The Value of "Green:" Evidence from the First Mandatory Residential Green Building Program

By Aroul, Ramya R.; Hansz, J. Andrew | The Journal of Real Estate Research, January-March 2012 | Go to article overview

The Value of "Green:" Evidence from the First Mandatory Residential Green Building Program


Aroul, Ramya R., Hansz, J. Andrew, The Journal of Real Estate Research


Abstract

There has been recent interest in green building and development practices and research. Resulting from growing environmental awareness and concerns, mandatory residential green building programs have been implemented nationally at the municipal level and Texas has passed legislation to create a statewide program. However, the impact of greenness on residential property values has not been rigorously evaluated. This study examines residential transaction prices in two cities and finds a statistically significant premium associated with "green" properties. Additionally, there is evidence of a larger premium associated with green properties located in Frisco, Texas, which has the nation's first mandatory residential green building program.

(ProQuest: ... denotes formulae omitted.)

Interest in green building is growing. Indeed, the intensity of interest expressed by many sectors of the real estate and the land development industry is a sign of acceptance of green investment and acknowledgement of the need for green building and development practices. There is also concern regarding quality improvement of new home construction from both environmental and sustainability perspectives. With allocation of $5 billion towards weatherizing homes by the American Recovery and Reinvestment Act (ARRA), significant resources will be channeled into green development projects (Committee on Appropriations, 2009). This investment combined with green building programs will further accelerate the American green revolution.

Since zoning, building codes, and most development regulations are enacted and enforced through municipal police powers, local governments are at the forefront in developing and updating green ordinances and policies. Nationwide, a few communities have taken leadership roles and have implemented formal mandatory green building best management practices programs.1 See Exhibit 1 for an overview of selected mandatory green building programs.

Even though smaller municipalities developed the earliest green building policies, the increasing acceptance of green building practices is reflected in the adoption of policies by cities, counties, and states. For example, the State of Texas has recently adopted legislation to adopt a statewide mandatory green building program to begin January 2012 for single-family residential dwellings.2

A mandatory green building program is a coordinated, systems approach to green development rather than a component-by-component approach to building (Bynum and Rubino, 1998). Since all builders are mandated to follow green building practices in a mandatory program, the community will experience dramatic shifts in sustainable construction practices and an accelerated implementation of green development.

Existing green research has focused on commercial buildings and the impact of voluntary third-party green rating systems. As discussed in the literature review, there has been some evidence that quantifies the economic benefits of green commercial buildings; however, limited research exists on the real estate market's response to residential green development and building practices. In addition, the market may recognize price premiums for the coordinated systems required of mandatory green building policies. Prior research on green building codes addressed the impact of mandatory household energy and water consumption regulations and did not address green valuation influences or green building programs.

This leads to two research questions. First, do single-family residential markets reflect and capitalize green investment practices in transaction prices? And second, does the market recognize the coordinated and mandatory aspects of a municipal green development program? These questions are of interest to homeowners, developers, investors, brokers, appraisers, policy makers, and researchers.

This study investigates the price effects of green on residential transaction prices in two similar Texas cities: Frisco and McKinney. …

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