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Do tenants pay energy efficiency rent premiums?

Author

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  • Jeremy Gabe
  • Michael Rehm
Abstract
Purpose - – Using a unique data set, the purpose of this paper is to test the hypothesis that tenants pay increased accommodation costs for space in energy efficient office property. Design/methodology/approach - – The authors obtain lease contracts for office space in central Sydney, Australia. Empirical data on annual gross face rent and contract terms from each lease are combined with building characteristics and measured energy performance at the time of lease. Hedonic regression isolates the effect of energy performance on gross face rent. Findings - – No significant price differentials emerged as a function of energy performance, leading to a conclusion that tenants are not willing to pay for energy efficiency. Six factors – tenancy floor level, submarket location, proximity to transit, market fixed effects, building quality specification and, surprisingly, outgoings liability – consistently explain over 85 per cent of gross face rent prices in Sydney. Research limitations/implications - – Rent premiums from an asset owner's perspective could emerge as a result of occupancy premiums, market timing or agent bias combined with statistically insignificant rental price differentials. Practical implications - – Tenants are likely indifferent to energy costs because the paper demonstrates that energy efficiency lacks financial salience and legal obligation in Sydney. This means that split incentives between owner and tenant are not a substantial barrier to energy efficiency investment in this market. Originality/value - – This study is the first to thoroughly examine energy efficiency rent price premiums at the tenancy scale in response to disclosure of measured performance. It also presents evidence against the common assumption that rent premiums at the asset scale reflect tenant willingness to pay for energy efficiency.

Suggested Citation

  • Jeremy Gabe & Michael Rehm, 2014. "Do tenants pay energy efficiency rent premiums?," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 32(4), pages 333-351, July.
    • Handle: RePEc:eme:jpifpp:v:32:y:2014:i:4:p:333-351
    DOI: 10.1108/JPIF-09-2013-0058
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    Citations

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    Cited by:

    1. Odilon Costa & Franz Fuerst & Spenser Robinson & Wesley Mendes-da-Silva, 2017. "Are Green Labels More Valuable in Emerging Real Estate Markets?," LARES lares_2017_paper_5, Latin American Real Estate Society (LARES).
    2. Martijn (M.I.) Droes & Boris Ziermans & Philip Koppels, 2017. "Information Asymmetry, Lease Incentives, and the Role of Advisors in the Market for Commercial Real Estate," Tinbergen Institute Discussion Papers 17-106/IV, Tinbergen Institute.
    3. Copiello, Sergio, 2016. "Leveraging energy efficiency to finance public-private social housing projects," Energy Policy, Elsevier, vol. 96(C), pages 217-230.
    4. Christensen, Pernille H. & Robinson, Spenser J. & Simons, Robert A., 2018. "The influence of energy considerations on decision making by institutional real estate owners in the U.S," Renewable and Sustainable Energy Reviews, Elsevier, vol. 94(C), pages 275-284.
    5. Liu, Nan & Zhao, Yuan & Ge, Jiaqi, 2018. "Do renters skimp on energy efficiency during economic recessions? Evidence from Northeast Scotland," Energy, Elsevier, vol. 165(PA), pages 164-175.
    6. Franz Fuerst & Ben Dalton, 2019. "Gibt es einen wissenschaftlichen Konsens zur Wirtschaftlichkeit nachhaltiger Immobilien? [Is there a scientific consensus on the economic viability of sustainable buildings?]," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 5(1), pages 173-191, November.
    7. Alessia Mangialardo & Ezio Micelli & Federica Saccani, 2018. "Does Sustainability Affect Real Estate Market Values? Empirical Evidence from the Office Buildings Market in Milan (Italy)," Sustainability, MDPI, vol. 11(1), pages 1-14, December.
    8. Yueming (Lucy) Qiu & Xin Su & Yi David Wang, 2017. "Factors influencing commercial buildings to obtain green certificates," Applied Economics, Taylor & Francis Journals, vol. 49(20), pages 1937-1949, April.
    9. Fuerst, Franz & Warren-Myers, Georgia, 2018. "Does voluntary disclosure create a green lemon problem? Energy-efficiency ratings and house prices," Energy Economics, Elsevier, vol. 74(C), pages 1-12.

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