Creating a Green Building Ecosystem: The Impact of Local Sustainability Polices

Abstract

Although there are several important federal initiatives, many sustainability efforts in the United States are enacted by states or municipalities. Some of these policies are structured as regulatory mandates while others offer incentives to drive adoption of sustainability related initiatives. We aim to examine how these sustainability efforts impact commercial real estate, specifically, property-level financial performance. We create an index to measure the intensity of local environmental initiatives by state and estimate the effect of higher levels of sustainability policy adoption on building level NOI, change in NOI, cap rates and mortgage default. We show that green policies are associated with higher valuations and lower initial cap rates at the time of loan origination. However, in terms of performance an increase in green policy intensity is associated with a significantly lower annual property level NOI. This in turn, leads to loans on those properties being more likely to experience severe delinquency. This is the case for both green regulations and green incentives, although the magnitude of these negative effects are larger for regulations. Furthermore, the negative impact of green policy intensity is mitigated for properties that have been recently renovated. The effects remain robust across property types, except for multifamily housing, lodging, and mixed-use properties which experience net positive NOI effects. While previous work has focused on the returns to property-level green renovations or certifications, results provide insight into how local sustainability policy may more broadly impact commercial real estate performance.

Keywords: ESG policies, energy efficiency, real estate property performance, NOI, yields, mortgage delinquency.