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Certification Matters: Is Green Talk Cheap Talk?

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Abstract

There is an active and growing literature examining the rental rate, sales price, and occupancy premiums associated with sustainable or energy efficient certified real estate. To date, the focus has rested largely on office properties and for sale single family residential properties. We examine the rental rates achieved by green multifamily properties, providing the first look at the population of LEED market-rate apartments in the United States. We find an approximate 8.9 % rental rate premium associated with LEED apartments. Moreover, this research provides the first indication that LEED certification garners an additional premium over non-certified space that identifies as green, indicating the strength of the certification signal and contributing to the longstanding discussion on the merits of certification.

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Notes

  1. https://www.ncreif.org

  2. http://www.reit.com/DataAndResearch/Property-Sector-Performance.aspx

  3. http://www.nmhc.org/Content/LandingPage.cfm?NavID=2

  4. www.usgbc.org.

  5. The Appraisal Foundation-approved methodology is considered to be the real estate industry’s best practice.

  6. The Appraisal of Real Estate – 12th Edition indicates that a single sale may sufficiently explain the market, but that the most important aspect of comparable selection is that the value of including each comparable in the selection be understood (pg. 420).

  7. There are eight cases in which this occurs. These eight properties are situated in: Seattle, WA (2 of 8 properties in MSA); Portland, OR (1 of 9 properties in MSA); Washington, DC (1 of 8 properties in MSA); Bayonne, NJ (1 of 11 properties in NYC MSA); Anaheim, CA (1 of 8 properties in LA MSA); Cincinnati, OH (1 of 2 properties in MSA); and, Augusta, GA (only property).

  8. The “family” refers to all unit types that share bedroom/bathroom configurations, despite the presence or lack of a den, ensuite laundry, and/or private outdoor space.

  9. In addition to cluster fixed effects, all equations are also estimated using MSA fixed effects. There is little change in the results, with the exception of a lower R^2 due to the decrease in variables.

  10. 2012 multifamily capitalization rates were 5.91 and 6.09 % for urban and suburban properties, respectively (Integra Realty Resources 2013).

  11. To put this value in context, using that average rental rate per square foot of $2.67 for the example building with a 40 % expense ratio and the 6 % capitalization rate would indicate a base building value of approximately $80 million.

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Acknowledgments

The authors would like to thank Michael Ferguson, David Brasington, and the participants at the 2015 AREUEA Annual Meeting, 2014 AREUEA International Meeting, Pepperdine University Speaker Series, and 2014 EBS Real Estate Conference for their helpful comments.

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Authors and Affiliations

  1. Department of Finance and Real Estate, University of Cincinnati, Cincinnati, OH, 45221, USA

    Shaun A. Bond

  2. College of Business + Economics, University of Guelph, Guelph, ON, N1G 2W1, Canada

    Avis Devine

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  1. Shaun A. Bond
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  2. Avis Devine
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Correspondence to Avis Devine.

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Bond, S.A., Devine, A. Certification Matters: Is Green Talk Cheap Talk?. J Real Estate Finan Econ 52, 117–140 (2016). https://doi.org/10.1007/s11146-015-9499-y

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