It pays to be green: Professor Avis Devine researches profitability of environmentally-friendly office properties
Recent research by Avis Devine has rental property owners seeing green, for two reasons. Her study, “Green Certification and Building Performance: Implications for Tangibles and Intangibles " co-authored by Nils Kok from Maastricht University in The Netherlands, shows that environmentally-friendly office properties are not only more sustainable, but can also demand higher rents and lower operating costs. It is research that has garnered international media and industry attention, and is proving that the benefits of sustainable real estate go beyond its green status.
In this Q&A, Avis discusses this research and how she sees it evolving and impacting the real estate industry in the future.
What areas of research do you focus on?
My research centers around sustainable and energy efficient real estate, and commercial real estate. I generally approach these topics through a “finance” lens, looking at the financial implications.
What ignited your interest in this research?
As I neared the end of my doctoral program, I was looking for a subfield in commercial real estate in which to specialize, and I saw this as a topical and important area. The work I could do in sustainable real estate research had the opportunity to be useful to the industry, and I knew I wanted to focus on an applied field. Plus, I have the unique opportunity to not just help the real estate industry but also society, as we navigate our decisions of how to utilize our world more gently. I’m not saying my research is going to change the world, but I’m excited to be working in a field that at least gives me the opportunity to try.
You recently published a study on the enhanced profitability and decreased operational variance of environmentally-friendly office properties in the US and Canada. Why did you decide to investigate this topic?
The existing literature has done a thorough job of identifying office property rental rate and occupancy rate premiums. However, gathering data needed to understand the implications of environmental certifications on building operations is difficult. My co-author, Nils Kok, and I had the opportunity through some consulting research with Bentall Kennedy, a major real estate investment advising firm, to gather this information and address these questions.
What criteria does an office property have to meet to be considered “environmentally-friendly”?
While there are any number of ways a building can be “green,” we’ve found that being third-party certified as either sustainable or energy efficient goes much further to convince market participants. I address this point in other research (Bond and Devine, 2015), which finds double the rental rate premium for LEED certified apartment units as compared to non-certified “green” units. Given this, the definition of green building is rooted in receipt of third-party environmental certification. This includes LEED certification in both countries, and Energy Star and BOMA BESt certification in the U.S. and Canada, respectively.
What did the study entail?
We collected property-level and tenant-level data on rent payments, operating expenses, tenant satisfaction, tenant request calls, and capital expenditures, as well as building characteristics including green certifications. We then completed a variety of comparative and regression analyses to measure the impact of the sustainable and energy efficient certifications on the buildings.
What were the key findings?
Results confirmed that environmentally-certified buildings experience higher rents and occupancy rates. Additionally, it showed that certified buildings paid out fewer rent concessions, experienced higher lease renewal rates, and had happier tenants. All of this leads to “stickier” tenants – tenants that stay put in their space, thereby decreasing the operational variance of the building (decreasing turnover, leasing costs, fit out costs, etc.).
Did anything surprise you in your research results?
We were pleased to find relatively happier tenants. However, were surprised to find a statistically and economically significant difference between the lease renewal rates of green-certified and traditionally constructed space, as well as similar findings regarding different levels of rent concessions for the two groups.
Do you think this research will impact the real estate industry?
I hope it does. Much of the goal of my research is to answer the questions in which the industry is actually interested. If we can make a compelling case for the financial benefits of green building, that should encourage its greater adoption in the industry.
How do you see this research evolving or expanding in the future?
I hope to expand into analyzing the impact of environmental certification on existing buildings. Most of our efforts thus far have been focused on changing how we building buildings. However, if we are going to alter the environmental footprint of the built world, we need to start improving the existing building stock as well.
Read more: “Green Certification and Building Performance: Implications for Tangibles and Intangibles " Journal of Portfolio Management
“Certification Matters: Is Green Talk Cheap Talk?” Journal of Real Estate Finance and Economics