Investment Property Databank (IPD), a global property information business, publishes a sustainability index for UK commercial property that focuses on a building’s total return (net operating income plus capital appreciation). Last month, IPD published the results of their most recent investigation for properties in the UK covering the period from the first quarter 2008 through the third quarter of this year. According to IPD, properties that met stringent sustainability criteria underperformed their “less sustainable” counterparts by 400 basis points. Over the eleven quarters examined by IPD, “less sustainable” properties delivered a cumulative total return of -10.8%, compared to -14.8% for “more sustainable” properties. Also, capital depreciation (rather than appreciation) among the “more sustainable” properties was -28.0%, compared to -25.2% for “less sustainable” assets. IPD classifies a property as “more sustainable” if it passes either the BREEAM Quality threshold or four of the five remaining sustainability conditions (building accessibility, building quality, energy efficiency, waste generation and water use). IPD’s database of 978 properties is divided according to their adherence to these quantifiable metrics. Notwithstanding, IPD did note the good news that in the third quarter of this year, the capital growth figure for the “more sustainable” properties was 1.2%, compared to 0.9% for their “less sustainable” peers. IPD is tracking this performance because they are finding that a building’s sustainability is being factored into investment and leasing decisions.
Property & Portfolio Research (PPR), a commercial real estate advisory firm, recently identified clear trends for U.S. green office building performance during the recession. At the beginning of the downturn, Class A office buildings with LEED certification (built after 2005) experienced lower vacancies and asking-rent premiums compared to their non-LEED peers. For example, prior to the third quarter of 2008, Class A LEED-certified office buildings, according to PPR, had lower vacancies and asking-rents that were 30% or more higher than Class A non-LEED buildings built in those same years. However, as the country became entrenched in the recession, not unexpectedly vacancies increased and the asking-rent premium shrank significantly. Tenants were no longer fighting for LEED space, rather it was now landlords who were fighting for tenants to fill any available office space. Meanwhile, deliveries for LEED-certified buildings outpaced those of non-LEED buildings. As a result, according to PPR, rents for green office space fell in line with the market average. Notwithstanding, PPR expects that as the economy strengthens, the green building asking-rent premium will reappear and occupancies for LEED space will outdistance non-LEED peers.
In the final analysis, while there may be variability in the performance of green buildings over the economic cycle, there is one thing that remains an absolute certainty. If you focus on the green building component associated with energy efficiency and make your building more energy efficient, you will always realize a return on investment and an increase in net operating income. This is a powerful business driving force that is independent of the economic cycle.