In 2021, ratings are all around us. Be it an official certification, an online review, or a crowdsourced star rating, the internet has given us access to lots of information about almost everything we buy. Sometimes these don’t impact our behaviors very much. How often has a J.D. Power award impacted your car buying choice? Other times, they’re very meaningful, like EPA fuel efficiency ratings.
There are a lot of ways our buildings are being rated, too. Over the past few decades there has been a proliferation of certifications for buildings, particularly when it comes to a building’s energy use, the first and largest of which is the LEED certification. Sustainability is certainly a priority for many tenants, particularly for Class A office, but the question still stands: Do certifications like LEED actually impact the values at which properties trade, whether for lease or sale?
It’s possible to answer that question, but first, we need to decouple marketing from practice and establish how value is actually being measured. We could talk about the impact to value of the certification name itself, in other words, the value of being able to market a given office as LEED Certified. But focusing just on that misses some important parts to consider when deciding whether a certification is relevant or not. Green-certified buildings tend to be distinguished by certain operational characteristics, like lower operating expenses, that are attractive all by themselves.
Green certifications do carry some value of their own, but more importantly, they represent certain details about the underlying property. Of course, the LEED plaque near the entrance has no actual impact on building performance in any way. It’s the series of adaptations, designs, and changes that the building made to attain LEED certification that can actually cut operating costs.
Let’s look at LEED Building Design + Construction, one of the most common certifications for new construction properties. According to USGBC, LEED’s parent organization, over 92 percent of certified new construction projects experience energy performance boosts of at least 10.5 percent. For large properties, that kind of energy efficiency boost can have a major impact on operating expenses, and consequently NOI.
Boosting property NOI, of course, is foundational to valuations. If property owners make the changes necessary to realize these benefits because they are pursuing a green certification, that could certainly be considered a value win.
Cutting down on operating expenses for owners is not the only way green building certifications impact asset values. Reducing energy and water use directly impacts net lease tenants who are responsible for their own utility payments. And for many occupiers, particularly high-paying tech companies, leasing from green properties is an explicit priority when selecting a new office space. If this contributes to higher rent rates attained by property leasing agents, or properties with shorter lease-up periods, that greater revenue figure would also roll up to increase overall property valuation. The data shows that this is an area where sustainability does indeed make an impact. According to a research article by Iuav University of Venice and CBRE, the average six-month leased percentage of the studied Milanese properties was 80 percent for sustainability certified properties and 21 percent for non-certified buildings.
According to Ben Myers, Vice President, Sustainability for Boston Property Group, certifications do have an inherent value all by themselves. “LEED, and any sort of certification, is a shortcut. You don’t need to be a sustainability expert to know that LEED Platinum means something.” The fact that LEED is run by a third party adds a lot of credibility to the claim that a property is, in fact, sustainable. Sure, owners can claim their buildings are energy efficient, and they can even share the data to prove it. But what’s easier: sharing a spreadsheet of energy consumption figures, or simply saying “Oh yeah, we’re LEED Gold?”
In addition to these leasing and marketing benefits, certifications also offer an advantage when seeking funding. Properties that not only ace their sustainability challenges but have the data to back it up appeal to a large market of funds and investors that specifically target these assets. According to data from Morningstar, there are around $1.7 trillion of assets under management in ESG funds globally. While not all of that figure is real estate-specific, the number is sure to grow since 87 percent of high net worth millennials are inclined to review company ESG data before investing. Since only a subset of properties actually track this data, this is also a value boost for owners.
There are many ways that property sustainability certifications demonstrate value, as we’ve just discussed. The challenge for owners considering pushing into the world of sustainability certifications is that untangling all of these value drivers is difficult. Perhaps an owner feels they don’t need any additional help expediting leasing, for instance. How much value does a certification have then? Or perhaps an owner is planning on building with energy efficient materials and practices in mind anyway. What is the value of a certification in that case? In order to answer this question, I put together a report called “What Is The Best Green Property Certification For Commercial Owners?” where I have compiled all of the leading sustainability certifications out there today, and uncovered their costs, benefits, and requirements in order to determine the fundamental impacts of sustainability certifications as applied to buildings today. What I found is that while certifications certainly have a positive impact on the properties that pursue them, not every certification is equal and some are more appropriate for certain situations than others. While LEED is the undeniable big dog in American green certifications, it is far from the best choice for every situation.
Certifications are not for every business scenario. Not all properties need them, whether or not they are independently energy efficient. But in competitive markets, where every last operating and marketing aspect of a property is scrutinized by a market filled with hawk-eyed occupiers and investors, getting certified can sometimes be the line that separates good from great. We’re just beginning to see cities like New York begin to enact their own standards of property energy efficiency. This is the way of the future for many of the most desirable real estate markets out there. Pursuing certifications is one way to get ahead of those requirements and shine in a market where everyone is being rated at all times.