Factors influencing commercial buildings to obtain green certificates

ABSTRACT

Identifying the key factors that influence commercial buildings’ decision to obtain voluntary green certificates is essential to building sustainability enhancement. Using commercial buildings in the state of New York, multinomial logit and nested logit models demonstrate that there is a significant correlation between the characteristics of commercial buildings (such as square footage, lot size, and years built) and green certification. More interestingly, if a commercial building is occupied by its owner, likelihood of green certification is actually smaller. This finding not only confirms that ongoing energy savings are heavily discounted when deciding whether to incur the upfront cost of green certification, but also suggests that the rental premium enjoyed by green buildings is likely greater in terms of present value than the expected operating cost savings. Another explanation could be that investor owners must operate in a competitive market for tenants while owner-occupiers do not operate in that competitive market, so they do not need to obtain green certificates to attract tenants. Consequently for policymakers, building owners that plan to rent out their commercial property space should be the early targets to promote green certification.

KEYWORDS:

• Voluntary green building certificates
• commercial buildings
• split incentives
• discrete choice analysis

JEL CLASSIFICATION:

• Q40
• O33
• D22

Acknowledgements

This research was funded by the SSE programme in College of Technology and Innovation at the Arizona State University and the National Science Foundation under grant NO. 1509077.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In the year of 2013, $30 billion was saved on American families and businesses’ utility bills from Energy Star programmes, which is equivalent to the annual electricity usage for more than 38 million homes. By the end of 2013, the U.S. Green Building Council (USGBC) has issued more than 20,000 LEED certifications for commercial projects, which was a significant milestone to the progress for healthier and high-performing commercial buildings. By the end of 2014, Energy Star has issued the green certifications for more than 25,000 buildings and 1.5 million homes. Based on the number of buildings, nearly about 10% of all the existing buildings in the United States are LEED certified and 10% are Energy Star certified; based on the building square footage, more than 10% of office buildings have obtained LEED certificates and more than 30% have obtained Energy Star certificates (Eichholtz, Kok, and Quigley 2013). In reality, 88 of the Fortune 100 companies are already using LEED.

² Strong local demand, a decisive mass of leading-edge firms, strong infrastructure construction, top-notch professionals, and a mature supply chain.

3 In this article, when we say commercial buildings’ decisions, it is equivalent to say commercial buildings’ management teams or building owners’ decisions – similar to the concept of a firm’s decision.

⁴ This requires the additional assumption that owners who occupy their own buildings and owners who rent out their buildings have similar underlying preferences. In other words, there is no self-selection bias such that owners that heavily discount energy savings are more likely to live occupy their own buildings. We will discuss in more detail the potential endoegenity issue in Section 3.

⁵ Most existing studies only pay attention to green office buildings without including other types of commercial buildings. In fact, there are a growing number of non-office commercial buildings obtaining green certification, such as food store markets, medical buildings, hospitals, hotels, parking structures, etc. The LEED and Energy Star database can provide information of all kinds of commercial buildings, making it more sensible to broaden the building type.

⁶ Adoption of energy efficiency facilities, improvement of water quality, and waste reduction for instance.

Additional information

Funding

This work was supported by the Arizona State University; National Science Foundation: [Grant Number 1509077].