The final installment in our six trends driving sustainability in commercial real estate series is research – examining the links between green buildings and financial performance. Studies on the benefits of owning and operating high-performing, energy-efficient buildings have grown in recent years to help show the linkage between sustainability and financial performance. Although such research reveals that sustainable buildings offer multiple financial benefits, such as lower utility bills, higher rents, higher occupancy, and greater net operating income, many challenges still exist.
For example, researchers are struggling to isolate moderating factors and identify the specific drivers behind sustainability-related improvements in financial performance. Moreover, much of this research is proprietary, subject to data-set or sample-size limitations, or not transparent enough for rigorous interpretation. These barriers hinder our ability to translate such research results into actionable investment strategies. Thankfully, organizations like the U.S. Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy (EERE) are working to address these challenges.
Principal Real Estate Investors is seeking to advance progress on evaluating the financial benefits of green buildings, while conducting meaningful and objective research on our own portfolio. Toward that end, we have partnered with the DOE Office of EERE as an inaugural data provider for the Commercial Real Estate Data Aggregation & Trend Analysis lab (Data Lab). The Data Lab will aggregate information from multiple commercial real estate owners, databases, and other sources. It will also function as a robust dataset to enable a deeper investigation of the relationship between buildings’ sustainability, energy, and financial performance.
In its pilot study, the Data Lab collected building, leasing, and financial information from over 130 of our office properties. The pilot study serves two purposes: (1) to determine if there’s a correlation between green certifications and financial performance; and (2) illustrate that this type of research is possible, while setting a precedent for future studies.
The study indicates that green and energy efficient buildings exhibit stronger financial performance than their non-green counterparts. Specifically, green buildings in our portfolio have:
- higher market value per square foot
- higher operating incomes per square foot
- higher occupancy, higher rent per square foot
- lower operating expenses per square foot
- lower rent concessions per square foot
Additionally, the study reveals that green-certified buildings in our portfolio show a 28% increase in NOI and a 17% decrease in operating expenses versus non-green assets. And in the broader context, the study has mirrored the findings of other industry studies and has laid the groundwork for future research agendas. The summary results of this initial partnership with the DOE are available here.
As a next step, we will conduct further analysis on our green building portfolio. In particular, we plan to examine tenant satisfaction data to see how building occupants perceive their experience in high-performing buildings and how that might translate into lease renewals and overall satisfaction.
To sum up, each of the six trends in our blog series, including materiality, resilience, performance, intelligence, experience, and research are interrelated and influence each other. That said, we need to understand the impact of these trends in commercial real estate, and how we can adapt accordingly as investment managers. As we look to the future of the sector, these trends represent new market realities in the new competitive landscape. Indeed, commercial real estate needs to be sustainable, resilient, smart, and engaging. As fiduciaries, we need to understand what really matters most to investors and develop our investment strategies accordingly.
Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of May 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.
The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.
Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document. Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided.