SRE Economics Lecture 1: The Economics of Green Buildings

Lecturer: Siqi Zheng
Date: February 2023
Institution: MIT Center for Real Estate

Key Concepts

Triple Bottom Lines

• People (Social): Focus on sustainability and viability.
• Planet (Environmental): Importance of environmental considerations.
• Profit (Economic): Economic benefits and cost-effectiveness.

Knowledge Structure

• Location: Discussion takes place in the context of a building.

Case Studies: Millennium Partners

• WINTHROP CENTER, 2022: Sustainability focus with Passive House office and WELL Gold LEED Platinum in Boston. Goals include job creation and downtown revitalization.
• MILLENNIUM TOWER, 2017: Focus on health and ultra-luxury in San Francisco.
• MILLENNIUM PLACE (HAYWARD PLACE), 2013: Emphasis on luxury furnishings and amenities in Boston.

Economic Benefits of Green Buildings

• Higher sales prices and quicker sales.
• Lower design and construction costs.
• Enhanced corporate image and ESG compliance.
• Increased productivity and lower operational costs.
• Higher market value and slower depreciation.

Cost Benefit Analysis (CBA)

• Decision-making process: Support an action if benefits exceed costs.
• Calculation: Net Present Value (NPV) and discount rates influence outcomes.

Effects of Green Buildings

• Financial Metrics: Increased rent and occupancy rates.
• Operational Metrics: Lower expenses and improved tenant health and wellness.

Life-Cycle Cost Analysis (LCCA)

• Components: Design/construction investment, operation savings, higher productivity.

Challenges and Market Failures

• Information Asymmetry: Misunderstanding of 'green' credentials can lead to undersupply.
• Split Incentive: Benefits are not evenly distributed between developers and tenants.

Certificates and Transparency

• LEED Certification: Framework establishes credibility and mitigates information asymmetry.
• Benchmarking Policies: Promote transparency and accountability in energy consumption.

Analysis of Rental and Sales Premiums

• Green-Certified Buildings: Demonstrated rent and sales price premiums.

Research Insights

• Siqi Zheng's Research: Public information increases willingness to pay for green housing.
• Greenwashing Concerns: Early market misrepresentation affects premium sustainability.

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This lecture highlights the integration of green building principles with economic incentives, emphasizing the value proposition in terms of sustainability and profitability. It also raises awareness about potential market failures and the necessity of informed decision-making facilitated by certification and transparency policies.