The findings of the research are mixed, in part because some investments are far more costly than the operational benefits while the balance is reversed for investments that are chosen with a stronger eye for fundamentals. In at least one case, Dwight Jaffee, Richard Stanton and Nancy Wallace determine that Energy Star certification may not enhance value once robust controls are introduced for a property’s cash flow and capitalization characteristics.
It is important to state that green and green-certified are not equivalent, even though they may be bandied as such. Why certify? The quality of properties’ energy-use characteristics is not directly and easily observable. If buyers value green but are not able to discern the green status of their various acquisition targets, information asymmetries will interfere with the efficient functioning of the marketplace. To correct for potential or realized market failures, certification allows for a reliable signal of quality and becomes valuable in itself.
Research by Charles Corbett and Suresh Muthulingam, undertaken at UCLA, evaluates LEED certification, not simply as a binary function, but in terms of the gradations facilitated by the certification process. They assess whether “signaling or the pursuit of intrinsic benefits dominates organizations’ decisions to adopt the LEED standard,” but find that neither one has explanatory value in isolation. Testing alternative model specifications, they ultimately suggest “a significant part of LEED certification behavior is driven by signaling considerations.”
The results of the Corbett and Muthulingam analysis may be impacted by the vintage of their study, which was undertaken in 2007. In a more recent analysis, Prasant Das, Alan Tidwell and Alan Ziobrowski show that the value of green is dynamic rather than constant. While they do find that green properties command rent premiums over their comparables, they also find that the premium changes over time, concluding that “green property rents may provide a hedge in down markets.” With that in mind, data from the downturn and current recovery should feed increasingly robust analysis to support our notions of green’s value as we move forward.
Sam Chandan, PhD, is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.