Why green labels boost real estate values

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

We found that, holding other factors constant, a green label provides a market premium of 9 percent compared to a similar home without the label. Considering that the average sales price of a home in California is $400,000, the price premium for a certified green home translates into some $34,800 more than the value of a comparable home nearby.

What’s driving the price premium of green homes?  Key findings from our study reveal that:

  • The premium associated with a green label is highest in areas with hotter climates, indicating that residents value green labels as a signal of energy efficiency especially in regions where it tends to cost more energy to keep a home cool;
  • The premium is positively correlated to the environmental ideology of the area, as measured by the rate of registration of hybrid (Prius) vehicles. Just as in the commercial sector, this correlation suggests some homeowners may attribute value to intangible qualities associated with owning a green home, such as pride or perceived status. (But also: the improved comfort and air quality of a green home.)

The bottom line: Green labels, or the characteristics these labels reflect (e.g., energy savings, water savings, greater home comfort) are valued by homebuyers and commercial building tenants alike. So what does this trend mean for the future of green buildings in the residential sector?

Market implications

We are already observing significant buy-in from builders and financers of green single-family and multifamily properties. In 2010, California-based homebuilder KB Homes announced that all new homes in Northern California would be labeled GreenPoint Rated. And in 2011, Fannie Mae launched the Multifamily Green Initiative to accelerate multifamily green property improvements and explore the development of a uniform rating system for multifamily properties, which lags far behind the single-family housing and commercial building sectors.

While these initiatives, and consumers’ increasing willingness to pay more for a green home,will likely increase the market presence of green-labeled homes, it remains to be seen whether the demand for these labels will be enough to offset the asymmetry that exists in the residential sector between the number of green and non-green homes.

However, based on the growing evidence of the financial benefits of green building in the commercial sector, we expect a similar trend will soon take shape in the residential green building market.

Photo of energy efficient building in San Diego provided by Dancestrokes via Shutterstock.