Class B LEED-Certified Offices Are Commanding Major Premiums

Office properties with LEED certifications are commanding higher prices than their non-certified counterparts, according to new research from Cushman & Wakefield. 

Class A LEED-certified office buildings are nabbing prices per square foot that are more than 25% higher than non-certified properties.

And “intriguingly, while trophy high-rise product in major urban centers has often been the face of sustainable assets, LEED-certified suburban assets actually outperformed their urban counterparts,” says David Bitner, Global Head of Capital Markets Research at Cushman & Wakefield. LEED-certified Class A suburban office are grabbing premiums that are 40% higher over non-certified assets. Gateway markets averaged a slightly higher premium at 29% vs. secondary markets at 27%. 

But the highest premiums Cushman observed are in LEED-certified Class B office spaces, which are commanding prices 77.5% higher than similar non-certified properties.

“This premium oscillated over the course of the decade, ranging between 33.9% to 115.2%,” Bitner notes. “It may be that investments in sustainability have a greater impact on Class B assets in offsetting the effects of aging and obsolescence on property performance and value. It may also be the case that sustainable Class B assets are greater relative outliers than in other market segments we analyzed.”

LEED certification compressed cap rates relative to non-certified office by 40-80 basis points (bps), according to Bitner. For LEED-certified urban Class A properties, cap rates were on average 58 bps lower than non-certified assets for the decade spanning 2011 to 2021. Cap rates were similar for LEED-certified suburban Class A properties, with a spread of -55 bps. 

The spread was wider for Class B properties, with an average 118 bps difference between LEED-certified and non-certified through the first quarter of 2020. The delta has shifted to 160 bps since then.

“For both the suburban Class A and overall Class B sales, we believe this temporary flip in the spread was an artifact of the low liquidity in the market at that time,” Bitner says. “As liquidity has recovered, the LEED-certified premium has returned to historical levels (-119 bp spread).”

Bitner’s analysis into pricing for assets reveals that LEED-certified Class A suburban properties are undervalued when compared to what a bottoms-up analysis would suggest, using revenues and prevailing cap rates. Meanwhile, Class A urban and Class A gateway+ asset values correspond to the bottoms-up valuation, meaning these assets are neither undervalued or overvalued, he says.   

“Looking forward, the sustainable office sector is supported by significant tailwinds that should continue to drive both cash flow and valuation premiums vs. non-LEED-certified comparable buildings,” Bitner says. “These tailwinds include the growing interest in sustainable office assets among institutional investors and increasing preference for sustainable space among Class A office tenants. As such, we expect the relative premiums on sustainable office to continue in the foreseeable future.”