This article was published in June 2017 and will not be updated. Please contact us if you have specific questions regarding the information in this article.
Austin, by most people’s standards, is considered an environmentally conscious city. In fact, Austin was ranked as one of the top 30 greenest cities in America by WalletHub in 2016. But just because Austin citizens care about the environment, does that mean Austin businesses are willing to pay more in rent for buildings proven to be environmentally friendly?
To dig into this question we first started by deciding what would qualify as environmental certifications. For our purposes, we used CoStar’s definition, which includes buildings that have received either an Energy Star label or been dubbed LEED certified.
What Is LEED Certification?
A building must meet certain standards to receive these certifications, ranging from saving water to conserving energy and using sustainable building materials. For example, the LEED certification assigns point values to buildings throughout the development process that are then used to assign a ranking. A “certified” building meets the minimum requirements of the LEED standards, while a “platinum” building has gone above and beyond to become a truly environmentally conscious addition to the Austin office market.
What Is the Energy Star Label?
The Energy Star label is only given to buildings that conserve energy better than 75% of similar buildings nationwide, making it another good benchmark to compare properties with.
How Do Certifications Affect Rental Rates?
To find out exactly how environmental certification programs affect Austin office rental rates, we looked at the differences in our competitive set[i] between buildings with certification and those without. What we found seems to confirm the idea that environmentally conscious construction has a positive impact on office rental rates.
[i] Our competitive set is comprised of the primary buildings in each submarket and is used to track market trends. A list of our competitive set buildings can be found in our 2017 Q1 market report.
In our study, 35% of the Class A office buildings citywide were certified and boasted a rental rate of $3 higher on average. This is something that developers can keep in mind when deciding whether it is cost-effective to pursue a certification for a project.
In addition, about one-third of the rentable area in AQUILA’s competitive set delivered over the past 10 years came with an environmental certification, showing that developers are potentially beginning to see the benefits of such certifications along with tenants and landlords.
However, we cannot definitively say that environmental certifications are the sole cause of this difference in rental rate. Some of the other influencing factors that could lead to this apparent benefit include:
- The improvements were done to a building on top of the environmental improvements
- Older, lower-rent buildings generally do not pursue environmental certifications, skewing the data in favor of newer, higher-rent buildings
As you may have noticed, the overall average is greater than all the submarket averages. This seemed impossible to us at first, but after double-checking our numbers we realized we had stumbled across a Simpson’s paradox. Basically, the average of the whole is greater than the average of its parts. This does not affect the rest of our analysis, but we wanted to make sure we pointed it out.
We also broke our analysis down by submarket to see how environmental certifications affect average rental rates in different areas. The Far Northwest saw the largest benefit, with a rental rate of $2.91 higher for buildings with an environmental certification. The CBD and Arboretum also saw a benefit, with rental rates of $2.07 and $1.81 higher respectively.
On the other hand, Shepherd Mountain showed a lower average rate, but that is likely due to other external factors not included in our analysis.
Again, we cannot say with complete certainty that environmental certifications are the driving force behind these differences, but there does seem to be a correlation nonetheless.
Conclusion
Environmental certifications like LEED can have a big impact on Austin office rental rates, and will likely continue to do so in the future. However, being environmentally friendly is not the only amenity tenants and landlords need to factor into their rental rates. To find out how other amenities play into the Austin market, check out our 1Q 2017 special report, Do Austin Office Buildings with More Amenities Capture Higher Rental Rates?
1AQUILA’s competitive set is comprised of the primary buildings in each submarket and is used to track market trends. A list of our competitive set buildings can be found in our 1Q 2017 Austin Commercial Real Estate Market Report.
