Research has documented a premium for housing with green amenities, on average, oversample periods.

The Increasing Value of  Green For Residential Real Estate

Authors    Ramya R. Aroul and Mauricio Rodriguez

 Abstract

 Research has documented a premium for housing with green amenities, on average, oversample periods. Given the increasing efficiency of green features and growing awareness of the environmental concerns in society, we posit that the relation between green amenities and transaction prices is not stationary. We find that premiums associated with green features are growing through time for residential real estate. We explain that this could be driven by a variety of factors. Our results suggest that appraisers should be careful not to make adjustments based on outdated ‘‘rules of thumb’’ pertaining to green characteristics. 

Environmental consciousness has grown over time. Harvard’s Center for Green Buildings and Cities finds that support for green buildings is gaining traction.1 Sanchez, Brown, Webber, and Homan (2008) document substantial savings associated with energy efficiency initiatives. Research indicates that commercial properties with green features are associated with higher rents, as well as higher transaction prices. Das and Wiley (2013) show that the green premiums for commercial properties change with changing market conditions. It is reasonable to expect that premiums for residential properties may also change with changing market conditions.

Green premiums for residential properties have been documented. Aroul and Hansz (2012) report a premium associated with homes with green amenities. Dastrup, Zivin, Costa, and Kahn (2012) find that premiums are paid for homes that have  solar panels. These residential studies report the association between green features and transaction prices, on average, over specific time periods. However, evidence is lacking regarding how green premiums might change through time for residential real estate.

In this paper, we extend the literature by examining the temporal variations in green premiums for residential real estate over an eight-year period. There has been increasing concerns regarding the environment, resulting in increasing consumer demand for more environmentally friendlier options.2 Furthermore, many individuals have started to focus on the environmental impact of their homes. Also, due to an increased awareness of the economic benefits as well as non-financial benefits of energy efficiency, green features have become a more prominent aspect in home purchase decisions. Therefore, we posit that the market’s capitalization of benefits stemming from green features is evolving and is not constant over a long time period. Thus, in this paper we examine whether the green premium stays constant over an eight-year sample period and determine if these green premiums change over time.

Consistent with prior work, initially, we report that the properties that are green are sold at a premium of 2.27%, on average, over the eight-year sample period. In addition, we observe that there was a positive impact on transaction prices when green requirements increased during the sample period. Next, we examine the time-varying green premiums in residential transactions. First, we present a year-by-year analysis and observe that green premiums are significant and growing through time. Second, we present results derived from using eight, time-based, green-based variables to examine the temporal differences in valuation of green and find that the green premiums increase monotonically from 2003 to 2009. These results indicate the market may be putting an increasing value on green related amenities. We describe some factors that may be driving these results. For example, increasing premiums could be partially due to improving technologies that provide a relatively higher present value of benefits associated with green features. These results are also consistent with buyers putting increasing value on benefits that greener homes provide to society.

The paper is organized as follows. In the next section, we review the relevant literature. We then describe the study setting and data. Next, we discuss the methods and present our findings. The last section contains the conclusion. 

Literature Review

There has been an increasing amount of research in real estate academia on green properties. Much prior work has focused on green initiatives for commercial buildings. Miller, Spivey, and Florance (2008) is one of the first organized studies on green buildings that explore research questions on the benefits of investing in energy savings and environmental design. Fuerst and McAllister (2009, 2011), in a similar endeavor, find consistent results to those by Miller, Spivey, and Florance (2008); all these studies used the same commercial real estate data source from CoStar.

Wiley, Benefield, and Johnson (2010) employ a hedonic estimation of sales price per square foot and find that eco-certified properties transact at a significant price premium when compared to a non-labelled property. Eichholtz, Kok, and Quigley (2013) report that green commercial buildings have higher rents and sell at higher prices. Das and Wiley (2013) document that the green premiums for commercial properties are not stationary, but change with changing market conditions. It is reasonable to expect that green premiums for residential properties may also change with changing market conditions, but this has not been empirically examined for residential real estate.

Studies on residential real estate indicate that green features have a positive impact on residential transaction prices. Aroul and Hansz (2012) examine residential transactions in two Texas cities and report premiums associated with green residential properties, on average, over the time period examined. Kahn and Kok

(2014) report that homes with green labels such as ENERGY STAR, LEED, and Green Point Rated located in California sell for 9% more than homes without labels, on average, over the time period examined. Brounen and Kok (2011) document the factors that influence whether or not a home has an energy rating and also find premiums associated with energy performance certificates in the Netherlands. Aroul and Hansz (2011) document a premium, on average, associated with dual-pane windows. Bloom, Nobe, and Nobe (2011) report that ENERGY STAR qualified homes sold for a premium, on average, in comparison with non- ENERGY STAR qualified homes in Fort Collins, Colorado. Deng, Li, and Quigley (2011) report a 4% premium for green amenities in multifamily residential buildings consisting of private condos and apartments in Singapore. Pivo (2014) documents that green amenities can help forecast lower mortgage default in multifamily rental housing.

Bond (2015) documents that new building codes and legislation have been introduced on a state-by-state basis to improve the energy efficiency of residential properties. Bently, Glick, and Strong (2015) indicate that Colorado’s real estate appraisers are gradually incorporating sustainable building features in their appraisal projects despite the challenges encountered. Goodwin (2011) documents that green amenities play a significant role when potential home owners make a purchasing decision. Bond (2015) explains that states are adopting increasingly higher efficiency requirements. This suggests that premiums associated with more efficient green amenities could increase through time. Sanderford, McCoy, and Keefe (2018) document that ENERGY STAR adoptions for single-family homes are a function of the local public policies, climate variation, and medium-term energy prices. These findings were based on aggregate proportion of certified adoptions because individual adoption patterns were not available.

To date, the studies on the impact green features have on individual residential transaction prices have examined the average premium throughout the sample periods studied. We extend prior work by examining the time-varying nature of residential green premiums to illuminate the temporal differences on the impact of green feature in residential transaction prices.

 Study Setting

The Dallas-Fort Worth metropolitan area is considered to be the financial hub of the Southwest, whose growth is attributed to high tech, manufacturing, and service industries. The City of Frisco has a mandatory residential green building program and is one of the fastest growing cities in the United States.3 The City of Frisco falls within both Collin County and Denton County. Both Collin and Denton counties experienced tremendous population growth in the last decade. Collin County had an approximately 50% increase in population and the highest sustained growth rate in the U.S., at 73.9% since 2000, while Denton County had a sustained growth rate of 61.6% in the same time period (U.S. Census Bureau, 2014).Frisco is one of the fastest developing cities in the Dallas-Fort Worth metropolitan region. In light of this exploding growth, the city decided to have a mandatory