It Pays to be Green

The global debate surrounding climate change has prompted investors, policy-makers, and corporations to consider using buildings as a means to achieve sustainability. In fact, buildings account for approximately 40 percent of the consumption of raw materials and energy, while their associated construction activity accounts for at least 30 percent of world greenhouse gas emissions. The design and operation of real estate can, therefore, play an important role in energy conservation, and buildings are increasingly being touted as vehicles for achieving energy efficiency, carbon abatement, and corporate social responsibility. This shift in the perception and use of buildings is gradually moving commercial property markets to seek highly coveted "green" certifications. This paper seeks to explore the financial consequences of building green by empirically evaluating the impact green certifications have on rents commanded by commercial office properties in Manhattan, New York. To investigate how green certification influences the effective rent of commercial office buildings, the sample of green-rated office buildings and the control sample consisting of nearby, non-rated, office buildings are used to estimate a semi-log equation relating office rents per square foot to the hedonic characteristics of the buildings, location, and transacting date of each building. The hedonic regressions suggest that there is a rental premium of approximately 4% for green certification.


Using Compstak data from 28,432 rental contracts for commercial office buildings in Manhattan, the data is cross-sectional at the contract level and contains the following information about each building:

  • street address
  • transaction year
  • transaction quarter
  • construction year
  • renovation year
  • sub-market
  • building class
  • transaction size
  • effective rent (equal to contract rent multiplied by the occupancy rate)
  • lease term
  • free rent period

There is a total of 4,969 distinct commercial office buildings in the dataset.

LEED and Energy Star rated buildings were identified by street address on Green Building Information Gateway (GBIG). The data is cross-sectional at the rating level and contains the following information about each rating:

  • street address
  • type of rating (LEED or Energy Star)
  • subcategory of rating
  • rating date.

The rating data was then merged from GBIG with the office building rental contracts identified in CompStak based on street address and rating date. Thus, a rating was “added” to a transaction if the rating was awarded prior to the quarter in which the rental contract transacted. A total of 242 LEED or Energy Star ratings have been distributed to 49 distinct commercial office buildings in New York City.

Image 1: The 4,969 distinct commercial office buildings identified in the CompStak database projected onto a map of Manhattan. The 30 distinct buildings which received a LEED or Energy Star rating prior to at least one rental transaction appear as green circles while the remaining, unrated buildings appear as yellow circles.
Image 2: Using GIS techniques to identify all other office buildings in the CompStak database within a radius of one quarter mile, 30 clusters of nearby office buildings were created. This image depicts the same buildings as Image 1, but additionally shows the radius of one quarter mile surrounding each rated building.