LEED vs. ENERGY STAR: A Cost/Benefit Analysis of Sustainability Labels for Commercial Buildings

Abstract

Existing commercial buildings are at the forefront of efforts to address climate change through the implementation of energy efficiency upgrades and other sustainability measures. These efforts have been supported by both public and private organizations, and appear to be gaining momentum as the United States continues to search for ways to make its existing and future infrastructure more sustainable. As a result of the push for more green buildings, many real estate investors have elected to pursue sustainability labels for their existing building portfolios, including the ENERGY STAR rating and Leadership in Energy and Environmental Design - Existing Buildings: Operations & Maintenance (LEED-EBOM) certification. These labels are designed to certify and verify a commercial building’s operating efficiency with respect to sustainability and environmental impact. There is much industry speculation over whether these labels contribute to overall building value for the investor, and if other intangible benefits exist for owners/operators and/or building occupants. This project attempts to provide institutional real estate investors, such as real estate investment trusts (REITs), with general guidelines for selecting one of the aforementioned sustainability labels based on its potential contribution to building value and possible reductions in carbon dioxide emissions attributable to building operations. Analyses were conducted using fundamental real estate valuation models and industry data to evaluate financial and environmental costs and benefits associated with the ENERGY STAR and LEED-EBOM building labels. Financial costs and benefits were analyzed using the direct capitalization valuation model, as well as simple and discounted payback models. Other materials and resources associated with the ENERGY STAR and/or LEED-EBOM labels contributing to other possible benefits were analyzed qualitatively. The results of these analyses indicate that both the ENERGY STAR and LEED-EBOM labels may increase overall building value, while reducing operations-based carbon dioxide emissions. In addition, the results reveal that one label cannot be deemed absolutely superior to the other, and that selection depends upon other factors specific to the investor and/or building project. Based on these findings, a set of general guidelines has been provided to assist real estate investors evaluate the merits and drawbacks associated with the ENERGY STAR and LEED-EBOM sustainability labels for existing commercial buildings. It is my hope that these guidelines will enable real estate investors to make sound financial and environmental decisions when implementing strategies to make existing commercial building operations more sustainable.