Abstract
California adopted the CalGreen building code in 2011, which requires developers to incorporate green features in new commercial buildings to reduce greenhouse gas emissions. The code provides cities the opportunity to require additional features above the minimum standard. However, the literature on green buildings suggests that rent per square foot could differ between markets and submarkets depending on the demand for green buildings. Using the CoStar Professional Property(c) commercial property database, I perform a regression analysis using the log rent per square foot per year as the dependent variable and explanatory variables that control for quality, size, and location. I use LEED and Energy Star buildings to control for green buildings and multiply these variables with the submarket variables to measure the demand for green buildings within each submarket. After controlling for size, quality, and location, I find that tenants are willing to pay a rental premium for Energy Star certified buildings in all submarkets across California, while the rental premium for LEED buildings is not statistically significant. However, I find that certain submarkets within California are willing to pay a rental premium for LEED features, suggesting that there is a difference in demand for green buildings. I find that tenants in cities with residents with more education and higher incomes could be willing to pay more for the non-financial benefits of LEED buildings. In addition, tenants in locations that culturally favor the green features of LEED could be more willing to pay a rental premium. My findings first suggest that each city needs to assess the demand for green buildings before raising the developments standards. Second, cities that have insufficient demand could offer development incentives if the societal benefit of the green features outweigh the costs. Finally, California should align the building standard more closely with energy star, since tenants in California are more willing to pay for energy savings and it would further decrease the greenhouse gas emissions.