Mixed Greens: Is Sustainability Sound?
Does investment in green building pay?
Apart from the evidence, to suggest otherwise would put us on the wrong side of history. Our collective intuition, however unscientific it generally proves itself, points to a future where we shall use our resources more efficiently and where technological advances will make that efficiency more cost effective to implement.
If not because of economics, and certainly not because of investors’ love for the environment, regulation may hasten the adoption of higher standards for building materials and energy performance. San Francisco is a case in point. In less progressive markets, the expectation that what is voluntary today will be the norm tomorrow (or the next day) is supporting the tradability of certified properties.
At least on an anecdotal basis, buyers will opt unequivocally for the green building when choosing between two properties that are otherwise undifferentiated. In an environment where liquidity remains off-kilter, that tradability commands a premium in the valuation. Borrowing a phrase from Professor Norm Miller, who has been among the most active researchers investigating the issue, the green premium may be accompanied by a brown discount.
The green ideology is not equivalent to hard analysis. The latter evaluates the cost of investment in materials and technologies, either for new properties or refurbishments and retrofits, against the cash-flow benefits. Apart from lower operating costs, the environmental benefits of green—such as cleaner air—may be internalized by tenants in higher productivity and captured in upside revenue.
From a practical perspective, quantifying the return on green investment is difficult. Because LEED-certified assets are generally newer or recently renovated, higher valuations for these properties may reflect the correlation of green status with other desirable property characteristics.