Determinants of premia for energy-efficient design in the office market

This study explores the dynamic nature of premia for energy-efficient design in the market for office space. Stationary premia for Energy Star- and Leadership in Energy and Environmental Design (LEED)-certified property transactions are estimated at 16.4 and 10.6% respectively, on a price per square foot basis. We provide evidence to suggest that these premia should not be uniformly applied to all properties, but that adjustments should be made to account for individual property characteristics and changing market conditions. In particular, variance in the premia for Energy Star-labelled assets is consistent with expectations for the actual impact on operating expenses. Premia for LEED-certified properties are more responsive to the expected marketing benefits accrued by tenants. LEED premia are increasing with market acceptance during the sample period, rather than decreasing as the novelty effect expires. Investment in both categories of property with energy-efficient design is increasingly advantageous during periods when office market conditions have softened.