INTRODUCTION – RESEARCH QUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS

1. Do Sydney tenants pay energy efficient office premiums?Jeremy Gabe & Michael Rehm July 2013

2. INTRODUCTION – RESEARCH QUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS A dominant narrative is that energy efficient buildings increase rents relative to uncertified property Premiums observed in US Energy Star properties (controlling for key hedonic characteristics, e.g. location, size, age, market trends) Rent discounts for poor NABERS-rated properties observed in Australian properties (relative to uncertified properties; Newell et al. 2011) All of these studies worked at the building (asset) scale

3. INTRODUCTION – RESEARCH QUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Rent premiums at the asset scale could arise because of higher income, occupancy, or market timing • Asking Rent • Average Rent

4. INTRODUCTION– RESEARCH QUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS The lease transaction scale can isolate whether higher income is a cause – do green office tenants pay more? • Chegut, Eichholtz, and Kok (2012) • 24-30% annual face rent premium for BREEAM buildings • Premium includes unmeasured quality characteristics (omitted variable bias) • Kokand Jennen (2012) • 6.5-7.5% face rent discounts for low energy rating • C-grade (not A- or B-grade) had highest rents • Possibility of multicollinearity of target variable with building age

5. INTRODUCTION– RESEARCH QUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Using Sydney as a case study overcomes some limitations of the first green lease studies • All major office buildings are rated • Rating based on audited performance • Rating reviewed annually • Market consensus on building quality grading • Face vs. Effective rent • Single market, with well-defined submarkets

6. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Australia has a comprehensive system of environmental performance reporting for commercial office buildings NABERS Energy GHG emissions compared with city median to determine star rating Converted tosource GHG emissions 12-month site energy consumption audit 6 Market Leader 0-stars Very Poor

7. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Evidence of Private Investment in Environmental Performance

8. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Why do Sydney owners invest in energy efficiency? • Government Interventions • Supply • AusIndustry Green Building Fund grants (2008-2011) • Energy Upgrade Agreements (cheap loans to owners repaid by future tenants via property taxes) • Demand • Mandatory rating advertisement before sale/lease • State/Federal government accommodation rating floors (4/4.5 star NABERS Energy) • Corporate Social Responsibility Arms Race • Australian property funds ranked top in the world • Operating Expense Savings • Gross lease (full service) contracts only • Rent Income Premiums?

9. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Tenants face weak financial/legal incentives to rent green office space at a premium; owners face stronger incentives to invest TENANTS (Net Lease) OWNER (Full-Service Lease) Labour Property Taxes $4,700 per m2 $50 per m2 Management Space (Net Rent) $542 per m2 $70 per m2 Energy Energy $17 per m2 $17 per m2 Carbon Tax Carbon Tax $2 per m2 $2 per m2 CSR and other intangible benefits remain as possible drivers

10. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Research Scope & Methodology ln⁡(𝑅𝑒𝑛𝑡)=𝑓(𝛼,𝛽,𝛾, 𝑢) 𝛼 = Vector of market characteristics 𝛽 = Vector of lease characteristics 𝛾 = NABERS Energy characteristics u = Stochastic term • Hedonic Price Analysis • Unit of Analysis: Lease • Net rents converted to Gross • Dependent Variables: • Natural log of initial gross face rent per m2 • Natural log of effective gross rent per m2

11. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Data • Lease Transactions • 708 unique lease agreements with face rent • 339 unique lease agreements disclose full signing incentives • January 2007 to September 2011 DESCRIPTIVE STATISTICS Mean(Std. Dev.)

12. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Results – Effective Gross Rent *Significant at 95% Level **Significant at 99% Level

13. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Conclusions • No evidence of a premium/discount based on energy attributes • Tenants respond as expected to financial and legal incentives • CSR initiative not strong enough to pay space premiums • Cannot reject an alternative hypothesis that rent premiums in building-scale studies caused by method used to calculate a single rental price

14. INTRODUCTION– RESEARCHQUESTION – CASE STUDY CONTEXT – DATA & METHOD - RESULTS Conclusions • Split incentive between owner/tenant not a clear barrier • Tenants have an incentive to negotiate a full-service lease: Net Rent + Outgoings > Gross (Full-Service) Rent • Energy Upgrade Agreements: Are tenants funding capital appreciation?