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LEED-Certified Buildings Lower Operating Expenses, Commands Higher Rents for Residential Units

Wednesday, December 2, 2020 - 12:00pm

Tackling climate change and advancing environmental sustainability is a challenge that is emerging as a key urban policy issue by an increasing number of US cities, and the District of Columbia is a national leader on this front. The District of Columbia was the first city in the nation to pass major environmental sustainability legislation. In 2006, the city enacted the Green Building Act (GBA), which requires that nearly all new privately-owned commercial buildings meet the standards of the United States Green Building Council’s Leadership in Energy and Environmental Design (LEED) green building rating system. LEED is a leading design standard for green buildings across the country.

The city has consistently led the nation in the number of LEED-certifications and was designated the world’s first LEED Platinum city in 2017 (see here). In 2018, the District had 145 certified building projects with 37.1 million LEED-certified gross square feet (see here). Because of the legislative mandate, it is currently presumed that nearly all large commercial buildings built after 2009, when the law was fully enacted, are green in certain respects. Even though the legislation targeted commercial buildings, surprisingly, an increasing number of newly built large residential buildings have obtained LEED certification. In fact, 71 percent of all new apartment units in large multi-family residential buildings delivered in the city since 2014 are LEED-certified. This suggests that some residential developers have discovered considerable additional economic value in building LEED-certified buildings. To begin to understand this issue better, we conducted a study (see here) to assess the effects of LEED-certification on the operating expenses, particularly utility expenses, and rents of both large commercial office buildings and large multi-family residential buildings.

Comparing LEED-certified to non-LEED buildings

The city’s GBA mandates all new private commercial development projects that are 50,000 square feet or larger meet, at minimum, the “Certified” level of LEED certification standards. Therefore, all commercial buildings built after 2009 presumably meet LEED-certified standards (per city building regulations). To discern between the office buildings that meet LEED-certified standards and those that do not, this study analyzed the 2018 rents, utility expenses and operating expenses for both older and newer buildings. A group of 35 large commercial office buildings built between 1990 and 1997 were considered “older” buildings and were presumed to not meet LEED-certified standards. These buildings were compared to 30 large commercial office buildings built between 2009 and 2018. These buildings were presumed to meet LEED-certified standards and are referred to as the “newer” buildings.

This study also compared the 2018 rents, utility expenses and operating expenses of 27 LEED-certified large multi-family residential buildings in the District to 26 non-LEED certified buildings of similar size, age and submarket locations. These 53 residential buildings comprised a total of 15,663 residential units in the District of which 7,299 were LEED units.

The impact of LEED certification on operating expenses and rents

The study found that operating expenses was on average $2.53 per square foot (7.43 percent) lower for the newer, LEED-certified commercial buildings and utility expenses were $0.80 per square foot (9.4 percent) lower than for older non-LEED-certified commercial buildings (see Figure 1). LEED certification was found not to have an appreciable effect on the average rent per square foot for newer buildings vis-à-vis older buildings.

For multi-family residential buildings, LEED certification lowered operating expenses by $1.39 per square foot (17.3 percent); utility expenses were $0.45 per square foot (7.8 percent) lower than for non-LEED buildings. LEED buildings were found to command rental rates $0.30 per square foot (10.2 percent) higher than comparable non-LEED buildings.

Effect of LEED Certification on Large Apartment Buildings

What do these findings mean for sustainability and housing affordability?

The study also found evidence that tenants in residential LEED-buildings have higher incomes than tenants in non-LEED, but otherwise comparable, buildings. This finding is related to the previously discussed finding that LEED buildings fetch about 10 percent higher rents (in an average of 27.2 square feet or 3.4 percent smaller space) and suggests that renters are willing to pay a premium for the sustainable living that LEED buildings provide. One might presume that this rent effect would generally preclude lower income households as tenants.

However, based on a closer review of the Office of Tax and Revenue’s 2018 building income and expense data (BI&E) for all income earning properties in the city, we found that at least 500 affordable housing units were Inclusionary Zoning (IZ) units in LEED-certified residential buildings. The city’s IZ program was enacted into law in 2006 and is one of many policy tools used by the city to provide more affordable housing units to low-income residents. The program requires a minimum of 8 –10 percent of the residential floor area of all new residential projects (including LEED projects) be set aside as units for low-income households.

This closer review of the data also revealed that at least 400 additional LEED units (exclusive of the 500 IZ units mentioned above) are in some type of affordable housing program (i.e. subsidized rent). Consequently, at least 900 low-income households in 2018 were afforded housing in some of the city’s newest, more expensive LEED residential developments, and thus participating in the District’s sustainable living movement.

A cross analysis between OTR’s individual income tax data and the real property tax BI&E data also revealed that 6 percent of tenants in LEED buildings filed income taxes as head of householders whereas there were only 2 percent of such tenants in non-LEED buildings. (Head of household tax filers are unmarried working adults with one or more dependents and tend to have lower annual income on average than single and married tax filers.) Furthermore, the study found that head of household tax filers in the more expensive LEED buildings earned on average $25,538 (39.1 percent) less than their counterparts in non-LEED buildings. This finding suggests that the District has found a way to achieve its twin, and what at first seem conflicting, policy goals of sustainable living and housing affordability.

The future of LEED in the District

The District of Columbia’s Green Building Act of 2006 required that only commercial buildings meet LEED standards. Yet a large and increasing number of residential buildings are LEED-certified (comprising 7,300 housing units in 2018), suggesting that there is a strong and vibrant market for LEED-certified buildings even in the absence of a legislative requirement.  This means that LEED buildings are not only environmentally sustainable but also make good economic and financial sense. The study also shows that LEED buildings do not necessarily compromise the District’s affordable housing goals; rather, the study shows that good affordable housing policy can be complementary to sustainable living. In any case, the growing number of both commercial and residential buildings in the city that meet LEED-certification standards will help the District of Columbia lower its overall carbon footprint more rapidly than anticipated at the enactment of the GBA in 2006.

What is this data?

The study used several types of microlevel administrative data from the District of Columbia Office of Tax and Revenue (OTR), including the 2018 Building Income and Expense data, 2018 Real Property Assessment data, and 2016 Individual Income Tax (IIT) data. The IIT data was used to analyze annual income for tenants of residential buildings.