Do tenants pay energy efficiency rent premiums?

Abstract

Purpose – Using a unique data set, the purpose of this paper is to test the hypothesis that tenants pay increased accommodation costs for space in energy efficient office property. Design/methodology/approach – The authors obtain lease contracts for office space in central Sydney, Australia. Empirical data on annual gross face rent and contract terms from each lease are combined with building characteristics and measured energy performance at the time of lease. Hedonic regression isolates the effect of energy performance on gross face rent. Findings – No significant price differentials emerged as a function of energy performance, leading to a conclusion that tenants are not willing to pay for energy efficiency. Six factors – tenancy floor level, submarket location, proximity to transit, market fixed effects, building quality specification and, surprisingly, outgoings liability – consistently explain over 85 per cent of gross face rent prices in Sydney. Research limitations/implications – Rent premiums from an asset owner's perspective could emerge as a result of occupancy premiums, market timing or agent bias combined with statistically insignificant rental price differentials. Practical implications – Tenants are likely indifferent to energy costs because the paper demonstrates that energy efficiency lacks financial salience and legal obligation in Sydney. This means that split incentives between owner and tenant are not a substantial barrier to energy efficiency investment in this market. Originality/value – This study is the first to thoroughly examine energy efficiency rent price premiums at the tenancy scale in response to disclosure of measured performance. It also presents evidence against the common assumption that rent premiums at the asset scale reflect tenant willingness to pay for energy efficiency.

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