reinsurance companies.

Of course, this is a great concept. And it resolves the barrier to energy efficiency upgrades posed by the large upfront capital cost. It opens up access to the capital market by not only providing creditworthy tax liens as monthly payments (the default rates on municipal tax payments are extremely low), but also by enhancing this by a warranty from the constructors (basically an ESCO model) AND an insurance from Hannover Re to back up that warranty. Of course, all of this might be quite costly. I’m curious what kind of retrofits will be feasible in the end, i.e., what will the effective rate charged to building owners be? 7%? 9%? If you apply these rates of return to the infamous McKinsey curve (the basis for many statements on the “massive” opportunities for NPV-positive energy efficiency investments), you might end up doing some quick wins (lighting, optimization) and stop there.

But the scheme also ignores a maybe more important issue in commercial and residential building retrofits: the transaction cost for building owners. The problem of construction work in a building while it’s fully occupied, or having contractors in your home for a week or two. It also ignores the fact that only a very small minority of homeowners as well as commercial landlords will go for a building upgrade without directly receiving some of the savings. If the savings-to-cost ratio is exactly one, a building will certainly become more efficient following an upgrade, but the only reason for an owner to upgrade a building would then be to increase its competitiveness. Or maybe to improve indoor air quality. Convincing landlords and homeowners of “the increased attractiveness” of their building is a difficult play. Ultimately, if energy efficiently is appropriately priced in the market (which I strongly believe), a building upgrade that is fully offset by the cost will not increase the value of the building. Unless other factors of “green” are priced (which I, by the way, also believe…) So, savings in the hands of landlords are needed. And then you’ll still have to do substantial marketing. Luckily, “[Ygrene] will market the plan aggressively, helping property owners figure out what kinds of upgrades make sense for them.”

I hope the marketing budget allows for long and aggressive marketing indeed. As Matt Golden of Recurve Inc. recently noted at a conference organized by the Berkeley Program on Housing and Urban Policy, there is sometimes a reality disconnect between what we think building owners should do, and what owners think they should do. In Matt's "sober view" of the residential market for energy efficiency retrofits, "capucinno-sized savings" will be ultimately be reaped in an efficient market, but only if the hurdle is low enough. (Admittedly, I'm currently drowning my energy savings at a Starbucks in Toronto.) The Prius-driving and iPhone-using consumers that value energy efficiency beyond the dollar value makes for a good niche to target first, but for the average consumer to embrace constructors drilling holes in the wall to blow in insulation, we need more!