Real estate investors are realizing more now than ever that social and environmental factors have a huge impact on the value of their investment properties.
Climate change represents one of the major global issues of our time. High levels of CO2 emissions continue to make this problem more persistent, which requires immediate intervention to prevent catastrophic scenarios in the future. Green building can be considered a preventive solution to this pressing issue, as a third of CO2 emissions worldwide is attributed to the real estate sector.
What is green building?
Green building, or sustainable building, is a real estate property that is designed, built, operated, and maintained using environmentally responsible and resource efficient processes. Moreover, renovated or refurbished properties can be also considered as green sustainable buildings if sustainable practices are carried out during the process. For example, using green building materials and implementing environmentally friendly technologies would reduce the carbon foot print of the real estate properties.
To qualify as green building, buildings must comply with different criteria to obtain a green certification such as the globally recognized Energy Star and LEED (Leadership in Energy and Environmental Design) certifications. These certifications ensure that real estate properties follow the set of standards that qualify them as a green building, or a sustainable building. In addition, real estate investors can add their green building certifications to their list of credentials and use them as a market strategy to attract more customers and investors, especially in a time where people are more aware of the environmental consequences of conventional building and are more willing to invest in green building real estate.
3 ways that green building affects the real estate investment business
1- Higher return for real estate investors
As a real estate investor, you might want to consider investing more in green buildings. From a real estate investor’s point of view, higher rate of return on investment is guaranteed when investing in green buildings. The reason for that is the higher price premium added to green buildings compared to conventional real estate properties. On average, LEED certified buildings achieve higher price premium of up to 30%. Green accreditation of real estate properties also contributes to higher occupancy rate by attracting more tenants, thus driving down vacancy rates, especially when the tenants are companies with reputable corporate social responsibilities.
Studies made by the U.S. Green Building Council (USGBC) in Washington DC show that single family homes that are designed and built using green building technologies tend to have a higher market value by about 3.5%. On top of that, green home builders or real estate investors can demand justifiable higher rents and even be eligible for financial incentives in the form of tax credits as a government policy to encourage more people to invest in sustainable buildings.
Furthermore, current real estate investors, especially millennials, are more aware of the environmental risks associated with conventional building methods. In other words, they are willing to spend more on real estate properties that are energy efficient and environmentally friendly.
2- Cost saving
A main difference between conventional building and green building real estate investments is the cost savings. Investing in green building real estate can have a higher initial value due to the higher cost of green building materials and the green technologies followed in the process. But in the long run these costs become insignificant when compared with future cost reductions. The most important benefit of green building is the energy efficiency, which is reflected in the direct costs of running the real estate property and the increase in the net income of the building. According to the US General Services Administration (GSA), green buildings certified by LEED or Energy Star can save on average 25% in annual energy costs.
By using green building technologies throughout the life cycle of the building, major cost savings can be achieved through conservation of energy and water resources, as well as reduction in the operational and maintenance costs. Reducing the operating costs of a building or a real estate investment portfolio increases the net operating income, thus increasing the profit from the real estate investment.
Furthermore, using green building technologies like photovoltaic solar panels gives real estate investors the opportunity to sell unused energy produced back to power suppliers, generating more income from the building and contributing to energy sustainability.
3- Social and environmental benefits
From a social perspective, green building’s effect on real estate investments can be measured with societal benefits that real estate investors enjoy such as lower greenhouse gas emissions, less water pollution, and better public health as a result of the green building technologies implemented. Subsequently, tenants and real estate investors can enjoy higher living qualities through better ventilation, more natural light utilized, and the ability to control the quality of the indoor environment. All these factors make tenants more willing to pay higher rents!
From an environmental perspective, green building technologies contribute to reduction in pollution. Thanks to the characteristics of sustainable building followed throughout the life cycle of the building, CO2 emissions and other greenhouse gases emissions are reduced, resources such as water are conserved, and the depletion of building resources is reduced by using green building materials and green building technologies.
Investing in environmentally responsible real estate properties is not just an idea, it is the future of real estate investment. As property owners or future real estate investors, you should consider this option for the many benefits it generates for your real estate investment, from higher return on investment to higher net annual income and, of course, a more socially and environmentally responsible sustainable building.
Don’t forget to use Mashvisor real estate analytics to find your next green real estate investment!