The Mission Las Vegas

by Tim Trainer

CoStar Group continues to gain recognition for its groundbreaking study on the income premium associated with “green buildings,” specifically those that have earned the U.S. Environmental Protection Agency’s ENERGY STAR label and/or LEED certification from the U.S. Green Building Council. The American Real Estate Society (ARES) has recognized the study as the “Best Paper Published in the Journal of Real Estate Portfolio Management (JREPM)” in 2008. ARES, whose members include leading global academic and professional researchers, recognizes papers annually that explore the critical issues of applied real estate decision-making.

As CoStar announced, the study was conceived and co-authored by CoStar Group CEO Andrew Florance, Senior Director of Analytics Jay Spivey also of CoStar Group, and Dr. Norm Miller, Professor at the Burnham-Moores Center for Real Estate at the University of San Diego.

By analyzing the extensive data available through CoStar’s comprehensive database of U.S. commercial property, the authors found that, on average, energy-efficient, sustainable buildings operated at higher occupancy levels and achieved higher rents than comparable “non-green” buildings in the same market, two variables that directly relate to higher net operating income for property owners.

The study also found that, on average, green buildings sold for a higher price per square foot compared with peer office buildings that were not ENERGY STAR-labeled or LEED-certified.

In conducting their study, the authors made use of CoStar’s comprehensive database of commercial property, setting up a rigorous comparison of buildings that had the ENERGY STAR label or LEED-certification with a peer group of like-kind, non-labeled/certified office buildings correlated by building size, height, class and year-built. Florance, Spivey and Miller ran multiple iterations of the study, analyzing larger and larger samples and using a hedonic multiple regression model to confirm the results.

“This study, ‘Does Green Pay-off?’ addresses one of the key issues regarding sustainable real estate development and management by showing that economic benefits accrue to the owners of green buildings,” noted Bill Hardin, the editor of JREPM and associate professor and Knight-Ridder Research Fellow at Florida International University. “If we look 10 years down the road, we will see that green buildings become the norm in commercial real estate with other non-green buildings suffering from functional obsolescence. This difference will be reflected in rents and occupancy rates.”

As CoStar Group’s Jay Spivey recalled, the impetus for the research grew out of adding the green buildings to CoStar’s database beginning in 2006.

“We noticed that these buildings seemed to be attracting a great deal of interest, both from tenants and investors, and appeared to be out-performing others in terms of their occupancy, the rents they were charging and when they sold they were generally attracting top dollar in their markets,” said Spivey.

But as he and Florance reviewed the literature, it appeared that almost all the research being done focused on the cost side of the equation: the costs associated with retrofitting or developing a green property, measuring the corresponding reduction in energy expenses that would occur and using that as the basis for determining the corresponding return on investment.

“It seemed to us that no one was looking at the income benefits associated with green property,” Spivey added. ‘We were excited about doing this study and analyzing the performance of green buildings in a way that no one had really done before, and because CoStar had data on all the buildings, including all the ENERGY STAR and LEED buildings, we were in a unique position to address that issue and analyze the actual performance green buildings were having in the marketplace,” Spivey added.

Together, Florance and Spivey approached Norm Miller who also became intrigued by the idea. And although from their observation of individual buildings, the authors were aware that interest in green real estate was heating up, they too were surprised by the results of their study.

“Initially, people were a bit skeptical of the results we found because they felt the results may be too good to be true,’ Spivey said. ‘Even we were surprised at the substantial income premiums we found for green properties. And I think because we were the first to put forward this hypothesis people wanted to test our theory and validate our findings, which is exactly what happened.”

Following their own rigorous confirmation process, the authors encouraged other researchers to review and validate their findings. They also made CoStar’s database available at no charge to the real estate research academic community for that very purpose.

Since then, other researchers have published separate studies using the property data in CoStar’s database. One study was led by Franz Fuerst of the Henley Business School at the University of Reading. And another by John Quigley of the University of California at Berkeley and Piet Eichholtz and Nils Kok of Mastricht University in the Netherlands — both of which corroborated the findings of the original study, and in some cases, found market premiums associated with green properties to be even higher.

Most recently, Gary Pivo, Professor of Planning at the University of Arizona, and Jeffrey D. Fisher, Director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business, published a working paper abstract on the performance of responsible property investing (RPI), which include ENERGY STAR-labeled buildings as a component. Analyzing data from the National Council of Real Estate Investment Fiduciaries (NCREIF), Pivo-Fisher produced similar results, finding that a portfolio of RPI office properties performed better than, at less risk, than a portfolio of properties without RPI features.

As CoStar Group’s Florance noted in his firm’s announcement of the award, “It’s very gratifying to see these results confirmed by several other respected researchers, providing ample evidence that energy efficiency and sustainable development are both good for the environment and good for business.”

As part of its ongoing efforts to increase awareness of energy efficiency issues in the built environment, CoStar has joined with the American Real Estate Society to sponsor The Journal of Sustainable Real Estate (JOSRE), a new real estate monograph series with the goal of publishing a collection of research papers addressing sustainable real estate issues. [NOTE: The deadline for submitting research papers for the first issue in the series is May 15, 2009. Additional information on JOSRE, as well as the "Does Green Pay-off?" study, is available on CoStar's Web site at www.costar.com/josre/ ]

In addition to sponsoring additional academic research, CoStar offers qualified university professors and their students full access to its comprehensive online information services for use in their research and in the classroom.

More than 1100 professors and graduate students at more than 100 universities are currently enrolled in the program, including Harvard University, Massachusetts Institute of Technology, The Wharton School of Business, The Ohio State University, Northwestern University, Cornell University, The Johns Hopkins University, The University of Colorado, Marquette University, the University of North Carolina – Chapel Hill, the University of Reading, the University of Notre Dame, and Vanderbilt University.

Additional information on the CoStar University program can be found at http://www.costar.com/specialprograms/costaruniversity.aspx.

Source: costar.com