The financial benefits of green buildings are often not considered at first since most people believe the costs are significantly higher than conventional properties. With an increasing number of sustainability certifications, new technologies and design concepts, the incentives for using sustainable solutions in real estate are becoming more and more significant.
In the following article, we will provide you with the costs and financial benefits of green buildings. Furthermore, you will also find out what other benefits these types of buildings have for businesses, tenants, and the environment.
Are Green Buildings Expensive?
Many people still believe that green buildings are significantly more expensive than regular structures, but in reality, they are indeed the opposite of that. Green buildings cost 2% more to build on average, but they save 14% to 19% in operational expenditures. Sustainable real estate investments can yield a positive return in as little as a few months or years thanks to these savings.
What are Green Buildings and Why Do We Need Them?
Before we start looking at the financial benefits of green buildings, it might be helpful to define what exactly we are going to talk about.
A green building aims to reduce the amount of resource and energy consumption to a minimum, by utilizing sustainable technologies, as well as architectural design. The ultimate goal is to create structures that do not harm the environment and climate or even have a positive effect on them.
Currently, real estate still is a major contributing factor to global CO2 emissions and energy consumption. It is responsible for 40% of global energy consumption and more than 30% of greenhouse gas emissions. You can find out more about its impact on the environment in our dedicated article.
These factors largely contribute to climate change, pollution, and impose new health risks. Its effects can be felt globally with rising temperatures and floodings, therefore impacting the way we live. But also the economy is hit by its effects with restricted supply chains and a lack of raw materials. So how do green buildings help to solve these problems?
Thanks to the newly implemented design changes and technologies, these types of buildings can make use of resources more efficiently, reduce energy consumption, and make use of on-site renewable energy supply.
Additionally, they are able to improve the tenant’s health and wellbeing, productivity, quality of life, and positively impact the neighbourhood.
In order to measure the performance of green buildings, a number of certification systems have been created that are available worldwide. The most popular ones include LEED, BREEAM, and Energy Star. Thanks to these standards, the green building market is able to grow quickly and consistently.
The Green Building Market
The potential of green buildings has been recognized by many global players in the real estate industry and it is expected to expand even faster with the goals of many governments to be energy-independent.
It is expected that the CAGR of the green building market is about 14.3% until 2027. The green building materials market alone is valued at around $280 billion in 2021 and is forecasted to reach $520 billion in 2027, which is only 5 years from now.
These recent developments show how significantly the real estate industry is going to transform within the next decade and how important sustainable solutions have become. The main focus of this article is to point out the financial benefits of green buildings, their costs, and the potential return on investment (ROI) of green buildings.
Costs and Savings of Green Buildings
One of the main concerns from real estate investors and developers is the additional cost that comes with implementing sustainable solutions in their properties. The common belief is that green buildings are much more expensive than regular ones. A study has found out that stakeholders that are not familiar with green buildings expect the additional costs to be about 15% extra.
Fortunately, this is not true for most projects as the additional expense for these types of buildings is only 2% on average.
The following chapters will highlight the costs that can arise when developing a green building. These are divided into the real estate development phases: planning, construction, and operating phase.
Planning Phase
The planning phase is crucial for the success of a sustainable development project and can have a large impact on the construction costs. Most of the additional expenses in this phase are related to specialized architects, engineers, consultants, and the green building certification.
Green Building Planning Costs
Sustainable construction projects are usually a bit more complex as they require the usage of new materials and technologies that are not implemented on a large scale. This also means that the architects and engineers need to have more knowledge about these factors, which makes it harder to find these professionals. Furthermore, because of the high demand in this sector at the moment, architects can charge higher amounts as compensation.
There are different ways of how architects and engineers are getting paid, either as a percentage of the construction project, as a fixed fee, or hourly. But since each of these categories will be higher in a green building, you need to expect to pay slightly more for these specialists.
Green Building Certification Costs
Another type of expense in the planning phase are sustainability consultants and green building certification assessors.
If you want to get a LEED certification for your project, for example, there will be a number of fees you must consider. First, a registration fee of $1,500 must be paid, in addition to a general service charge of $5,000. Second, a certification review fee of $0.060 – $0.068 per ft² makes up most of the LEED process’ costs. The larger the project, the lower the fee per ft². Additional fees can be charged if you want the certification to be conducted faster or if you have appeals, as well as inquiries. These fees can be reduced if the development company is a member of the US Green Building Council (USGBC).
These expenses can vary depending on the type of structure and the level of sustainability you want to attain. Usually, they are somewhere in the range of $10,000 to $30,000 per project. On the other hand, these fees do not differ wildly between green building certification schemes in general.
Construction Phase
The main components of a green building are a sustainable HVAC system, energy-efficient lighting, good insulation, passive design elements that enhance the efficiency, and on-site renewable energy sources. Depending on how many of these solutions a developer wants to implement and how high the quality standards are, costs can rise significantly.
Because each of these components are considered in the various green building certification programs, we are going to focus on how LEED buildings have performed regarding their construction costs.
Construction Cost Premium for Each LEED Level
| Certification Level | Cost Premium |
|---|---|
|
Certified |
0.0% - 1.0% |
|
Silver |
2.0% - 2.5% |
|
Gold |
1.4% - 8.0% |
|
Platinum |
6.0% - 9.5% |
|
Average of All Buildings |
2.0% |
Sources: Massachusetts Technology Collaborative, Journal of Sustainable Real Estate, Renewable and Sustainable Energy Reviews
This sustainability premium can be seen when comparing the different levels of LEED certification. While there can be no additional expenses to achieve the basic certified level, to achieve a platinum certification, up to 9.5% in extra construction costs can occur.
These numbers have been identified by various researchers and academics in the sustainable real estate field. The information has been collected within the last 20 years and shows similar results throughout the timespan. While there are some variations, a gradual increase in costs can be seen throughout the levels.
With an average construction premium of 2.0%, it is clear that green buildings are not as expensive as most people think they are. With the values that are going to be discussed in the next paragraphs, this type of real estate offers many benefits and opportunities for investors, as well as developers. Not only to help the environment but also to receive a positive return on investment.
Operating Phase
The operating phase is responsible for the most amount of energy consumption, as it is the longest period in a building’s life cycle. That’s why it is crucial to improve the efficiency of energy, water, and waste management – and that’s also why the extra 2% of construction costs have been invested in the beginning.
During the operating phase, a green building’s value comes to light and shows how these sustainable solutions can significantly reduce running expenses.
Green Building Operating Cost Savings
Operational cost savings are related to reduced energy and water consumption, as well as reduced maintenance expenses. The following information has been retrieved from several academic and business studies (PACIFIC NORTHWEST NATIONAL LABORATORY; John H. Scofield; Greg Kats, Capital E; Anet M. Smit, Frans du Toit).
The higher the sustainability score, the higher the savings in each part of the building’s consumption and therefore operating costs. While some studies argue that LEED-certified and silver buildings only have very little savings, others argue that they are between 28% – 30%. Properties with a LEED gold certification seem to have the highest benefits when it comes to resource and cost savings, which has been documented in all mentioned studies. Platinum-certified buildings have not been mentioned in numerous studies.
On average, green buildings can save between 25% – 50% of energy, 10% – 40% of water consumption, and reduce maintenance costs by about 12%. All of these factors combined can lead to a reduction of operating costs of about 19% and to 34% less CO2 emissions.
Green Building Cost Savings
| Average Savings | |
|---|---|
|
Energy Consumption |
25% - 50% |
|
Water Consumption |
11% - 40% |
|
Maintenance Costs |
12% |
|
=> Total Operating Costs |
14% - 19% |
|
CO2 Emissions |
34% |
All of these cost and resource savings contribute to the positive financial return of a green building. By implementing sustainable solutions from the beginning of a development project, within just a few months or years the investment can pay off, increase the company’s revenues, and help the environment.
So in the end, green buildings are a win-win situation for everyone.
Values of Green Buildings
Now that we know how much green buildings cost extra to construct and how much they will save us during their use-phase, it is important to take a look at the other benefits they can provide.
Higher Asset Value
-> Asset Value Increase by 7.0% – 18%
Because of the high demand for sustainable properties and the relatively low supply still, green buildings can see higher resell asset values than conventional buildings. This trend is further supported by rising interest in ESG compliance by companies and overall demand from tenants to live and work in green buildings.
Multiple reports from different organizations (Knightfrank, bdcnetwork) have shown that the asset value can increase in the range of 7.0% – 18%.
Higher Rents and Occupancy Rate
-> Rental Price Increase by 5.0% – 12%
-> Occupancy Rate Increase by 6.0% – 16.0%
Another benefit from using sustainable technology and design is that higher rents are accepted by the tenants. Additionally, there is also evidence that the occupancy rate of green buildings is higher than in non-green properties. (Knightfrank, Fuerst, F. and McAllister, P., Johnson Controls)
The approximate gain is in the range of 5.0% – 12% for the rental income and about 6.0% – 16% for the occupancy rate. Of course, there are many factors that impact these numbers and they can vary significantly between different regions.
Increased Tenant Productivity
-> Improved Productivity by 5.0%
One last valuable advantage of green buildings, especially offices, is the increased tenant productivity. Studies have shown that employees work more efficiently when their workplace has improved lighting, climate, air, and sound conditions. The highest impact can be seen by better lighting systems and quiet working areas. These components can also be found in the various certification programs.
The productivity gain from green solutions in offices is about 5% for LEED and energy-star certified buildings. (Johnson Controls)
Other Benefits of Green Buildings
Green building technology and design also have other advantages, such as enhanced health and wellbeing. These are difficult to quantify and hence do not bring much value to this article. Its effects can still be noticed in the increasing rental prices that tenants are willing to pay.
In a recent post, we discussed some of them in detail, as well as the drawbacks of this sort of real estate.
Overview of The Financial Benefits of Green Buildings
Conclusion
While some extra costs during the planning and construction phase can occur for a green building project, their overall values exceed these expenses. Depending on what kind of sustainable performance the developer wants to achieve, costs will increase the more features are implemented. At the same time, the benefits will also increase and provide a sufficient return on the investment.
On average, a green building will cost 2% more to construct and have 14 – 19% operating cost savings from less energy, as well as resource consumption. Furthermore, there are other financial benefits of green buildings such as a higher asset value, rental income, occupancy rate, and productivity.
If you want to learn more about sustainability, smart buildings, smart cities, and PropTech, feel free to take a look at our other articles.
