Why green labels boost real estate values

Walk into an office building in downtown San Francisco and you’re likely to see a familiar plaque at the entrance promoting the building’s green certification. At least 35 percent of San Francisco’s total commercial square-footage now bears a LEED and/or EnergyStar label, according to the U.S. Green Building Council.

Extensive research on the financial impact of green labels in the commercial real estate sector shows that tenants not only want to house their companies and employees in green buildings, they are willing to pay a price premium to do so. We have documented that buildings with a “green rating” (Energy Star and LEED) command rental rates that are roughly 3 percent higher per square foot than otherwise identical buildings -- controlling for the quality and the specific location of the office building -- and sales prices of green buildings are about 16 percent higher.

But does the price premium, and demand for green labels, exist in the residential real estate market as it does in the commercial sector? The short answer is yes.

The value of green hits home

In July 2012, my colleague Matthew Kahn and I released the “Value of Green Home Labels,” the largest study of its kind to document a significant price premium for green-labeled homes. Looking at sales transactions of 1.6 million homes in California from 2007 to 2012, we investigated the price implications of the three largest California green labels: LEED for Homes, Energy Star and GreenPoint Rated.

Next page:  What we learned