Sustainable real estate. An empirical study of the behavioural response of developers and investors to the LEED rating system
| Published date | 01 February 2013 |
| Date | 01 February 2013 |
| DOI | https://doi.org/10.1108/14635781311292953 |
| Pages | 10-40 |
| Author | James DeLisle,Terry Grissom,Lovisa Högberg |
| Subject Matter | Property management & built environment |
BEST PAPER AWARD FOR THE
SUSTAINABLE REAL ESTATE AT THE
AMERICAN REAL ESTATE SOCIETY
(ARES) CONFERENCE 2012
Sustainable real estate
An empirical study of the behavioural
response of developers and investors
to the LEED rating system
James DeLisle
Urban Design and Planning/Real Estate, University of Washington,
Seattle, Washington, USA
Terry Grissom
Urban Design and Planning, University of Washington, Seattle,
Washington, USA, and
Lovisa Ho
¨gberg
School of Architecture and the Built Environment, ABE, KTH,
Karolinska Institute and Higher Education, Stockholm, Sweden
Abstract
Purpose – The purpose of this paper is to explore the notion of sustainability and research reporting
price premiums for LEED-certified buildings.
Design/methodology/approach – This paper explores the notion of sustainability and research
reporting price premiums for LEED-certified buildings. The durability of certification levels is explored
by converting projects developed under the initial NC2-series system to a new vintage rating adopted in
2009. This conversion is made by applying Lagrangian multipliers to model stochastic impacts.
Findings – The study reveals that 18 percent of 591 projects developed under the NC2-Series were
“misclassified” in terms of certification levels when converted to new NCv2009 standards. To the extent
the market has pursued LEED certification levels, the unanticipated changes may have led to the
adoption short-term solutions that are inappropriate due to the long-term nature of real estate assets.
Research limitations/implications – Given the complexity of the LEED rating system, it is
unknown how the market will react to the lack of durability and approach pricing over the long-term.
Practical implications – The results indicate market participants should adopt a proactive
approach to LEED certification.
Originality/value – The study identifies significant dynamics in the LEED certification system for
new construction and behavioural responses that have not been reported in the literature.
Keywords LEED, Sustainability, Complexity,Green building, Behaviour, Realestate,
Sustainable developme nt
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Lovisa Ho
¨gberg received partial support for her visiting position at the University of
Washington by a Valle Scholarship and the Scandinavian Exchange Program.
JPIF
31,1
10
Received July 2012
Accepted September 2012
Journal of Property Investment &
Finance
Vol. 31 No. 1, 2013
pp. 10-40
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781311292953
Introduction
In the USA interest in sustainable development has dramatically increased over the past
decade. Indeed, for many designers, developers, investors and users the Leadership in
Energy and Environmental Design (LEED
w
) Green Building Rating System is a product
of the US Green Building Council (USGBC) and has become an industry standard. From
a behavioural perspective, this widespread acceptance can be explained by a number of
factors ranging from a commitment to environmental awareness to a desire to capture
higher risk-adjusted returns on investments. This latter claim has been supported by a
number of papers that reported LEED-certified projects have traded at significant
premiums compared to other projects. While such research has been welcomed by the
market, little attention has been focused on the long-term picture and how behavioural
responses of developers have responded to changes in the LEED rating system.
Furthermore, researchers have not explored the durability of value premiums which is of
paramount importance to investors. This question is especially important due to the
significant modifications that have been made to the LEED rating system. From a
technical perspective, these changes are understandable as the USGBC has made it clear
that it will continue to enhance the LEED rating to take advantage of new materials,
systems and knowledge that have emerged during the diffusion of innovation process.
While the commitment to continuous improvement is understandable in terms of
efficacy from a performance perspective, it may have unintended consequences from an
investment perspective as it creates a moving target and adds a level of unce rtainty that
can affect values over time.
This paper explores the stabilityor reliability of the LEED rating system over time. It
shouldbe noted that this lineof inquiry is not intendedto criticize theefforts to improve the
performance of buildings in an effort to reduce the environmental impact and create a
betterbuilt environment.Rather, the objectiveof this paper istwofold. The first objectiveis
to explorethe behavioural side of theequation, focusing on howdesigners and developers
pursued certification levels under the initial set of LEED rating standards (i.e. the
NC2-seriesor vintage).The second objectiveis to determine how durablethose certification
levelswere in light of changesthat were made to theLEED system when thenew NCv2009
system was rolled out. The empirical analysis includes a systematic analysis of the
individual attributes in each of the categories of credits that were used by producers of
space to achieve various levels of certification (e.g. certified, silver, gold and platinum) to
rate projects. In addition the pattern of credit distributions around the breakpoints
between levelswill be analysed to provideinsights into the behaviour of space producers.
Of particular interest is whether developers targeted minimum certification levels and
slightlyovershot the breakpointsto provide a moderate cushionin case some credits were
lost. While this strategy could help constrain costs, it would make the designations
vulnerable if changes in weights of the six impact categories comprised of 71 individual
attributesfor earning credits occurred as the underlying rating systemwas revised. This
questionwill be empiricallyanalysed by convertingthe NC2-seriesproject level creditsand
resultantcertification levels to the NCv2009vintage rating system.These changes will be
appliedto 591 individual projects to determine how many would havereceived a different
certificationlevel had the new standard been in place when they were firstcertified.
The underlying questions addressed in this paper reveal a conundrum for the
industry; whether it is more important to stabilize a rating system such as LEED, or
whether it is more important to introduce continuous change in pursuit of greater
Sustainable real
estate
11
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