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Green Is Good: The Impact of Sustainability on Real Estate Investment

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Across the commercial real estate (CRE) investment landscape, ESG-focused funds have been growing in popularity across institution types. 
ESG refers to an investment strategy which seeks equivalent or higher returns while simultaneously making a positive impact in three areas: environmental, social and governance. Of the three ESG categories, investors have focused primarily on environmentally aligned assets. In this series, we look at how ESG-oriented assets are performing when it comes to investment sales, across markets and asset-types, making the case that sustainability is good for investors, occupiers, and communities alike.

Part 3: Sustainability’s Impact on Multifamily Performance

Green Is Good Part 3 examines rents and revenue for LEED-certified multifamily assets and analyzes how LEED-certification affects performance of multifamily investment sales.

Between 2000 and 2021, LEED-certified multifamily buildings grew from 7.5% to 18.1% of Class-A urban inventory in Gateway-Plus markets (New York City, Los Angeles, Chicago, San Francisco / San Jose, Seattle and Washington, DC). It’s clear that renters are increasingly seeking greener places to live — especially Millennials and Gen Z who want sustainable buildings that demonstrate their commitment to eco-conscious living. In this third part of our Green Is Good series, we also uncovered how, when it comes to multifamily assets, green begets green — as multifamily leads other product types in green finance development. 

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Explore sustainability's impact on multifamily sector.
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PART 2: Sustainable Office Impact on Investment Pricing

Over the past 10 years, LEED-certified sustainable office buildings made up 29.7% of total office investment sales in the United States. This amounted to $357.4B in transactions. In this analysis, we set out to assess the premium in sales price on a per square foot basis for these sustainable office assets, as well as how cap rates differ between LEED-certified and uncertified products, and whether these differences fluctuate based on quality class, location (urban vs. suburban), or market type.

Our findings conclude that:

  • LEED-certified Class A urban office sales generate a 25.3% per square foot premium over non-certified buildings, rising to 40.9% for suburban buildings
  • LEED-certified Class B office achieve 77.5% premium over non-certified competitors
  • LEED certification compressed cap rates relative to non-certified office by 40-80 basis points
  • LEED-certified Class A suburban properties are undervalued when compared to a bottoms-up analysis
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PART 1: Sustainable Buildings Outperform in Class A Urban Markets

With 80% of investors intending to incorporate ESG into their strategy by 2023, we analyzed LEED-certified sustainable buildings in comparison to non-certified offerings to assess whether ESG-committed assets out-perform the competition.

In this report we dive into the findings of this analysis, concluding that:

  • LEED-certified buildings averaged $4.13 or 11.1% higher rent than non-LEED certified buildings
  • Construction costs to attain LEED certification can increase between 7.43% to 9.43%
  • LEED-certified assets outperformed by at least 49 percentage points during both post-GFC and COVID-19 periods
  • LEED-certified occupancy rate between Q1 2020 and Q1 2021 increased from 90%-92%, versus non-LEED occupancy falling from 90% to 88%.
  • Over the last 3 years LEED-certified assets held a 21.4% higher average market sales price per square foot
  • LEED-certified buildings make up 46% of urban deliveries in the last 10 years, despite accounting for just 2.5% of U.S. inventory
Download Part 1

 

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