Bentall Kennedy

ROI on Sustainable Assets

By Erica Rascón on Nov 7, 2016 in News

Yardi client Bentall Kennedy recently released a report that may change the way that the industry sees sustainable building.

Giselle Gagnon, Senior Vice President, Strategic Resources Group explains, “Our team at Bentall Kennedy has long been committed to implementing sustainability practices across our managed property portfolio – for us it demonstrates to our clients and tenants that we are investing soundly and sustainably,” she says. “So we commissioned a study to seek research-based evidence to test our hypothesis that green office building certifications deliver higher value.”

Sustainability within the commercial sector is a vital component of environmental health and corporate efficiency. Commercial properties are responsible for 81 percent of electricity consumption across North American and Europe. The industry also accounts for 40 percent of all energy consumed in those continents.

Until now, stakeholders did not have the resources needed to determine which green building certification would be the most effective, yielding the highest returns and making the smallest impact on the environment. Previous studies fell short in a number of ways: All were based on publicly available information, such as posted asking rents, green building certifications and the sale price of assets. The majority excluded data on concessions and their effect on net rents. Many studies overlooked intangible benefits entirely. None examined actual in-depth, diverse metrics across a large office portfolio for as long as 10 years.

As a recognized leader in Responsible Property Investing, Bentall Kennedy filled those voids. The company commissioned a comprehensive, long-term study on the benefits of sustainable certifications for commercial properties. In late 2015, The Journal of Portfolio Management published a report of the study entitled, “Green Certification and Building Performance: Implications for Tangibles and Intangibles.”

“The study is unique in that, in addition to financial metrics, it looks at the implications of green building certifications on less tangible aspects of performance, such as the likelihood of lease renewal and tenant satisfaction,” says Gagnon.

Concessions are another feature that distinguish the Bentall Kennedy report. “Few if any studies on sustainable buildings have examined rent concessions because large-scale, consistent datasets for those metrics are hard to come by,” adds Gagnon.

Bentall Kennedy convened an internationally acclaimed research team lead by Dr. Nils Kok, associate professor of finance and real estate at Maastricht University in the Netherlands, and Dr. Avis Devine, assistant professor in real estate and housing at Guelph University in Ontario, Canada. The team analyzed a decade’s worth of data including detailed rental rates, tenant satisfaction scores, occupancy levels, and lease renewals across 58 million square feet of office space. The data reveals the return on investment stakeholders can expect from three major certifications LEED, BOMA BESt, and ENERGY STAR.

The Findings

Overall, the findings suggest that certified commercial office assets garner 8-10 percent higher valuations than comparable non-certified assets. Buildings with higher efficiency ratings yielded higher sales prices, higher rents, and higher occupancy ratings.

For example, an asset in Canada with dual LEED and BOMA certifications received an 18.7 percent increase in the occupancy rate compared to non-certified buildings. This is notably higher than LEED-only certified assets in the U.S., with occupancy rates that were 4 percent higher than non-certified buildings.

Gagnon admits that she was not surprised. “This research supports the intuition we have been acting upon for years – that green certified office buildings deliver higher income and value. The indications that tenants prefer to occupy buildings with sustainable elements are an added bonus – the research shows that tenants are more satisfied overall and more likely to re-lease their space,” she observes.

Concessions

 BOMA BESt and LEED certified buildings first introduce cost savings at the negotiation table. Under those certifications, rent concessions for LEED and BOMA BESt buildings in Canada are on average 4 percent lower than in similar non-certified buildings.

Rents

Overall, LEED certified buildings averaged 3.7 percent higher net effective rents than similar non-certified assets in the United States. LEED Core and Shell certifications performed significantly better, resulting in a 14 percent premium.

ENERGY STAR buildings received a 2.7 percent premium for rental rates. BOMA trailed with 1.2 percent premium increase over non-certified buildings.

Tenant Satisfaction

 Overall, tenant satisfaction scores in green certified office buildings were 4 percent higher than in similar uncertified buildings.

Buildings in Canada with BOMA BESt Level 3 and 4 certifications received 7 percent higher tenant satisfaction scores than non-certified buildings.

Lease Renewals

BOMA BESt certifications tout the greatest likelihood of lease renewal amongst certified and non-certified buildings. BOMA BESt buildings offer a 3.4 percent marginal increase in the likelihood of lease renewal when compared to noncertified buildings.

Tenant renewal rates are 5.6 percent higher in Canadian buildings with BOMA BEST Level 3 certification than in buildings with no BOMA BEST certification.

Energy Performance

 On average, LEED-certified buildings consumed 14 percent less energy than conventional structures. LEED Existing Buildings shines the brightest amongst its peers; offices with such certification consume about 28 percent less power than comparable conventional buildings.

 Gagnon says, “Thanks to this study, there is evidence that suggests office buildings with green credentials earn higher income and value. Regardless of the level of skepticism, these findings and their application demonstrate the potential for an overall improved valuation for green certified buildings relative to their non-certified counterparts. The combination of higher rental rate premiums and occupancy rates combined with lower rent concessions can translate into higher values of 8 to 10 percent in a green certified building over a non-certified office asset. That’s hard to ignore!”

 “The findings of this study validate the financial case for prioritizing strategies that lead to green building certifications,” concludes Gagnon. “Bentall Kennedy will continue its commitment to investing soundly and sustainably because we believe it’s not only good for the environment, but also for our clients’ bottom lines. In 2015, Bentall Kennedy rolled out a LEED for Existing Buildings: Operations & Maintenance Volume program in both Canada and the U.S., as well as a BOMA BEST Portfolio Program in Canada. These multi-year programs enable us to effectively increase the coverage of building certifications across our managed-portfolio in support of delivering higher income and value.”