34 Pages Posted: 30 Aug 2017
Date Written: August 28, 2017
Buildings are responsible for over one-third of all resource consumption, greenhouse gas emissions, and energy consumption. Commercial buildings, including office buildings, represent approximately half of that total. In mature economies such as the United States, new construction annually represents only a small fraction of the existing stock of buildings, as individual buildings last on average 100 years. The majority of buildings that will exist in such countries in 30 years are already built, and a large fraction of them are already over 10 years old. Hence, retrofitting of commercial buildings, through major renovation projects, is extremely important for sustainability within the built environment in such countries. Yet, almost all the research and data regarding the economics of green building focuses only on new construction. This paper focuses on the green retrofitting of office buildings in the US. We quantify the magnitude of value enhancement created by green retrofit construction, as well as the subsequent price dynamics effects of such sustainability. In terms of methodology, we introduce an innovative way to control for other effects to isolate the investment risk and return impact of green retrofitting. We do this by applying a repeat-sales modeling of only (and all) buildings which will ultimately be retrofitted. By using new real estate price indexing methodology, namely a structural time series model employing a hierarchical repeat-sales (HRS) specification, we can build statistically rigorous comparative price indexes of retrofit green, versus non-green, office buildings in the US, quarterly for the 2005-2014 period, even with relatively scarce transaction price data (less than 450 observation pairs, which is nevertheless a large sample compared to previous studies of green building economics). We find substantial value enhancement in green retrofit projects (up to 17 percent), and we find evidence that retrofitted green buildings may provide investors with lower asset price volatility, though such buildings also apparently experienced a sharper price decline during the financial crisis.
Keywords: commercial real estate, sustainability, retrofit construction, repeat-sales model, structural time series, green buildings
JEL Classification: R3, C32, Q5
Suggested Citation: Suggested Citation
Geltner, David and Moser, Lucas and van de Minne, Alex, The Effect of Green Retrofitting on US Office Properties: An Investment Perspective (August 28, 2017). Available at SSRN: https://ssrn.com/abstract=3028183