www.lhsbc.

com | May 2013

Does Building Green Create Value?
By Gil Yaron, LL.M, LL.B, BA&Sc and Melissa Noel, MBA, BSc
Light House Sustainable Building Centre Society, Vancouver, BC

The number of certified buildings in Canada has
continued to grow steadily since 2000, despite the
recent downturn in the North American real estate
market. Outside of the United States, Canada has
the largest number of LEED certified buildings in the
world, with 3,768 projects certified as of 2011
(Watson, 2011). A 2008 study found the reported
dollar value of non-residential LEED projects in
Canada represented 13% of total non-residential
permit values (Leslie, 2008). Around the world,
exponential growth is forecasted for LEED certified
and LEED like buildings over the next two decades
(see Figure 1). Experts also estimate an additional
30% of green buildings are currently being built to
LEED standard, but are not being registered or
certified. In the wake of strong market activity, the
question now is whether building green translates
into tangible value for property owners and
developers.
Studies Show the Benefits of Building
Green
There is growing evidence to suggest that improved
performance and market recognition associated with
green certification increases the value of a building.
A recent study published by Singapores Building &
Construction Authority and the National University of
Singapore found renovated commercial buildings to
be more energy efficient with higher valuations
attributable to lowered operating expenses
(Marusiak, 2012). The literature also suggests that a
buildings performance and green building
certification impact its assessed value (AV) and
market value (MV). One study that encompassed all
buildings in the United States over 50,000 square
feet found that LEED certification has a positive
effect on market values and assessed values
(Dermisi, 2009). Specifically:


ENERGY STAR designation increases AV and
MV substantially.
The effect of LEED rating/level on AV and MV is
based on the level of geographic aggregation.
LEED-Existing Building (EB) Gold has a strong
positive effect on AV, while LEED-EB at the
Silver level has a similar effect on both AV and
MV.
LEED New Construction (NC) at the Gold level
has a strong positive effect on MV
LEED Core & Shell (CS) at the Gold and Silver
levels almost doubles that effect on AV when
making adjustments for building location.



Figure 1: Current and Projected Cumulative LEED
and LEED-Like Square Footage Globally
(US, Canada, India & Italy)


What is a Carbon Neutral Building
2 www.lhsbc.com | May 2013

Using sophisticated statistical techniques to ensure
comparability between green and conventional
properties, another recent survey of more than
26,000 US office buildings certified through LEED or
Energy Star found they sell for a premium of about
13 per cent. However, the study noted that the
buildings efficiency is the ultimate determinant in
these calculations, not the fact that the building is
certified. (Eichholtz P., 2010). Premiums of 5.3% for
Energy Star certified buildings and 9.9% for LEED-
certified buildings were also observed in a similar
study (Miller, 2008 citing Miller, J ay and Florance,
2008).
Studies also show that the rate of return on
investment is higher for green building upgrades. A
survey conducted by the Building Owners &
Managers Association (BOMA International), US
Green Building Council, and the Real Estate Forum
found that 65% of respondents acknowledged a 5%
increase in their ROI compared to the year before,
as a result of green building investments (Burr,
2008).
These studies are often dismissed in Canada for a
variety of reasons. Most studies consider American
building inventory, making them inapplicable to
Canadian markets. Others are discounted because
they take a snapshot of the market and do not
account for changes over time. Furthermore,
anecdotal industry experience suggests that even if
savings are realized on green buildings through
reduced construction costs, long-term operational
efficiencies, higher market values and leasing rates,
these savings may be offset by increased property
taxes resulting from higher assessed property
values.
Sustainability in Building Valuations
Part of the problem is that current valuation and
appraisal techniques do not address the issue of
sustainability in buildings. In 2007, representatives
from nations around the world signed the Vancouver
Valuation Accord -- an agreement to address the
interrelationship between sustainability and value.
The Accord was a recognition of the absence of
sustainability indicators in the valuation and
appraisal of buildings. Since that time, academics,
governments, investors and industry have continued
to wrestle with the question of whether, and to what
degree, green buildings are worth more than
conventional buildings and to address gaps in
current appraisal and valuation techniques to better
account for sustainability elements (Lorenz, 2011).

Capturing the Value in Green Buildings
The investment potential associated with green
building, particularly building retrofits, in North
America is staggering. According to one recent study
by the Deutsche Bank, the United States alone
offers a $279 billion dollar investment opportunity
with resulting energy savings over 10 years totaling
more than $1 trillion based on an average 30%
efficiency gain. The commercial real estate sector is
estimated to offer $72 billion of investment potential
alone (DBCCA, 2012).
Investors, owners and property managers are
starting to explore the value of certified buildings
through concepts such as risk, life cycle costing, and
operational efficiency. A recent report from the
Institutional Investors Group on Climate Change
(IIGCC)
1
sets out the increasing trend amongst
institutional investors to consider sustainability and
ESG (environmental, social and governance)
indicators in regard to the risk and potential
performance of their real estate portfolios (IIGCC,
2013). An American survey of 718 executives in
architecture, construction, real estate consulting,
corporate owner-occupants, developers, engineers,
real estate owners, corporate tenants and real estate
service providers found that fifty-six percent of
executives said their companies were extremely or
very committed to following environmentally-
sustainable practices in their operations, citing
energy efficiency, ongoing operations and
maintenance costs and building value as the primary
reasons for incorporating green features into a
construction project (see Figure 2). However,
despite this commitment, the survey found only 48%
would seek LEED certification, down from 53% in
2010 and 61% in 2008, which begs the question
whether certification itself, or simply the inclusion of
green features, enhances the value of a sustainably-
built building (Turner Construction, 2012).



1
Institutional Investors Group on Climate Change (IIGCC) is a
forum for collaboration on climate change for European investors.
It provides investors with a platform to encourage public policies,
investment practices, and corporate behaviour that address long-
term risks and opportunities associated with climate change.
IIGCC currently has over 80 members, including some of the
largest pension funds and asset managers in Europe,
representing around 7.5trillion in assets.
3 www.lhsbc.com | May 2013


Figure 2: Importance of sustainability factors when evaluating green building features (2012).
3

The Green Building Valuation Report
To address the gaps in the research around building
valuation, Light House is initiating a first-of-its-kind
Green Building Valuation Report for the Canadian
market starting in 2013. The annual report will track
and compare key financial indicators for green
certified and conventional commercial buildings in
seven major Canadian cities, including market value,
assessed value, leasing rates and operating costs.
An invaluable resource to the Canadian building
construction and real estate sectors, the Green
Building Valuation Report will provide longitudinal
trends analysis based on Canadian market data to
better assess the value of the nations green building
inventory. The study will consider the value of
building certification and provide ongoing
assessment of the ability of property appraisal and
valuation techniques to capture the value of high
performing buildings.
About Light House Research Services
Light House is dedicated to advancing green
building and the sustainable infrastructure and
economic systems into which green buildings are
intrinsically integrated. Light House projects cut
across all scales of building and development, from
buildings to regions, and across the residential,
institutional, commercial, and industrial sectors. We
provide research, advisory and project management
services to businesses, policy makers and the real
estate and construction industries. These are part of
the full-suite of other services that we offer, including
sustainable land use planning, policy, facilitation,
rating system documentation, energy audits and
post-occupancy evaluations.





___________________

3
Source: Turner Construction, 2012





What is a Carbon Neutral Building
4 www.lhsbc.com | May 2013


References
Burr, A. (2008, December 5). Studies Suggest More
Gains for Green Building in 2009. CoStar Group.
Retrieved from
http://www.costar.com/News/Article/Studies-
Suggest-More-Gains-for-Green-Building-in-
2009/108106
DBCCA. (2012). United States Building Energy
Efficiency Retrofits: Market Sizing and Financial
Models. The Rockefeller Foundation and DB Climate
Change Advisors. Deutsche Bank Group.
Dermisi, S. V. (2009). Effect of LEED Ratings and
Levels on Office Property Assessed and Market
Values. JOSRE , 1 (1), 24-47.
Eichholtz P., K. N. (2010). The Economics of Green
Building. Escholarship .
IIGCC. (2013). Protecting Value in Real Estate:
Managing investment risks from climate change.
Institutional Investor Group on Climate Change.
Leslie, M. (2008, Summer). The Green Building
Market in Canada: Non-Residential Advances.
Ontario Roofing News (34), pp. 1-11.
http://www.eco-business.com/news/properly-pricing-
green-buildings/
Lorenz, D. A. (2011). Sustainability and property
valuation: Systematisation of existing approaches
and recommendations for future action. Journal of
Property Investment & Finance, 29 (6), 644-676.
Marusiak, J . (2012). Properly pricing green buildings.
Retrieved from

Miller, N. S. (2008). Does Green Pay Off? Journal
of Real Estate Portfolio Management , 14 (4), 385-
399.
Turner Construction. (2012). 2012 Green Building
Barometer. Turner Construction.
Watson, R. (2011) 2011 Green Building Market and
Impact Report.





For more information about
Light Houses research services,
contact
Gil Yaron
Director, Special Projects &
Partnerships
778.668.3675
gil@lhsbc.com