REIT and Green Building

By Susan Persin, managing director, Trepp
Green building has become more widespread as people recognize that the positive financial implications of “going green” extend beyond environmental stewardship.

During the recession, demand for green buildings stayed strong. Many large corporations have sustainability initiatives that lead them to favor green buildings. Additionally, green-lease policies have been adopted by federal, state, and local governments in the United States and internationally.

The lower operating costs associated with energy efficient green buildings are attractive to both investors and tenants.
Government regulation, which can affect anything from preferential treatment for entitlements to requirements to disclose information about building efficiency, provides further incentive for green building.

REITs and other large institutional owners are at the forefront of the movement toward green buildings.

Academics have had some success quantifying the extent to which commercial properties with LEED or Energy Star certification outperform conventional buildings. These buildings achieve higher rents and sales prices and have lower operating expenses.

A 2010 study called “The Economics of Green Buildings” analyzed the significance of green building trends on the commercial office market and noted lower utility bills and higher employee productivity, as well as higher rents and sales prices.

The study also noted a significant increase in EnergyStar and LEED certified buildings even during the 2007 to 2009 economic downturn.

Additionally, a 2012 University of Notre Dame study that focused on PNC bank branches found that businesses perform better when operating in LEED rated buildings.

In an effort to quantify the impact of green buildings, NAREIT, the FTSE Group, and the U.S. Green Building Council announced last November the joint development of a Green Property Index that will enable investment in REITs based on objective sustainability rankings.

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