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JOURNAL OF SUSTAINABLE REAL ESTATE 2023, VOL. 15, NO. 1, 2162515 ARES https://doi.org/10.1080/19498276.2022.2162515 American Real Estate Society a b c d Jeremy Gabe , Karen McGrath , Spenser Robinson and Andrew Sanderford a b c Real Estate, University of San Diego, San Diego, CA, USA; Finance, Bucknell University, Lewisburg, PA, USA; Finance, Central Michigan University, Mt Pleasant, MI, USA; University of Virginia, Charlottesville, VA, USA KEYWORDS ABSTRACT Eco-certification; multi-fam- This paper examines the persistence of differentiated pricing in the multi-family housing ily; rent premium; related to eco-certification. In examining a sample of market rents for non-specialty, multi- sustainability; urban form; family properties both across the U.S., as well as those areas that enjoy the highest concen- walkability trations of LEED certified apartments, we find rental premiums of 10.2% and 14.7%, respect- ively for those properties with LEED certification. The addition of the continuous Walk Score, to control for variations in urban form, results in premiums of 7.4% and 9.6%, respectively. These findings are directionally consistent with those found in earlier studies, and demon- strate a persistence in rental premiums for certified properties over time, and with increased LEED adoption. Introduction with climate change. Indeed, an estimated two-thirds of all U.S. consumers, and 90% of Gen-Z, have indi- The early 1990s were an innovative time regarding cated that they are willing to pay a premium for sus- sustainability and urban form. Indeed, 1993 saw the tainable products, with the primary stated U.S. Green Building Council (USGBC) and the consideration being a desire to help the environment Congress for New Urbanism (CNU) formed. Amidst a (Petro, 2022). Shareholder proposals related to envir- growing awareness surrounding buildings, neighbor- onmental and climate not only reached an all-time hoods, and their impact on people and the environ- high in 2021, but saw increased support for those pro- ment, the USGBC sought to establish a framework to posals among voters (Trevino et al., 2021). Given the encourage sustainable building practices in the real fact that the commercial and residential sectors have estate and construction industry while the CNU’s accounted for as much as 57.9% of the total energy principles focused on walkability, among other urban consumed, and over 35% of total CO emissions per design features that are positively associated with year in the United States it is clear that the greening quality of life. While 1998 marked the official launch of the built environment is a vital part of the solution of the USGBC’s Leadership in Energy and regarding global sustainability efforts (EIA, 2021). Environmental Design (LEED) certification scheme, it However, the predominance of academic literature is also marked a turning point in energy usage, with it focused on differentiated pricing and economic per- being the first year that commercial and residential formance of commercial office buildings. This, despite buildings surpassed the industrial sector as the single the fact that individuals have much more control over largest consumer of energy in the United States. the amenities they are willing to pay for regarding WalkScore followed later in 2007 and its broad adop- housing than office, shorter lease periods more readily tion since connects the increased importance and reflect current willingness to pay, and that with prop- measurement of urban spatial structure alongside erty values of nearly $3 Trillion, multi-family housing green building features. represents the largest U.S. commercial real estate sec- Since its launch, LEED has become the most widely used property rating system in the world, and easily tor, and accounts for as many as 14% of all U.S. associated with green building to a general public that LEED certifications (NAREIT, 2019). Though there has grown increasingly aware of the risks associated has been some work specific to purchase price CONTACT Andrew Sanderford firstname.lastname@example.org University of Virginia University of Virginia, Charlottesville, VA, USA. 2023 The Author(s). Published with license by Taylor & Francis Group, LLC This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. 2 J. GABE ET AL. premiums relative to LEED or WalkScore, there is a Star focuses solely on energy performance, with com- notable dearth of literature relating to multi-family mercial properties achieving certification by operating housing. within the top quartile of peer buildings, and residen- This paper is motivated by the opportunity to help tial properties though the verification of energy effi- remedy that disparity. Similar to commercial office, cient features. Though there are additional which encompasses a multitude of studies over time, certification or eco-labeling schemes such as the reflecting changes to the available data that reinforced National Association of Home Builders National and expanded upon the results of seminal works, this Green Building Standard (NGBS), LEED is the most paper examines the persistence of differentiated pric- prominent certification scheme in the U.S. multi-fam- ing in multi-family housing. Utilizing a sample of ask- ily housing market. Since its launch, the LEED certifi- ing rents obtained from the CoStar Group’s cation has evolved in order to best reflect the Apartments.com multi-family rental data for the years demands of an increasingly sustainability conscious 2016– 2017, it builds on work by Bond and Devine public. As opposed to specific amenities such as an (2016a) and Gabe et al. (2021) in demonstrating the ensuite laundry or pool, the LEED certification repre- impact of LEED certification and Walk Score on a sents green building strategies that address the plan- building’s average rental rate per square foot. Given ning, design, construction, and operations of a the environmental importance of this sector, the property as a means to reduce the negative environ- increased public awareness surrounding sustainability, mental impacts of buildings and their inhabitants. and the general deficit of academic work in this area, Projects are certified under different classification sys- the paper makes two important contributions to the tems, such as Building Design and Construction literature. First, we observe differentiated pricing in (BDþ C), Interior Design and Construction (IDþ C), sample—congruent with the extant literature in office Homes, and Neighborhood Development (ND). Once and smaller sample work in multi-housing. Second, a project has met the prerequisite requirements for the magnitude, direction, and different timing/source Sustainable Sites, Water Efficiency, Energy and data suggests that the pricing differences are persistent Atmosphere, Materials and Resources, Indoor across time, akin to the findings in office—predicated Environmental, and if for Homes: Innovation, it then on the comparison to the findings from Bond and earns additional points within each of these areas, as Devine (2016a) where data gathered represented the well as Regional Priority and Location and Transport. early part of the economic recovery out of the Great Buildings qualify to be Certified at 40 points. Up to Financial Crisis. While the second finding is compara- 110 points can be earned, with properties able to tive, it both validates prior work and cleaves the mul- achieve Silver, Gold, and Platinum status. Each project ti-housing research to the broader conversation about decides which of the up to 140 established point credit differentiated financial economic performance of eco- options it will seek to earn; thus, each building certified buildings and those with greater locationally achieves certification in a unique manner. As with efficiency. To wit, it provides accretive results that previous research that has looked at willingness to pay help frame our evolving understanding of the market for eco-labels that represent a bundle of attributes, for sustainable buildings and locations. such as LEED, while concurrently examining the will- Below, the paper provides a summary of eco-certifi- ingness to pay for underlying individual attributes, cations for commercial buildings and their market there are points available under some systems that penetration over time, a brief discussion on Walk hold similarities to Walk Score or building amenities. Score and its validity in controlling for urban form, a For instance, some projects may earn a point for review of the extant sustainable real estate literature, a being located within = mile of a service, or a point description of the data and methodology, and discus- may be given for fitness room that is open to all resi- sion of empirical model results. dents, and provides a stated amount of equipment for both adults and children. Depending on the system, these two opportunities can yield between 0 and a Background total of 3 points towards certification. Sustainable Building Certifications & Adoption The aforementioned certification pathways repre- Trends sent static certifications, and do not lapse once earned. In the United States, there are two predominant eco- However, given the increasing desire for performan- certification schemes that cover both commercial and ce-based metrics LEED introduced a dynamic certifi- residential properties: Energy Star and LEED. Energy cation, Operations and Management (Oþ M), in JOURNAL OF SUSTAINABLE REAL ESTATE 3 2009. This dynamic certification requires collecting properties, researchers had access to uniform systems of and reporting property performance data relative to certification that allowed for a relatively consistent sam- baseline requirements and additional points. Projects ple of properties in the U.S. Peaking in 2010 for com- are required to re-qualify within 5 years of their previ- mercial office, and in 2012 for multi-family property, ous Oþ M certification in order to retain their desig- the number of new yearly certifications has remained nation. Shortly after launching Oþ M, LEED also relatively stable, reflecting trends in new construction initiated what it calls a “recertification” plan which, and renovation, in addition to offering an established given that the original, static designation does not and diversified distribution of properties. lapse, allows a project to add an additional certifica- tion under the Oþ M designation in order to demon- Walkability & Walk Score strate that the building is functioning as envisioned. It The study of the impact of urban form on property should be noted that as of the end of 2017, only 11 prices is not a new one. However, the advent of new multi-family properties had obtained certification under Oþ M, and no Oþ M certifications had lapsed. urbanism reflects the changing consumer demands Though the number of properties with sustainable related to walkable blocks and streets, with housing in building certifications is still relatively small in com- close proximity to other amenities such as shopping (CNU, 2022). While seminal research in this area, parison to the overall amount of total building stock most notably the work of Song and Knaap (2003), available, that number has been continually increasing. was reliant on the outputs of geographic information Approximately 14% of all non-government, invest- system (GIS) mapping, the advent of the Walk Score ment based commercial office buildings and 3.3% of investment-grade multi-family units within the 30 allows for a common metric with which to measure largest U.S. markets having some form of eco-certifi- walkability and control for urban form. Launched in cation (CBRE, 2019). Some of this growth has been a 2007, the Walk Score uses a proprietary algorithm to identify the number, and range, of amenities such as result of inclusion of such schemes into city, county, banks, grocery stores, restaurants, and schools in a state and federal policies, with LEED principles being given area. It then awards points based on the dis- included in 151 individual pieces of legislation between 2000 and 2008 (USGBC, 2021). As evidenced tance to these amenities from any known address. by Figure 1 below, which highlights the number of Amenities that are within a 5-minute walk receive properties that achieve new LEED certification each maximum points, after which values decrease to 0 year, although the majority of the legislation has been beyond a 30-minute walk. The score itself is appor- focused on government or government funded proj- tioned into ranges, with 90– 100 being a “walker’s paradise” (daily errands do not require a car), 50–69 ects rather than mandating private building require- being “somewhat walkable” (some errands can be ments, the private for-profit commercial sector has always been the primary user of the certification. accomplished on foot), and 0–24 as “car-dependent” As more properties achieved LEED certification each (almost all errands require a car) (Walk Score, 2022). year, as shown in Table 1 below, and with the 1999 There have been some stated criticisms associated launch of the Energy Star rating for commercial with the Walk Score, namely that it does not address Annual Number of New LEED Cerﬁcaons by Investor Type 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Individual Non-Proﬁt/Educaon Gov't/Gov't Use Corp./Invest./Proﬁt Org Figure 1. Annual number of new LEED certifications by investor type. Source. USGBC and Author’s own work. 4 J. GABE ET AL. Table 1. Annual number of new LEED certified projects by project type. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Office 2 4 6 17 41 68 121 209 425 1204 1515 1419 1316 1357 1123 1118 1114 1092 12151 Retail 3 7 12 39 143 244 241 415 544 611 781 699 945 326 5010 Multi-family 1 1 8 7 14 37 61 164 326 493 624 539 595 523 489 513 4395 Industrial/warehouse 1 3 4 8 8 9 14 22 63 70 88 91 117 151 144 145 118 1056 Source. USGBC and Author’s own work. topography or weather, which may influence how premium for eco-certified owned apartments in much people choose to walk in a given location. Singapore whereas in Tokyo, Fuerst and Shimizu However, the Walk Score has been validated by (2016) indicate that the premium for eco-certified researchers in the U.S. and abroad as a sound metric condominiums is 5%. In Indonesia, Njo et al. (2021) for measuring how much residents of a neighborhood found results that more closely reflected those in actually do walk to destinations (Carr et al., 2011; Singapore with 15% purchase premiums for green Duncan et al., 2011; Koohsari et al., 2018). As such, apartments. In Europe research by Fuerst et al. (2015) Walk Score is increasingly used in residential housing in the UK and by Olaussen et al. (2017) in Norway literature as a means to control for variations in urban both reveal that energy efficiency demonstrated form. through European Energy Performance Certificates (EPC) earn housing premiums. Indeed, a meta-analy- sis of EPC ratings conducted by Cespedes-Lopez et al. Literature Review (2019) illustrated that they add a housing price pre- Sustainable Real Estate Literature: Commercial mium of 4.2% globally. There are also additional threads that connect to Tracking the diffusion of sustainability-labeled build- the economic differentiation research. For example, ings into the property markets, the sustainable real there is a thread examining tenant preferences for sus- estate literature has evolved to describe differentiated tainable attributes of commercial buildings and homes financial performance among certified buildings in all (Aroul & Hansz, 2012; Aroul & Rodriguez, 2017; asset classes. The preponderance of the extant research Bruegge et al., 2016; Cadena & Thomson, 2021; focuses on buildings, with a smaller tilt towards firms Christensen et al., 2022; Clayton et al., 2021; Dastrup (e.g., REITs). Further, the majority of the literature et al., 2012; Goodwin, 2011; Robinson et al., 2016; focuses on office, a table of relevant works of which Walls et al., 2017; Zhang et al., 2018). There are also can be found in the Appendix. Given the limited threads exploring green leases (Gabe et al., 2019), the research related to multi-family housing, this paper diffusion patterns of sustainably certified real estate focuses there. In the sub-sections below, we provide a (Devine & McCollum, 2019; Kok et al., 2011; summary of the sustainable real estate literature, Sanderford et al., 2018), and the role of policy in acknowledging the comprehensive review contained in increasing the adoption of sustainable certifications, Holtermans and Kok (2019). materials, and building practices (Bond & Devine, The sustainable real estate literature has matured 2016b; Koebel et al., 2015). Though we focus on walk- significantly in the last 20 years along with the diffu- ability or Walk Score to account for differences in sion of certified assets. It is now clear that sustainabil- urban form per Bond and Devine (2016) and Gabe ity certified assets create differentiated economic et al. (2021), there have been works that looks specif- returns as compared to their non-certified counter- parts (Eichholtz et al., 2010). This outperformance ically at its effects on property prices (Bartholomew & Ewing, 2011; Boyle et al., 2014; Pivo & Fisher, 2011; exists across asset classes including office (Fuerst & Yin et al., 2020) or as a locational robustness check McAllister, 2011b; Wiley et al., 2010), industrial (Wittowsky et al., 2020). (Harrison & Seiler, 2011), hotels (Robinson et al., There are a number of individual papers that help 2016), apartments (Bond & Devine, 2016a), retail (Chang & Devine, 2019), housing (Kahn & Kok, to shape our efforts here. Below, we provide a bit 2014), and across both public and private firms (Co€en more detailed summary several that inform our et al., 2018; Devine et al., 2022; Devine & Yonder, € empirical work. Holtermans and Kok (2019) highlights the value 2021; Eichholtz et al., 2012; Sah et al., 2013). International studies further demonstrate that green differentiation persistence over time. It also reeval- buildings earn market premium. In Asia, uated some of the key questions originally posed by Addae-Dapaah and Chieh (2011) find an 11.69% price researchers in order to determine whether the initial JOURNAL OF SUSTAINABLE REAL ESTATE 5 financial advantages attributed to eco-certification in consumers, including labels or certifications them- commercial office properties have held both over selves. Simons et al. (2014) conducted focus groups of time, and with the increased adoption of such office users in the Chicago, Denver, Washington, D.C. schemes. The authors were able to employ a more and San Francisco Bay Areas to rank various ‘green’ robust sample, utilizing panel data to construct rental attributes frequently associated with office properties indices in order to determine rental growth, as well as to determine those deemed most important by the a cross-sectional sample in order to further establish respondents. Users assigned the greatest weight too whether the earlier findings relative to occupancy, access to natural light in work spaces, convenient pub- rent and price premiums held. Though they found no lic transportation, indoor air quality, temperature con- significant difference in rental growth between certi- trol/comfort, efficient lighting, and heating and fied properties and their non-certified counterparts, cooling. Respondents were also asked to assign the the results regarding other premiums have held over benefits of sustainable building features to people, time. Indeed, there are average rental premiums of planet, or profit. While the preponderance of research 2.2% and effective rental premiums of 4.6% for eco- to date has been primarily focused on the economic certified properties, with LEED and Energy Star prop- benefits of green building, Simons et al. (2014) found erties commanding 1.9– 1.5% and 1.3– 4.1%, respect- that the benefits of a green building were perceived to ively. Pricing premiums for LEED or Energy Star accrue to people, or employees. exhibit a 10.1% increase in transaction price over Building on the tenant preference work, Robinson non-certified properties, with LEED certified buildings et al. (2016) worked to determine the green features for which tenants would be willing to pay. Utilizing a commanding premiums of 14.8%, while the Energy Star certified properties transact for 6.6% more. In web-based survey, the paper explored reactions to examining whether certain eco-certifications become existing building features as well as tenants’ percep- less valuable over time, the paper finds that the value tions of the relative importance of various building attributes (i.e., attribute ranking). Both LEED and of the Energy Star label does decrease the further from certification timing the difference is measured. Energy Star designations ranked in the middle in In the extant literature, the majority of LEED certi- terms of importance and frequency of selection, with fied commercial office properties are newer, larger, indoor air quality and access to natural light being taller, are more likely to be located in prime geo- most valuable. The authors do note, however, that graphic areas such as CBDs, and are more likely to be certain attributes, such as the Energy Star designation, Class A than their non-certified counterparts. are less observable or easily available. Insofar as ten- Additionally, the authors observe that it is the norm ant’s willingness to pay for an attribute in terms of rather than the exception for Class A commercial percentage above their existing lease, access to natural office properties to obtain a LEED and/or Energy Star light within individual workspaces and indoor air certification, so that the price premium might instead quality were, again, seen as the most valuable features. be reflective of the higher quality of the asset rather Consistent with the ranked results, LEED designation than the certification. Fuerst et al. (2017) examined a was ranked in the middle, with Energy Star designa- sample of 2,734 Class A office transactions between tion coming in slightly lower. The authors then uti- 2007 and 2012. They found that though there is a lized probit models to determine willingness to pay market share premium for these high-quality assets for eco-certified buildings, the attributes for which a overall, this premium is actually 5% higher for assets respondent is willing to pay a more than 2% pre- that are eco-certified. However, the authors also note mium, and the attributes by rank. The results deter- that, contrary to previous research, when looking at mined that energy companies, public companies, and the certification effects, LEED, Energy Star or Dual companies that utilized sustainable suppliers or who certified (holding both eco-certifications) individually, had green commercial interiors were most likely to the price effects were more suggestive of price premi- pay more for eco-certified properties. Additionally, ums that are related to the creation of a ‘clientele only those in the real estate, energy and IT industries effect’ whereby the greater the investors’ market share showed a propensity to specifically value the LEED of eco-certified properties, the greater the price said designation. Most recently, Robinson et al. (2017) used lease-le- investors will have paid. Given the tilt towards differentiated performance, vel analysis to investigate many of the individual there also been interest in identifying the specific attributes found within the LEED designation in order building elements that of the most value to tenants as to determine which of these features are most 6 J. GABE ET AL. valuable. The authors found that the LEED certifica- also used advanced econometric techniques such as tion commands a 13.6% premium. Energy Star, as coarsened exact matching to shape the sample. The results of the initial regression showed an compared to non-LEED properties, commands a 6.5% increase in the rent per square foot for LEED certified premium, but when individual green attributes are buildings to be 7%. Models that utilize CEM weights considered, the Energy Star designation becomes just also showed a rental premium for both LEED certi- one within the bundle of green attributes that com- fied, and green marketed properties. LEED certified mand a premium, while the LEED designation exhib- properties presented with an 8.9% premium, with the its value-add regardless of other sustainable building premium for all green properties at 7.6%. The pre- controls. mium related to properties that marketed themselves as green, without possessing LEED certification, Sustainable Real Estate Literature: Multi-Family dropped to 1.76%, indicating that the non-LEED Housing green properties reduced the overall green premium, though this specific sample was greatly diminished Despite the relative focus by academics on the effects and the result was not statistically significant. Indeed, of eco-certifications on commercial and single-family controlling for both treatment groups, LEED certified residential properties, there is a paucity of literature and green non-certified, results in a LEED premium related to sustainable multi-family housing. Two of 9.1% versus 4.74% for green, non-certified proper- pieces inform our empirical work below and frame ties. In relation to the treatment group subsamples, the research opportunity. the LEED certification premium also held, with less Couch et al. (2015) examined the relationship walkable properties valuing the certification more between LEED and sales prices for multi-family proper- highly with a 5.77% rental premium as compared to ties in the Chicago, New York, Portland, and Seattle the most walkable group at 4.9%, indicating the LEED markets. These markets were chosen based on the fact certification is viewed as more valuable by suburban that they were identified as having the highest concen- renters. Finally, it is clear here that the LEED pre- tration of LEED multi-family properties relative to mium isn’t just about the novelty of a new, and certi- other markets. Their resultant sample of 136 properties fied property. Indeed, for properties greater than consisted of 25 LEED certified, and 111 non-certified 2 years old, the rental premium was the highest of any control properties, with property-level data obtained of the models at 9.5%, significant at the 10% level, through CoStar and CoreLogic. Controlling for loca- indicating that the premium may be more reflective of tion, building attributes, and demography, the results the certification rather than the fact that newer prop- indicated that LEED certification was not a significant erties typically command higher rents. predictor of variation in property prices. Stepwise Since these two papers were published, the penetra- model selection identified rentable building area, land tion of LEED certification into this asset class has area, and population per square mile as the significant increased significantly, with 736 LEED certified multi-- drivers of value. family rental properties across 36 Core Based Statistical Most germane to this study is the work of Bond Areas (CBSAs). Given this growth in the number of and Devine (2016a). In this work the authors exam- certified properties, the rise the percentage of house- ined the effects of green multi-family housing on ren- holds that rent versus own, and the ever-increasing tal rates at year end 2012. From an initial sample of attention being paid to environmental concerns by LEED certified, privately constructed multi-family individuals and regulators alike, it is important to properties with no less than 10 units, and further explore whether the initially observed premiums are excluding specialty properties such as student and evident in a different time period and in a broader senior housing as well as those who had more than array of geographies. It is this question that motivates 25% of their units allocated to affordable housing, the paper. they arrived at a final sample of 97 LEED certified properties and 193 comparable properties encom- Data & Methods passed a total of 26,774 and 57,115 units respectively. The sample included a substantial volume of building Using CoStar Group’s Apartments.com, institutional attributes beyond basic characteristics and introduced grade, non-specialty properties with 50 or more units a Walk Score to the model— building on work by across the most populous 50 CBSAs in the U.S. were Pivo and Fisher (2011) to account for urban form. It identified. Those markets without comparable LEED JOURNAL OF SUSTAINABLE REAL ESTATE 7 properties were removed, resulting in a sample of high LEED adoption as well, though the differential is 82,094 unique market-rate multifamily properties marginally less with LEED properties down slightly on across 36 CBSAs, with 736 of those properties being average to $2.74 PSF and the average rent of non-cer- LEED certified. Though there is a general dispersion tified properties increasing to $1.67 PSF. All other of LEED multi-family properties throughout the U.S., results are in-line with expectations, and reflect char- there are certain markets that reflect high adoption acteristics consistent with LEED certified properties areas similar to those used in Couch et al. (2015). generally being newer, and located in desirable areas These high-adoption CBSAs, each of which contain that have high pedestrian access to amenities, such as more than 50 LEED certified multi-family properties, urban centers (Table 2). are Chicago, Portland, Seattle, and Washington, D.C. We incorporate this data into a relatively trad- These four markets account for 12,996 unique proper- itional hedonic modeling framework. The generic ties, of which 316 possess LEED certification. model we use resembles the guidance found in In addition to property and unit controls consistent Malpezzi (2003) and more recently in Seiler (2014) with previous research, such as age, renovation status, and is specified as: configuration and grade, walk score was included as a LnAvgRent ¼ b þ b LD þ b WS i i ijt 0jt 1jt 2jt summary measure of urban location, reflecting the (2) findings of Gabe et al. (2021). Apartments.com col- þ b MF þ e i ijt 3jt lected daily asking rent observations for each of the Where LD is the dichotomous indicator variable with properties. Utilizing proprietary analytics to account 1 signifying that the property is LEED certified, and 0 for potential data validity issues, such as pending for those properties without certification, WS repre- vacancies and multiple observations of the same unit, sents the continuous Walk Score of the property, and these daily asking rent observations were then con- MF is a vector of multi-family apartment building verted into estimated monthly average asking rents, characteristics consistent with previous research, per configuration, as described in Gabe et al. (2021). including property type, configuration, renovation sta- Further, seasonal variance was controlled for through tus, age, age squared to account for historical value, the generation of annual rental observations per build- and amenities such as pool, gym, private outdoor ing, and consolidated into monthly averages. These space, and ensuite laundry, for property i at time t in monthly averages were then combined into separate market j: annual observations per building, resulting in a full Models 1–4 look at all markets that contain LEED year asking rents for 2016, and a full year asking rents certified multi-family properties. Model 1 examines for 2017 for the sample. Average rent per square foot the full sample of properties and control variables, for each individual multi-family building being calcu- relating the natural log of average rent per square foot lated as the weighted average per configuration type to a set of hedonic and other building characteristics, using Equation 1 below: thus providing a baseline for analysis. Models 2 and 3 R UnitCount UnitRent it it i¼1 denote the relationship between average rent and AverageRent ¼ it R UnitCount UnitSF it it i¼1 either LEED certification or continuous Walk Score, respectively, for the full sample. Indeed, though the For building i at time t: (1) multi-family housing market exhibits greater spatial heterogeneity than commercial office, the characteris- As expected, the average asking rents for LEED tics of both property types are not dissimilar in that properties across all 36 CBSAs was greater than for non-LEED properties, at $2.77 PSF versus $1.58 PSF, properties achieving LEED certification are more respectively. This also holds for the four CBSAs with likely to be newer, Class A, and high-rise, indicating a Table 2. Descriptive statistics. Avg. Mo. % Garden % High-rise % Studio % 1BR % 2BR % 3BR Renovated Walk # Buildings in Asking Rent/SF (%) (%) (%) (%) (%) (%) (%) Age score complex All Markets: $2.77 4.90 45.90 16.50 49.90 29.00 4.50 2.40 8.2 82.83 1.86 LEED Cert. Properties All markets: $1.58 74.70 6.50 6.50 40.10 43.90 9.50 3.70 36.86 53.33 11.07 Non-Cert. Properties High LEED Conc. Mkts: $2.74 1.90 54.40 17.60 54.60 24.50 3.30 3.50 7.82 88.69 1.39 LEED Cert. Properties High LEED Conc. Mkts: $1.67 61.60 10.40 10.50 38.80 42.20 8.60 4.00 39.16 60.12 9.09 Non-Cert. Properties 8 J. GABE ET AL. bias towards urban locations as suggested by a higher Rental Premiums Walk Score. Thus, Model 4 comprises controls for Model 1 serves as a baseline model and provides con- both walkability as well as green building certification. text for the additional model specifications. Consistent In all models, we control for market and geography with prior theory and extant evidence, all measures in (to hone the identification relative to walkability) with Model 1 present with the expected signs and are stat- fixed effects for each of the CBSAs in the sample. istically significant. Per Bond and Devine (2016), Accounting for the possibility that, given the rela- those property attributes that correspond more closely tively low number of LEED certified multi-family with newer properties in urban locations, such as properties, any possible rental premium might be a high-rise and those with a high percentage of studios, reflection of product scarcity, Models 5–8 mimic the provide evidence of rental premiums, as do property structure of Models 1–4, but utilize the sample con- amenities. sisting of the four CBSAs, identified as high LEED Model 2 estimates the value of LEED certification adoption markets. In this, the authors seek to deter- across all properties. Relative to non-certified proper- mine whether LEED properties retain rental premi- ties, and all else equal, LEED certified properties com- ums in markets where the LEED product is more mand a rental premium of 10% and all other common and available, and therefore no longer a variables remain largely unchanged. Here, fixed-effects niche good, consistent with the work of Fuerst control for differences between markets accounting for findings from prior research that have questioned the et al. (2017). degree to which these premiums are associated with In addition to being evaluated in situ, the results consumers’ willingness to pay for amenities found in from the models are also qualitatively compared urban locations frequently associated with LEED certi- against prior work from Bond and Devine (2016a) fied properties. Following Bond and Devine (2016) and which examined a different set of buildings and geog- Gabe et al. (2021), Model 3 adds Walk Score to the raphies to make determinations about the durability baseline model in order to capture variations in urban of the green and walkability premiums in multi-hous- form more specific than market fixed effects—much in ing— to the extent they are evident. This descriptive the spirit of Pivo and Fisher (2011) and their study of and comparative step is not intended to replace a the office market. The results are congruent with the time series analysis. Instead, it is included to context- prior papers and demonstrate a small positive relation- ualize our empirical results and to help take stock of ship between rents and relative location. For every add- ways that similar models applied to different data at itional 10 points in walk score translates into a 2% different times can contribute to accretive understand- additional rent per square foot. Renters are willing to ing to financial economic phenomena. pay more for more locationally efficient—or sustainably located apartments. Model 4 is consistent and congruent with the prior Results & Discussion research, accounting for both LEED certification and The models point to two contributions to the litera- walk score. Utilizing the full sample, whereby LEED ture: (1) there are premium rents among eco-certified certified properties account for more than three times multifamily buildings and those buildings with greater the number previously examined, and accounting for walkability (2) given the differences in sample, time greater geographical absorption diversity with seven period, and geography examined from the prior litera- additional CBSAs, the resultant rental premium of ture, it would appear that initial financial advantages 7.4% significant. In their most quotidian state, Models attributed to LEED certification and walkability for 1– 4 provide sample and construct validation. They multi-family properties have held both over time, and also add to the literature detailing the role eco-certifi- with the increased adoption of the scheme in both cations and walkability as drivers of differentiated eco- previously identified markets as well as new ones. nomic performance. Earlier studies and demonstrate These findings area consistent with Bond and Devine that overall, LEED certified properties command sig- (2016a) and Holtermans and Kok (2019). Further, nificant rental premiums as compared to their stand- these differentiated outcomes are even greater in those ard comparable buildings in commercial real estate markets that reflect the highest levels of adoptions of and multi-housing contexts. The results here expand LEED properties, suggesting that the data can accom- the geography and scale of analysis from some prior modate an alternative explanation to a scarcity work and help build out more of the story about dif- premium. ferences for sustainability (Table 3). JOURNAL OF SUSTAINABLE REAL ESTATE 9 Table 3. Determinants of multi-family property rents models exhibit the expected signs and statistical significance 1– 4 include all markets with observed LEED-certified relative to the extant literature. apartments. When accounting for the impact of LEED certifica- LnAvgRent tion in column 6, there is a pronounced increase— All markets with LEED buildings one that is greater than was associated with the prop- (1) (2) (3) (4) erties that have achieved certification in the full LEED 0.102 0.074 sample. The rental premium identified at 14.7% would 0.009 0.009 seem to be counterintuitive given that as LEED certifi- Walk score 0.002 0.002 0.00 0.00 cation becomes more of a standard feature, the will- Garden 0.140 0.139 0.091 0.090 ingness to pay a premium for scarcity should 0.003 0.003 0.003 0.003 High-rise 0.173 0.169 0.146 0.143 decrease. Accounting for WalkScore in Model 8, as 0.004 0.004 0.004 0.004 expected the LEED premium decreases somewhat to % Studio 0.713 0.710 0.669 0.667 0.008 0.008 0.008 0.008 9.6%, though is still greater than the 7.4% obtained % 1 BR 0.499 0.498 0.474 0.473 from the full sample. 0.006 0.006 0.006 0.006 % 2 BR 0.255 0.255 0.254 0.253 This result, while on its face a bit unexpected, is 0.006 0.006 0.006 0.006 not incongruous with prior work. Fuerst et al. (2017) Reno < 10 years 0.034 0.034 0.037 0.037 0.005 0.005 0.005 0.005 demonstrate that even in markets where the majority LnAge 0.164 0.163 0.148 0.147 of properties were LEED certified, LEED certification 0.004 0.004 0.004 0.004 still commanded a premium, though the relationship LnAge2 0.025 0.025 0.020 0.020 0.001 0.001 0.001 0.001 was with price and reflective too of a potential clien- Gym 0.107 0.107 0.107 0.107 tele effect. It also should be noted that the level of 0.002 0.002 0.002 0.002 Pool 0.041 0.041 0.053 0.053 absorption of LEED multi-family properties does not 0.002 0.002 0.002 0.002 yet reflect levels seen in Class A office properties. Priv. Outdoor space 0.012 0.012 0.013 0.013 0.002 0.002 0.002 0.002 Thus, it is also possible that the rental premiums asso- Ensuite laundry 0.046 0.046 0.046 0.046 ciated with LEED properties have influenced the num- 0.002 0.002 0.002 0.002 # Complex buildings 0.000 0.000 00 ber of properties achieving LEED certification, and would be a topic of future research. Year 0.032 0.032 0.032 0.032 0.002 0.002 0.002 0.002 Finally, column 8 explores the relationship between Constant 64.902 64.909 65.026 65.030 rents and LEED certification, controlling for urban 3.487 3.485 3.431 3.43 Mkt fixed effects Yes Yes Yes Yes form through walk score. Results indicate that the Observations 82,094 82,094 82,094 82,094 2 rent premium for LEED is even greater in markets R 0.723 0.724 0.732 0.732 Adjusted R 0.723 0.723 0.732 0.732 where LEED is more common than in the overall Notes. sample. This is consistent and congruent with Bond Significant at the 1% level. and Devine (2016a). It is also consistent with Pivo Significant at the 5% level. Significant at the 10% level. and Fisher (2011) who observed valuation premiums relative to higher walkability in the office market. The results above contribute to the broader conver- High Adoption Markets sation about the potential to address social and envir- Acknowledging the low numbers of LEED properties onmental issues while achieving appropriate risk in many markets, the prior work categorized markets adjusted financial returns which in turn connects to by adoption level. Findings using these distinctions the important, evolving, and passionate debate about suggested that LEED certified buildings themselves the theory of the firm (Coase, 1937; Pivo & UN, 2008). might be considered a scarce commodity, and any Real estate firms of all types continue to develop their rental premium reflective of that uniqueness might understanding of what it means to be a fiduciary and represent the eco-certification itself (Fuerst how investments related to ESG and climate adapta- et al., 2017). tion/mitigation contribute to the generation of eco- In this context, Model 5 serves as a baseline model nomic value in excess of the cost of capital. for the four markets identified from the full sample The results add to the literature which demon- containing no less than 50 LEED certified properties. strates across real estate asset classes (Chang & Similar to Model 1, column 5 shows the results for Devine, 2019; Eichholtz et al., 2010; Harrison & Seiler, property characteristics and provides a robustness 2011; Robinson et al., 2016) and regions of the globe check for our model and sample. Again, all values (Devine et al., 2017; Devine & McCollum, 2019) that 10 J. GABE ET AL. Table 4. Determinants of multi-family property rents models there are differentiated economic performance pat- 5–8 only include markets with >50 LEED-certified apartments. terns between eco-certified and well-located buildings LnAvgRent and their traditional counterparts. Here, our contribu- All markets with LEED buildings tion is to illustrate differentiated rent patterns attend- (5) (6) (7) (8) ant to the sustainability and relative location of LEED 0.147 0.096 apartment buildings across a large sample of data. 0.02 0.02 These results should contribute to increased price dis- Walk score 0.004 0.004 0.00 0.00 covery efficiency given their consistency and Garden 0.174 0.172 0.102 0.102 expansion. 0.01 0.01 0.01 0.01 High-rise 0.160 0.148 0.118 0.111 These findings and continued debate are timely as 0.01 0.01 0.01 0.01 the U.S. Securities and Exchange Commission (SEC) % Studio 0.826 0.822 0.716 0.715 proposed rule, S7-10-22, will require that all public 0.02 0.02 0.02 0.02 % 1BR 0.532 0.527 0.461 0.459 firms disclosure of material climate risks. The 0.02 0.02 0.02 0.02 European Union, Japan, Australia, India and other % 2BR 0.248 0.248 0.248 0.248 0.02 0.02 0.02 0.02 countries already have legal frameworks requiring cli- Reno < 10 years 0.065 0.063 0.069 0.068 mate risk disclosures for similar types of firms. Where 0.01 0.01 0.01 0.01 LnAge 0.223 0.219 0.184 0.182 eco-certified and walkability are components of a 0.01 0.01 0.01 0.01 broader conversation about climate, it is clear that LnAge2 0.036 0.036 0.026 0.027 0.00 0.00 0.00 0.00 there is a meaningful and material role for the built Gym 0.089 0.090 0.084 0.085 environment in contributing to and creating solutions 0.01 0.01 0.01 0.01 Pool 0.012 0.012 0.038 0.038 to climate change (Glaeser & Kahn, 2010)(Table 4). 0.01 0.01 0.01 0.01 Priv. Outdoor space 0.025 0.024 0.030 0.030 0.01 0.01 0.01 0.01 Comparison to Prior Findings Ensuite laundry 0.065 0.066 0.058 0.058 0.01 0.01 0.01 0.01 Considering that LEED properties tend to be newer # Complex buildings 0.00 0.00 0.001 0.001 0.00 0.00 0.00 0.00 and located in more desirable urban locations, consist- Year 0.035 0.035 0.035 0.035 ent with prior work when the Walk Score is included 0.01 0.01 0.00 0.00 Constant 69.529 69.554 69.794 69.806 in order to account for variations in urban form, the 9.24 9.21 8.84 8.83 results are consistent with the 7% premium identified Mkt fixed effects Yes Yes Yes Yes Observations 12996.00 12996.00 12996.00 12996.00 by Bond and Devine (2016a) at 7.4%. This slight R 0.55 0.56 0.59 0.59 increase might reflect the apparent increase for the Adjusted R 0.55 0.56 0.59 0.59 consumption of sustainable goods overall, but also Notes. Significant at the 1% level. with Gen Z renters beginning to come of age. When Significant at the 5% level. we look at the four markets with the greatest levels of Significant at the 10% level. adoption, we find an even greater premium associated with LEED certification. Similar to the findings of certified, and non-certified properties, derived from a Fuerst et al. (2017), increased absorption of certified source widely utilized by the consumers of multi-fam- properties does not result in a decrease in premium. ily property, we observe a rental premium and would Indeed, the rental premium found in these markets suggest that this premium persists. Naturally, as the exceeded the general premiums at 14.7% overall, and work is cross-sectional, the second point estimate of 9.6% when accounting for the Walk Score. Though differentiated outcomes is not definitive time series these results are contrary to Couch, et al. (2015), they evidence. Qualitatively, what we observe is that the also represent a much larger sample. differentiation or premium persists across two very It should also be noted that the high concentration different samples and at different points in the market cities were included in the overall sample, thereby cycle. affecting the results of the overall sample and potentially making the overall results closer to the 4.9–9.45% range found by Bond and Devine (2016a). Conclusion However, the results are consistent with the finding The aim of this paper was to measure the extent to about persistence in differentiated financial outcomes between certified and non-certified space over time. which LEED certification was a material predictor of As we draw on an expanded sample of locations, the variation in multi-family rents. 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Year Author(s) Focus Sample Sample year(s) Method Location controls 2008 Miller, Spivey & Florance Sales Price Class A Office 2004–2008 Hedonic Regression City LEED & Energy Star 2009 Fuerst & McAllister Occupancy Commercial Office N/A Hedonic Regression/Quantile Regression Submarkets LEED & Energy Star 2009 Dermisi Assessed and Market Values Class A & B Office 2009 Robust Hedonic Regression None LEED 2010 Wiley et al. Rent, Occupancy, and Sales Price Class A Office 1999–2007 Hedonic Regression, Two-Stage Unspecified Vector of Locational LEED & Energy Star Least Squares Attributes 2010 Pivo & Fisher Cap Rates and Sales Price Commercial Office 1999–2008 Hedonic Regression State Energy Star 2010 Eichholtz, Kok & Quigley Rent and Sales Price Commercial Office 1999–2007 Hedonic Regression Quarter Mile Radius Location LEED & Energy Star Clusters 2011 Fuerst & McAllister Rent and Sales Price Commercial Office 1999–2008 Hedonic Regression Submarket LEED & Energy Star 2012 Kok et al. Rent and Occupancy Class A & B Office 2011 Hedonic Regression 14 Markets LEED: EBOM 2012 Reichardt et al. Rent Commercial Office 2000–2009 Difference-in-Differences/ MSA LEED & Energy Star Hedonic Regression 2013 McGrath Cap Rates Commercial Office 2002–2010 Robust Hedonic Regression Submarket Investment-Only LEED & Energy Star 2019 Holtermans & Kok Rent, Occupancy, and Sales Price Commercial Office 2004–2013 Repeated Measure Regression/ MSA/Quarter Mile Radius LEED & Energy Star Hedonic Regression Location Clusters
Journal of Sustainable Real Estate – Taylor & Francis
Published: Dec 31, 2023
Keywords: Eco-certification; multi-family; rent premium; sustainability; urban form; walkability
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