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Insights

Green is Good Part 2: Sustainability's Impact on Office Investment Pricing

In Part 1 of this series, we examined the effect of sustainable strategies upon rents and leasing of U.S. office assets.

Utilizing LEED-certification as an indicator, we determined that there was a noticeable premium for rents and revenue, controlling for quality, age and class of buildings. In Part 2 of this series, we examine how LEED certification impacts sale pricing.  
 
Over the past 10 years, LEED-certified office buildings made up 29.7% of total office investment sales in the U.S., comprising $357.4B in transactions. In this analysis, we set out to answer the following questions.  

  • What was the premium in sales price on a per square foot basis for these assets?  

  • How did cap rates differ between LEED-certified and non-LEED-certified product?  

  • Did these differences fluctuate based on quality class, location (urban vs. suburban), or market type?  

Key Findings 

 

  • Keeping quality and class constant, LEED-certified Class A urban office sales generated a 25.3% price per square foot (psf) premium over non-certified buildings, while LEED-certified Class A suburban office achieved a 40.9% premium over non-certified assets. 

  • LEED-certified Class B office achieved the highest premium, 77.5% over its non-certified comparable set. 

  • LEED certification compressed cap rates relative to non-certified office by 40 – 80 basis points (bps)

  • When we investigated the fairness of pricing for assets, we determined that LEED-certified Class A suburban properties are undervalued when compared to what a bottoms-up analysis would suggest, using revenues and prevailing cap rates. Class A urban and Class A gateway+ asset values corresponded to the bottoms-up valuation, meaning these assets are neither undervalued nor overvalued. 
     

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