Do tenants pay energy efficiency rent premiums?
| Date | 01 July 2014 |
| Pages | 333-351 |
| Published date | 01 July 2014 |
| DOI | https://doi.org/10.1108/JPIF-09-2013-0058 |
| Author | Jeremy Gabe,Michael Rehm |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Do tenants pay energy efficiency
rent premiums?
Jeremy Gabe and Michael Rehm
Department of Property, University of Auckland Business School,
Auckland, New Zealand
Abstract
Purpose – Using a unique data set, the purpose of this paper is to test the hypothesis that tenants pay
increased accommodation costs for sp ace in energy efficient office property.
Design/methodology/approach – The authors obtain lease contracts for office space in central
Sydney, Australia. Empirical data on annual gross face rent and contract terms from each lease are
combined with building characteristics and measured energy performance at the time of lease.
Hedonic regression isolates the effect of energy performance on gross face rent.
Findings – No significant price differentials emerged as a function of energy performance, leading
to a conclusion that tenants are not willing to pay for energy efficiency. Six factors – tenancy floor
level, submarket location, proximity to transit, market fixed effects, building quality specification
and, surprisingly, outgoings liability – consistently explain over 85 per cent of gross face rent prices
in Sydney.
Research limitations/implications – Rent premiums from an asset owner’s perspective could
emerge as a result of occupancy premiums, market timing or agent bias combined with statistically
insignificant rental price differentials.
Practical implications – Tenants are likelyindifferentto energy costs becausethe paper demonstrates
that energy efficiency lacks financial salience and legal obligation in Sydney. This means that split
incentivesbetween owner and tenant arenot a substantial barrier to energyefficiency investment in this
market.
Originality/value – Thisstudy is the first to thoroughlyexamine energyefficiencyrent price premiums
at the tenancy scale in response to disclosure of measured performance. It also presents evidence against
the common assumption that rent premiums at the asset scale reflect tenant willingness to pay for energy
efficiency.
Keywords Sustainability, Climate change, Social responsibility, Energy, Office, NABERS
Paper type Research p aper
I. Introduction
Public policymakers and industry are interested in whether energy efficient buildings
exhibit superior value characteristics relative to less efficient buildings. Warren-Myers
(2012) provides a comprehensive survey of early literatu re associated with research
into the marketeffects of green building certification.Natural resource-efficient buildings
that reduce environmental damage are often knownin the industry as “green” buildings.
Improving data quality is critical to advance research on the market value of green
property according to the Warren-Myers review; research has transitioned from cost-
benefit case studies to advanced valuation methods that have found evidence of value
premiums, butthe lack of quality data has limited the effectiveness of research to inform
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received September 2013
Accepted November 2013
Journal of Property Investment &
Finance
Vol.32 No. 4, 2014
pp. 333-351
rEmeraldGroup Publishing Limited
1463-578X
DOI 10.1108/JPIF-09-2013-0058
The authors thank RP Data Ltd. for assisting with the data gathering associated with this
research. In addition, comments received during the 2013 American Real Estate Society Meeting
were helpful to the outcome of this research, particularly those of discussant Dustin Read. Jeremy
Gabe is supported by the University of Auckland Doctoral Scholarship.
333
Energy efficiency
rent premiums
practice. Havingfound initial evidence of energy efficiency premiums, these groups and
academics are now interested in the cause and implications of observed premiums.
Tenant willingness to pay higher rent is a key potential cause of green building
value creation and thispaper will contribute to the literature bydirectly testing whether
tenants are willing to pay rent premiums for energy efficient office accommodation.
Rent premiums have important implications for the property industry because they
act as a market incentive for private investment in energy efficiency, reducing the
need for government intervention. Eichholtz et al. (2010) argue that rent premiums
encourage investors to develop green buildings, evenif there is a cost premium on green
development. As for why tenants would pay energy efficiency rent premiums, Eichholtz
et al. suggest tenants benefit from operating expense savings, insurance against
operating cost inflation risk, and reputational benefits from locating in a property
associated with social responsibility. They also discuss the relationship between indoor
air quality and employee productivity, but the link between energyefficiency and indoor
air quality is weak (Fisk, 2000; Roulet et al., 2006), so this argument applies to green
building investments that are not considered in this paper. Reichardt et al. (2012) argue
that a lack of energy efficient building supply means early-adopting owners can collect
scarcity rents reflecting marginal tenant willingness to pay for energy efficiency.
Overcoming data limitations in existin g studies, this paper directly examines tenant
willingness to pay for space in energy efficient office buildings. Current hedonic pricing
studies on energy efficiency rent premiums are restricted by their use of asset-scale
data or – when leasing transactions are used – by omitted variables associated with
subjective building quality characteristics. W hen rent is measured directly from
lease contracts in a market where energy labelling and quality labelling are thorough,
we find no evidence of a rent differential as a function of energy consumption or energy
labelling. Further work demonstrates that this finding is in line with weak financial
and legal incentives fo r energy efficiency facing tenants, even those in net le ase
contracts that pay all operating expens es.
II. Relevant literature
Hedonic regression studies examining the market value of energy efficiency in office
property find a range of value premiums for certified energy efficient buildings
relative to uncertified buildings. Research in the USA finds evidence of rent premiums,
occupancy rate premiums, cap rate reductions, and sales price premiums for Energy
Star rated buildings (Miller et al., 2008; Eic hholtz et al., 2010; Pivo and Fisher, 2010;
Wiley et al., 2010; Fuerst and McAllister, 2011a, b; Reichardt et al., 2012). The rent and
occupancy premiums from these models are summarised in Table I. A diverse range of
energy efficiency rent premiums from varied measures of asset-scale rent are found in
the existing literature on the USA . Outside North America, studies on value premiums
for energy efficient office space have been conducted in the UK (Chegut et al., 2012;
Fuerst and McAllister, 2011c; Fuerst et al., 2013), the Netherlands (Kok and Jennen,
2012) and Australia (Newell et al., 2011). These studies reach similar conclusions in
regard to green premiums as the American studies, with the lone exception of Fuerst
and McAllister (2011c), who conjecture that their finding of no premium represents
how difficult it is for prospective tenants to obtain an energy performance certificate
in the UK.
This paper examines the findings associated with higher rents further. Most studies
of energy efficiency premiums are conducted at the asset scale, which makes the causal
factor unclear. Authors assume higher rent measured at the asset scale is sufficient to
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