The Value of Sustainability in Real Estate A Review From A Valuation Perspective

Journal of Property Investment & Finance
The value of sustainability in real estate: a review from a valuation perspective

Georgia Warren-Myers
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Georgia Warren-Myers, (2012),"The value of sustainability in real estate: a review from a valuation
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David Lorenz, Thomas Lützkendorf, (2008),"Sustainability in property valuation: theory and
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David Lorenz, Thomas Lützkendorf, (2011),"Sustainability and property valuation: Systematisation of
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Sustainability
The value of sustainability in real in real estate
estate: a review from a valuation
perspective
115
Georgia Warren-Myers
Faculty of Business and Law, Deakin University, Melbourne, Australia
Abstract
Purpose – The purpose of this paper is to synthesise the plethora of research that has been
conducted into the relationship between sustainability and market value in real estate, by critically
analysing the research and the applicability of sustainability and value research in valuation practice.
Design/methodology/approach – The research on the relationship between sustainability and
market value in real estate is examined from the perspective of its usefulness to the valuation
profession in providing guidance, information and evidence to be used in valuation practice.
Findings – Existing research conducted into the relationship between sustainability and market
value has not provided the valuation profession with evidence which would allow the incorporation of
normative theories on the value of sustainability in valuation practice. This review highlights the lack
of evidence, and the applicability of current research into sustainability and value to the valuation
profession in providing guidance and information in valuing real estate incorporating sustainability.
Practical implications – This paper highlights the limited applicability of research to date in regard
to the relationship between sustainability and market value for the valuation profession. The lack of
historical evidence, data or information on the quantifiable effects on market value of this new trend
(sustainability), leaves the valuation profession uncertain as to the relationship between sustainability
and market value. There is a probable risk of valuers interpreting strategic research incorrectly, and
making inappropriate adjustments or comparisons because of their lack of knowledge and limited
sustainability assessment skills. Although there is an evolving body of knowledge, there is a need for
extensive analysis of unbiased, evidence-based research in individual and broader markets to provide
guidance, evidence and knowledge of the implications of sustainability in the valuation of real estate.
Originality/value – The examination of research investigating the relationship between
sustainability and value from a valuation perspective provides an alternative insight into the
applicability of current research in valuation practice. The increasing profile and role of sustainability
in the real estate sector needs to be addressed in valuation practice; however, the variety of research to
date needs to be interpreted by valuers in the correct context. This paper brings to light the
applicability of sustainability and value research for the broader valuation profession, and the
potential implications of misuse or misunderstanding of that research.
Keywords Real estate, Market value, Valuation, Sustainability, Research work
Paper type Literature review
Introduction
The importance of increasing the level of sustainability in the commercial real estate
stock is paramount for reducing the negative impact of the built environment on our
planet. However, without financial justification and viability of the required investment
it is likely that the advancement of sustainability in commercial real estate will be Journal of Property Investment
limited. Investors are in the business to maximise their return on capital outlay based on & Finance
Vol. 30 No. 2, 2012
economic theory. Valuers, in their pivotal role within real estate markets, as the pp. 115-144
assessors and advisors of market value, are being consulted as to their opinions, q Emerald Group Publishing Limited
1463-578X
judgement, and assumptions about the effect of sustainability on market value. DOI 10.1108/14635781211206887
JPIF Currently, however, the lack of empirical evidence, appropriate knowledge, applicable
30,2 and unbiased research, and assessment tools for sustainability, jeopardise the ability of
valuers to provide an informed opinion of market value for both existing and sustainable
assets.
The lack of evidence for a relationship between sustainability and market value is
seen as a barrier to broader investment (Sayce and Sundberg, 2009). Valuers have been
116 criticised in recent research for being laggards and are being blamed for failing to
produce financial justifications for investing in sustainability in commercial real estate
(Armitage, 2009). Valuers have a pivotal role in the commercial real estate market, not
only as critics of the real estate market but also as the third-party, arbitrary assessors
of the market value of assets (Levy and Schuck, 2005). Consequently, their treatment of
sustainability in valuation practice has ramifications for the real estate industry, and
for broader financial markets with interests in real estate.
A plethora of research has been conducted into the relationship between
sustainability and market value, however, the interpretation and implementation of
this research in valuation has been limited. This paper provides a critical analysis of
the research and highlights the inappropriateness of the research and its applicability,
or lack thereof, in valuation practice.
Background
The limited number of sustainable properties in the commercial real estate market may
be a result of the inadequate information identifying a relationship between
sustainability and market value. To date, research seems limited to normative
proposals of how sustainability “should” affect market value, demonstrated primarily
through case studies and statistical models which have been used in an attempt to
identify a positive relationship between sustainability and market value. Research on
sustainability and market value has received considerable attention in research in recent
years, which has led to a rapidly evolving body of research. However, the positivist focus
and limited critical assessment of the relationship between sustainability and market
value has left the valuation profession uncertain of the clarity, reliability and validity of
the information presented. Existing research has endeavoured to provide a rationale
and, in some cases, to provide evidence of the relationship between sustainability and
market value. However, the valuation profession, as a whole, seems to have remained
relatively unaware of the research proposing a relationship between sustainability and
market value and the implications for valuation practice.
The evolving body of research has a large proportion focused on the normative
effects of sustainability, indicating how sustainability “should” affect market value, for
example, Paumgartten (2003), Kats (2003) and Bartlett and Nigel (2000). Alternatively,
compelling business cases were developed by industry and government to provide
financial justification for sustainability to real estate owners, managers, developers,
architects and designers of real estate, for example, US Green Building Council (2003),
Frej (2003), Paumgartten (2003), Madew (2006), Lucuik (2005), RICS (2005), New Zealand
Ministry for the Environment (2006, 2007) and Bartlett and Nigel (2000). These studies
concentrate on reduced operating costs and increased occupant productivity, employee
retention, pay-back periods and net present value. However, the conversion from
“should be” to “what” is has been limited, particularly in the production of evidence to
demonstrate the relationship between sustainability and value. From a valuation
perspective, until evidence is available that justifies a relationship through particular Sustainability
parameters required in valuation, there is no motivation to implement normative theory in real estate
regarding sustainability within valuation practice.
Initially, research focused on the relationship between cost and value in addressing
the value of sustainability in commercial real estate (Davis Langdon Consultancy,
2004; Aye et al., 2002; Case, 2005; Matthiessen and Morris, 2004; Suttell, 2006).
However, in established markets such as the commercial office market, the cost 117
approach is not an appropriate method for determining “market” value (Whipple, 1995)
and, consequently, the ability of valuers to use this information and incorporate it into
valuation practice is limited.
Normative theories suggesting how sustainability “should” affect value, have been
interpreted into scenario (case) studies and cost studies, which are not applicable to
valuation practice and the assessment of market value. Consequently, this has led to
more-focused research examining valuation methods to ascertain market value of
sustainable properties. Valuation-based analyses, for example, Bowman and Wills
(2008) and other quantitative studies, such as, Miller et al. (2008b), Fuerst and Mcallister
(2008a) and Pivo and Fisher (2009), have been undertaken in an attempt to provide more
certainty and evidence around the relationship between sustainability and market value.
However, due to the nature of these studies, their applicability in valuation practice is
limited, as case studies and quantitative studies can be used to inform valuation but not
to actually determine market value.
Suggestions have been made to modify valuation theory and methodologies, or to use
more advanced valuation methodologies in this research area. Research into incorporating
sustainability in valuation has been primarily developed by Sayce and Ellison (2003a, b),
Sayce et al. (2004a, b), Lorenz and Lutzkendorf (2008), Lorenz et al. (2006), Guidry (2004),
Mcnamara (2002, 2005), Boyd and Kimmet (2005) and Kimmet (2006). However, the
applicability of these studies in valuation practice is not appropriate based on either the
ability of valuers to conduct this type of assessment in practice, particularly in regard to
the reliance on large data sets, or on experience with these methods. In addition, the
reliance of global markets on the standardised reporting and assessment measures in
established markets, like the commercial real estate market, means changes to the process
will have profound effects. It has been suggested traditional techniques will provide the
solution, the identification of the value of sustainability, when the market evidence
demonstrates a differential on valuation elements in the assessment process (Boyd, 2006).
However, there has been recent development of research using advanced valuation
methods to ascertain the added value of sustainability, for example, Miller et al. (2007,
2008a, b), Pivo and Fisher (2009), Eichholtz et al. (2008, 2009) and Fuerst and McAllister
(2008a, b). The variability in the results from these studies has not clearly provided a
defined relationship between sustainability and market value, and the reliance on and use
of the information from these studies needs to be considered carefully and cautiously
(Muldavin, 2008a). The studies are mathematical and tend to generalise a market, meaning
that the methods are not generally justifiable in valuation practice, as particular market
nuances are not incorporated and are likely to be ignored or lost in the amount of data and
variables available, and which, if utilised for valuation practice, may lead to incorrect
reporting of values.
This paper investigates the evolving body of research and information focused on
the relationship between sustainability and market value, by analysing and discussing
JPIF the hesitation and lack of incorporation in valuation practice. The majority of research
30,2 to date investigating the relationship between sustainability and value has been
categorised into the following themes to allow critical analysis and examine the
applicability of the theory or study for valuation practice:
.
discussion and analysis of stakeholders’ perceptions and sentiments;
.
normative studies that suggest the relationship “should” be present;
118 .
case studies used to demonstrate normative theory; and
.
quantitative studies to quantify the effect of sustainability.
This paper aims to provide a critical analysis of the research on sustainability and value
from the perspective of a valuer, in order to highlight the type of research available on
this topic and its applicability and implication for the valuation profession.
Sustainability and value: problem definition and normative theories

The relationship between sustainability and market value has received considerable
attention. Justification of the positive financial affects sustainability has on commercial
properties’ market values has been deemed necessary in order to gain market-wide
adoption of sustainability practices. However, the normative research, indicating how
sustainability “should” affect market value, has been a focus in the literature for more
than a decade, without a conclusive answer. The blame has pointed to many
stakeholders in the industry (Cadman, 2000). However, recently, the focus on valuers has
increased and they have been identified as a primary barrier preventing the
identification of the relationship between sustainability and market value.
The drivers for sustainability in commercial real estate have been discussed
vigorously in academia and industry over the past decade and more. Market-focused
drivers (Table I) have been identified by various government bodies, industry and
not-for-profit groups to encourage the uptake and adoption of sustainability practices
in the commercial real estate industry. Although these general market drivers are
considerations, the real estate market needs to be aware that stakeholders are usually
Market drivers Increasing shareholder value and building value

Tenant attraction and retention
Staff attraction and retention
Government reduction targets and accommodation criteria
Demand for quality space
Reduced operating costs
Pressure from stakeholders and shareholders
Demand for SRIs
Global reporting and disclosure projects
Risk mitigation and good governance
Legislative changes
Escalating cost of resources
Brand protection
Table I. Corporate social responsibility
Market drivers for Increased global focus on climate change
sustainability in the real
estate market Source: JLL (2007b)
more interested in the benefits they receive from adopting more sustainable practices Sustainability
and implementing sustainability initiatives in their portfolios (Table II), as tenants and in real estate
landlords have both similar and dissimilar benefits.
Normative research has been used to inform stakeholders of the claimed benefits of
sustainability – financially, socially, and environmentally. This has encouraged
stakeholders to embrace sustainability by generating a theory of how sustainability
“should” affect value. This intrigued market innovators who have adopted sustainability 119
based on their interpretation and rationalisation of the risks and benefits. Stakeholders
have a fundamental role in the evolution of the real estate market and the adoption of
sustainability. Consequently, the actions of stakeholders will ultimately affect the
identification of any relationship between sustainability and market value. For many
years, the real estate market was considered to be limited in its adoption of sustainability,
and Cadman (2000), in consultation with various industry groups, identified key
relationships between the stakeholders and causes for the lack of adoption and
development of sustainability in the commercial real estate market (Figure 1). The lack of
Owners Occupiers
Enhanced brand Enhanced brand

Higher net revenue return Reduced operating costs
Improved tenant retention Improved productivity
Higher rents Enhanced building quality
Mitigation of future regulatory impacts Mitigation of future regulatory impacts
Shorter letting-up periods Decreased environmental footprint
Reduced operating costs Retention and attraction of employees
Increased market share Enhanced building environment Table II.
Differentiated position of asset Stronger tenant/owner/manager relationships The theoretical benefits
Efficient reporting to stakeholders Efficient reporting to stakeholders of sustainability divided
between owners and
Source: JLL (2007b) occupiers
Occupiers
“We would like to have
sustainable buildings
but there are very few available.”
Investors Constructors
“We would fund sustainable The vicious “We can build sustainable buildings,
buildings, but there is but the developers
circle of blame don't ask for them.”
no demand for them.”
Developers
“We would ask for sustainable buildings,
but the investors Figure 1.
won't pay for them.” The vicious circle
of blame
Source: Cadman (2000)
JPIF sustainability adoption was a result of each of the stakeholders blaming another as to
30,2 why they could not act on their desire for sustainability.
There was, however, a missing factor in the original circle of blame developed by
Cadman (2000), that being the role of valuers as advisors to the different sectors of the
market. Thus, the valuation profession has a crucial role in the adoption of sustainability
in the commercial real estate market, because decisions made by real estate investors,
120 financiers, and other stakeholders are based on opinions and advice from valuers. The
importance of financial justification and verification of the effect of sustainability on
asset values by the financial sector, is paramount (RICS, 2005), otherwise there will only
be limited, or no, investment in sustainability. This concept represents a free market
where regulation for sustainability has not been mandated and has meant limited
evolution of sustainability within the market. However, it would be anticipated that any
form of regulation or compliance would have a consequential impact on asset values.
Lorenz (2008) further developed these theories taking a positive perspective on the
elements in the circle of blame theory, and identifying the normative perceptions of the
stakeholders, as shown in Figure 1. Normative research in real estate has been
produced to encourage sustainability in commercial practice. For example, Lorenz has
used normative theories to demonstrate the positive effect of sustainability on

stakeholders. However, Lorenz (2008) does not limit the stakeholders to the four noted
previously (or five including valuers), and opens up the roles to indicate those involved
directly and indirectly with the commercial real estate market. They include
mainstream financial professions (including real estate professionals), banks, valuers,
insurers, educators, and the over-arching role of policy makers (Figure 2).
The rapid evolution of sustainability in commercial real estate has been accompanied
by a plethora of research papers advocating the benefits of sustainability to owners
Owner Associations
`We represent the interests of our
members but we also encourage Assessors/Certifiers
them to improve sustainability `We assess and communicate the
performance.' Owner/End Users sustainability performance of buildings
`We demand and occupy because that's the basis for improved
sustainable buildings because decision-making.'
Insurers they are cheaper to run,
`We grant better insurance
increase our well-being and
conditions for sustainable
improve our image.'
buildings because they offer
many loss prevention
benefits.'
Designers & Researchers

Investors Valuers & Advisors
`We invest in sustainable buildings
Constructors `We find out what works
`We recognise the benefits `We design and construct best and why and we
because that's what occupiers and reflect this in our sustainable buildings and empirically prove the
want and because they give estimates of market value environments because that's benefits because that's
bettern returns and have higher and calculations of worth as what our clients want and what what everybody needs to
value growth potential.' well as in our advice given society expects.' know.'
to clients.'
Educators
Developers `We spread the knowledge on
`We develop sustainable sustainable buildings because that's
Banks buildings because they are critical for the implementation of
`We grant better easier to sell, achieve higher sustainable development principles
financing conditions for prices and are much more within the profession.'
resistant to obsolescence.'
Figure 2. sustainable buildings
because they are less
A contradiction: the risky.'
Policy Makers
virtuous circle of blame `We create a supportive legal framework for the benefit of all.'
and feedback loops
Source: Lorenz (2008)
and occupiers, and encouraging stakeholders, namely, investors and occupiers, to buy Sustainability
into sustainability based on the value, either through investment or occupation. As in real estate
aforementioned, many stakeholders are awaiting financial justification which they are
expecting from the valuation profession. However, limited acknowledgement of any
relationship between sustainability and market value by valuers means limited
investment. It is the same circle of blame, where valuers require evidence to report the
change, but change will not occur if valuers do not present a positive relationship 121
between sustainability and market value. Therefore, research investigating the
perceptions and actions of investors and occupiers is required.
Normative research has attempted to convince the industry of the benefits of
sustainability using a variety of techniques, from cost-benefit analysis, net present value
calculations, and even different valuation techniques. There is still limited empirical
evidence justifying normative statements and theories regarding the relationship
between sustainability and market value. The removal of normative studies and
anecdotal evidence from the field of research significantly reduces the amount of
research on the topic of sustainability and market value (Sayce and Sundberg, 2009).
In order to provide justification of some of the normative theories on the relationship
between sustainability and market value, research has investigated the perceptions
and willingness-to-pay of investors and occupiers who play key roles in the real estate
market (noted in the circle of blame). However, diverse findings in perception studies
indicate prevalent uncertainty in the industry. Positive perspectives for investors and
occupiers have been promoted, some rationalising the position of the stakeholders and
others actually surveying participants for their opinions on the subject, for example,
Goodman (1994), Lockwood and Deloitte (2008) and Mays (2003). Longitudinal studies
on real estate stakeholders’ perceptions in the UK over ten years, found ambitious
positive perceptions and responses from respondents. However, there was little
indication these stakeholders were seeing any impact on the rents or values in the real
estate market (Parnell and Sayce, 2007). The anticipation of stakeholders of when
sustainability would grow in importance and effect yields was always in the future, by
a couple of years. However, repetition of the study found that this observation moved
further and further out. This has been mirrored in other studies; see, for example,
surveys conducted by Jones Lang LaSalle between 2006 and 2010. These sentiments
were reflected in surveys of the occupiers in the commercial real estate market, with
strong occupier sentiments of sustainability being a prevalent issue then and
increasing occupiers’ willingness-to-pay over the period between 2005 and 2007 ( JLL,
2007b). However, recent survey results indicate a reduction in occupiers’
willingness-to-pay (JLL, 2008). The conversion of willingness-to-pay has not been
evident within the market, which has tactical implications for investors as the cash
flows are yet to be derived and uncertainty remains, and the underlying rationale of
rents and prices remains unanswered (Pfrang and Wittig, 2008). It may be because
stakeholders, occupiers, or investors in the real estate market are not willing to
sacrifice profit for the environment (Merrill Lynch, 2005). The impact sustainability
has on value remains elusive and time does not seem to have provided answers to the
question (Parnell and Sayce, 2007). This may have a relationship with the
characterisation of stakeholders within the real estate market.
In classifying stakeholders’ adoption of sustainability, there are different
classification typologies. Four key categories are applicable when analysing the
JPIF commercial real estate market, and may explain why surveys like JLL and CoreNet
30,2 ( JLL, 2007b) indicate such strong occupier sentiments for willingness-to-pay for
sustainability, but show limited evidence of these inclinations in the market.
Stakeholders can be classified based on their actions and activeness in sustainability in
the market place, using this classification system enables a greater understanding of the
incorporation and investment in sustainability and consequently the evolution of the
122 market towards a more sustainable built environment. These classifications include:
.
regulatory greening;
.
ceremonial greening;
.
competitive greening; and
.
holistic greening ( Jermier and Forbes, 2003).
Regulatory greening refers to environmental and social improvements by mandatory

requirement and compliance. However, this has only recently affected the commercial
real estate industry in the UK and Europe, with the introduction of schemes like the EU
energy efficiency mandatory disclosures for commercial real estate. A similar scheme
was introduced in Australia with mandatory disclosure from 1 December 2009

(Department of Environment, Water, Heritage and the Arts, 2010). Market-driven
typologies, however, are of more interest as a result of the market-led adoption of
sustainability evident in most countries.
Ceremonial greening may also be called “green washing”, and there has been
considerable literature written on this concept, for example, Clegg (2009), Greer and
Bruno (1996), Lubbers (2002) and Tokar (1997). Green washing is, essentially, where
organisations exploit consumers’ demands for more environmentally or socially
responsible products, which are justified in either third-party certification schemes or
have misleading or fake labels and make false claims (Terrachoice, 2009). The
organisations project themselves, using self-congratulatory rhetoric, as green,
sustainable, and socially responsible yet continue to operate as per usual. The
typical perception of green washing is of organisations expressing commitments and
formal programs but falling short in actual implementation or response to those
commitments (Jermier and Forbes, 2003). Essentially, this is paying lip service to
sustainability whilst appearing to be more sustainable and inferring strong intentions
and actions when really there is nothing of the sort going on. This could be relevant to
a number of willingness-to-pay surveys, for example the occupiers from the JLL and
CoreNet (JLL, 2007b) survey who indicated they would pay more to occupy sustainable
real estate; whether they actually are, or will, is a completely different story.
Competitive greening is another form of organisational greening or social
responsibility. However, unlike ceremonial greening, competitive greening indicates
that the organisations are actually investing in sustainability. The intention, however, is
to achieve a “competitive edge”, a mantra found in many normative research
publications suggesting that sustainability will pay financially (Jermier and Forbes,
2003). Many organisations, in promoting sustainability, have used the competitive edge
sustainability will give real estate, as a selling point for sustainability in commercial real
estate (Lockwood and Deloitte, 2008; JLL, 2006, 2007a, b). However, the focus is usually
on short-run returns on sustainability and maximising competitiveness, rather than
overall improvement of sustainability objectives.
Holistic greening is where an organisation has a deep commitment to environmental Sustainability
and social improvements which are well resourced to be implemented on a system-wide in real estate
basis ( Jermier and Forbes, 2003). From a real estate perspective, this would involve
organisational change, not only in the organisation’s operation but throughout in terms
of environmental, social and economic performance and operation. Separating out the
ceremonial from the competitive, from the holistic, seems relatively straightforward.
However, in the commercial real estate market it is difficult to address the different levels 123
due to the current market’s level of evolution.
The inconclusiveness of results from surveys over time, and the conversion from
willingness-to-pay to actual cash flow remains a key issue, however, it is not unique to
the real estate market. Socially responsible investment (SRI) research has found diverse
results where, in some cases, sustainability has a positive effect on performance and in
other studies results point towards inferior performance (Stenstrom and Thorell, 2007).
The variation in stakeholders’ opinions means the circle of blame theory continues.
Investors are waiting on occupiers to pay more for sustainability and are hesitant to
invest as a result. The normative theories about the relationship between sustainability
and market value are yet to be proven and, consequently, hinder investment. The
implications for valuation practice are apparent. Evidence is not forthcoming from
stakeholders within the sector, leaving valuers with no evidence to justify any of the
normative theories of the relationship between sustainability and market value which
they can incorporate into valuation practice.
As a result of inconclusive market evidence, there has also been considerable focus on
case studies, which provide hypothetical reasoning for the normative theories of the
relationship between sustainability and market value. The rationalisation of the benefits
has been developed in a variety of media to encourage and demonstrate sustainability in
commercial real estate. Industry, academia, and government have all developed and
published normative theories of the relationship between sustainability and value using
varying case study analysis with, for example, some using case studies and different
approaches to value justification.
Industry bodies have undertaken considerable research in investigating the
relationship between sustainability and value through a variety of media. Although
using a range of analysis methods, industry bodies have developed research to compel
the positive relationship between sustainability and market value. A representative
example of industry-led research publications examining the relationship between
sustainability and market value and drivers for the real estate market includes JLL (2004,
2007a, b, 2008), Colliers International (2007), CB Richard Ellis (2007), Merrill Lynch
(2005), Davis Langdon Consultancy (2004), Davis Langdon (2007), Investa (2007a, b) and
JP Morgan (2008), Colonial First State (Radanovic and De Francesco, 2008). In addition,
there are many other groups contributing to the growing body of knowledge on the
subject of sustainability and market value. However, the applicability of the information
in these studies to valuation practice is limited. It does, however, demonstrate the
evolution of the market and identification of trends in the commercial real estate market,
which does help to inform valuers of changing elements and perceptions within the
commercial real estate market.
Governments have played a key role in funding sustainability research, which has
been further supported by not-for-profit organisations like the Green Building Council
Australia, and the New Zealand Green Building Council, for example, the Department
JPIF of the Environment, Transport and the Region (DETR 1999, 2000), Egan (2004),
Mays (2003), Kats (2003), New Zealand Ministry for the Environment (2006, 2007) and
30,2 Gbcaus (2008).
Professional bodies have also made a steady commitment to sustainability and
developing research on the role of valuation and sustainability. In particular, the
Appraisal Institute (USA), RICS (worldwide), API (2007) (Australia) and PINZ
124 (New Zealand) have all been involved to varying extents in the education and research of
sustainability in real estate. The funding of major research projects by valuation-based
institutions includes projects, for example, by RICS (2005) and Australian Property
Institute (Bowman and Wills, 2008). Many of these studies have focused on case study
analysis, such as RICS (2005), Madew (2006) and Bowman and Wills (2008), providing
unique case-by-case analysis of the financial benefits of sustainability, and generalising
the findings to be applicable in practice and in global markets. However, most recently,
these bodies have produced some guidance notes, valuation information papers and
education programs for valuers identifying the increasing role of sustainability in
commercial real estate (RICS, 2009).
Sustainability and valuation-based research

Professionally-based studies and also other academic publications have examined
sustainability in real estate valuations, to provide information and direction for the
valuation profession. Many of these guidance publications are generally based on
normative theory, experience or observation of the role of sustainability in valuation
practice. However, many do identify some of the key aspects either driving or inhibiting
the valuation of sustainable real estate. The nature of the advice and the perspectives of
the information and publications for the valuation profession have evolved over time.
Initial publications focused on identifying key normative theories discussing the
relationship between sustainability and market value, then evolved into more
discussions of issues and barriers within the market and the need to identify a
relationship between sustainability and market value, and then to the examination of the
issues related to more detailed aspects in valuation practice concerned with risk,
obsolescence, market dynamics, and sustainability assessment in valuation. Although
there is still considerable promotion of normative factors in later research, there has been
acknowledgement of the educational issues of the valuation profession and the need to
capture the risk inherent in valuation practice in regard to sustainability.
A representative sample of these publications and their topics are described below:
.
Boughey (2000) – theoretical analysis of real estate markets, value, and
sustainability.
.
Easterbrook (2000) – economic theory and sustainability.
.
Chao and Parker (2000) – examination of energy savings and advice to real
estate valuers.
.
Guidry (2004) – definitions of sustainability and encapsulation and normative
theories of value.
.
Gottfried (2004) – analysis of the changing trend in the market and the need for
education.
.
Anonymous (2005) – sustainability definition and pay-back theory linked to
value.
.
Chaiwatanatorn (2006) – definition of sustainability, normative drivers, and Sustainability
valuation methodology. in real estate
. Robinson (2006) – real estate valuation applied to environmentally sustainable
development.
.
Lutzkendorf and Lorenz (2006) – examination of the education and training on
sustainability and its relationship with economics and valuation.
125
.
Bergman (2007) – examination of the tangibility of sustainability and its value.
.
RICS (2007b) – definitions and guide as to surveying sustainability.
.
RICS (2007a) – examination of the changing market dynamics and challenges in
valuing sustainable real estate.
.
Brinkman et al. (2008) – investigation of the dynamics in the market and
examination of risk regarding climate change and the effect on corporate valuations.
.
Muldavin (2008b) – analyses sustainability and its incorporation within
valuation practice.
.
Parker (2008) – overview of emerging evidence suggesting change in the market,
and increasing issues regarding risk and obsolescence and its relationship with
valuation issues.
.
Scott (2009) – review of green building valuation in the construction section and
the paradigm shift.
.
Sayce and Sundberg (2009) – examination of the body of research and the quest
to find the business case for sustainability.
. Reed (2009) – normative analysis of drivers of value in the valuation process and
sustainability.
.
RICS (2009) – statement of norms regarding the valuation of sustainability,
providing guidance, and caution in valuing sustainability.
The theoretical body of knowledge on the relationship between sustainability and

market value has been developed from various forums and theories. However, the
continuing requirement for evidence and proof by the industry has led to extensive
development of hypothetical analyses, case studies and quantitative investigations.
Sustainability and value: case studies and quantitative studies

Research investigating a relationship between sustainability and market value from a
normative perspective is often demonstrated using case studies, hypothetical analysis or
quantitative analysis using actual data. They can be categorised into key fields of
research:
(1) Cost-benefit analysis or ratios.
(2) Quantitative studies.
(3) Valuation methodology simulations:
.
cost approach analysis;
.
residual approach analysis; and
.
income approach analysis.
JPIF The rapidly evolving nature of the body of research has meant there is considerable
30,2 research endeavouring to find a relationship between sustainability and market value
by using a variety of justification methods. The majority of these studies do not
specifically address market value, but address the value of sustainability, which is not
necessarily the same thing. The literature on the topic of sustainability and value is
now extensive and continually evolving. Analysis of a representative sample is
126 reported in Table III, which identifies the approach taken to identify a relationship
between sustainability and market value, and whether it is cost-benefit analysis,
traditional valuation modelling, or quantitative studies. It then categorises by the type
of analysis undertaken whether it is a hypothetical case study or analysis of actual
market data. Table III is a chronological chart of how research into the relationship
between sustainability and value has changed over time. Initially, a strong bias
towards cost-based analysis and cost-benefit analysis is predominant, with some
valuation-type analysis becoming more prevalent later, followed by the introduction of
quantitative studies in recent years. Research has somewhat moved away from
cost-based studies in favour of more analytical analyses based on valuation and
market value, and quantitative definitive studies of dollar values.
The benefits of sustainability and the relationship with market value have been
discussed in detail by various researchers – academic, industry, government, and
not-for-profit organisations. Although benefits may exist, the ability to quantify and
assess a relationship between sustainability and market value is somewhat more
difficult. As shown in Table III, the majority of studies have focused on cost-benefit
analysis and the justification of expenditure on the return receivable, either through
occupier productivity, reduced operating costs or increased rents and prices. Although
some of these studies provided evidence to justify the claims made, the inferences made
regarding value did not demonstrate a comparison to market value, which is obtained
through valuation methods. They do, however, have variations in their methodology,
including cost-benefit analysis ratios, life-cycle analysis assessments, pay-back ratios
and calculations, all used as economic assessment tools which are typically used as
performance evaluation tools by stakeholders. These analyses demonstrate the effect on
a dollar value for stakeholders. However, they do not interpret the effects nor show a
relationship between sustainability and market value from a valuation perspective. Net
present value calculations were used in a number of studies to justify the financial
expenditure on sustainability in commercial real estate, for example, see New Zealand
Ministry for the Environment (2006, 2007). However, the incorporation of unproven
benefits relating to occupier health and well-being creates more normative assumptions
which are not identified in traditional valuation techniques. From a valuation
perspective, the evidence for added value would need to eventuate through traditional
elements related to market value, for example, an increase in rent as a result of occupiers
being willing to pay more for the perceived benefits of improved occupier health and
comfort. However, calculating the added value through employee health and
productivity does not have a direct relationship with the market value of the real
estate (Kimmet, 2006).
Other studies have concentrated on using valuation methodology to demonstrate the
relationship between sustainability and market value. Many of the studies focused on
the cost approach in particular, for example, Davis Langdon Consultancy (2004),
Matthiessen and Morris (2004), and English (2004). Although these studies provide
Life cycle Traditional Case Actual
Sustainability
and benefits valuation Quantitative Hypothetical study market in real estate
Research analysis analysis analysis analysis analysis analysis
Chao and Parker G U U

(2000)
Bartlett and Nigel A U U
(2000) 127
Kats (2003) G U U
US Green Building I U U
Council (2003)
Paumgartten (2003) A U U
Davis Langdon I U U
Consultancy (2004)
Matthiessen and I U U
Morris (2004)
Winter (2004) I U U
JLL (2004, 2006) I U U U
Case (2005) G U U
Robinson (2005) A U U U
Merrill Lynch (2005) I U U

RICS (2005) I U U U U
JLL (2006) I U U U
Madew (2006) I U U
Robinson (2006) A U U
Suttell (2006) A U U
BD þ C (2006) I U U
Lorenz et al. (2006) A U U
New Zealand G U U
Ministry for the
Environment (2006,
2007)
Lorenz et al. (2007) A U U
Morris and I U U
Matthiessen (2007)
Nelson (2007) I U
Davis Langdon (2007) I U U
Ellison et al. (2007) A U U
Yudelson (2007) I U U
Bowman and Wills I U U
(2008)
Lorenz (2008) A U U
Eichholtz et al. (2008, A U U
2009)
Miller et al. (2007, A U U
2008b)
Fuerst and Mcallister A U U
(2008a, b)
Pivo (2008) A
DeFrancesco and I U U
Levy (2008)
Pivo and Fisher (2009) A U U
Bienert et al. (2009) A U U
Table III.
Notes: G ¼ government produced study; I ¼ industry/professional body produced study; Matrix of case studies
A ¼ academic research and quantitative studies
JPIF an analysis of the cost, the equating of cost to value for these assets is discounted by the
30,2 valuation profession as an inappropriate method for determining market value for
properties in a mature market (Whipple, 1995). Residual analysis has also been used in
order to ascertain a relationship between sustainability and market value, where
hypothetical development was used to identify the effect of sustainability on residual
land value (Robinson, 2005). However, assumptions and incorporation of income
128 parameters made from normative statements of research were included, in particular, an
additional amount based on occupier productivity, which inflates the effect of
sustainability on the residual land component. Although, in some instances, this
research demonstrates the potential effect of sustainability on residual land value, it is
still a hypothetical analysis using normative theory for assumptions, rather than
assumptions based on market comparison. However, as a valuation method to ascertain
market value, this approach is typically used on englobo developments or residential
development assessments, and, as a methodology, has received considerable criticism as
a valuation approach (Whipple, 1987, 1995; Boydell and Gronow, 1997).
There have also been a considerable number of publications and research using
traditional income approach techniques in ascertaining the relationship between
sustainability and market value, for example, RICS (2005), JLL (2006) and Bowman and
Wills (2008). Many of these studies use normative theory as the basis for assumptions,
particularly regarding increased rents and reduced operating expenditure and, in some
cases, make adjustments to the capitalisation rates. Whether these studies are based on
real or hypothetical properties, the processes used in valuation practice are not
necessarily adhered to in the development of case studies, as it is a case study not a
market valuation. Consequently, the use of heuristics in ascertaining and judging the
correctness of the end value could be open to considerable interpretation and variation.
Some research has investigated the relationship from a theoretical perspective in
valuation practice using traditional valuation theory and theory relating to the benefits
from sustainability. There has also been research based on normative theory, which
relies on incorporating the triple bottom line approach and its integration and role within
valuation (Kimmet and Boyd, 2004; Boyd and Kimmet, 2005, 2006). Their theoretical
approach identified a relationship between sustainability and market value using triple
bottom line theory, rather than demonstrating the added value of sustainability, as
shown in Figure 3. The rationale used to construct the theory of triple bottom line
valuations was based primarily on sustainable criteria already established, in this case,
the Green Building Council of Australia and their environmental rating tool, Green Star
(Kimmet and Boyd, 2004). However, the focus on design and construction in the Green
Star tool, rather than the operational period, creates a disconnect between the perception
and interpretation of the framework by stakeholders in comparison to valuers (Boyd and
Kimmet, 2005).
Similar relationships between sustainability and market value in valuation were
identified by Pivo (2008) and Pivo and Fisher (2009), as shown in Table IV. Pivo and
Fisher’s (2009) theory focused on particular attributes noted to be key sustainability
parameters identified by Pivo (2008). Their research identified the relationship with
market value through valuation theory.
The use of valuation methods, either in a theoretical context or in case study analysis,
has not yet provided certainty within the commercial real estate market as to the
relationship between sustainability and market value. This has led to research focused
Environmentally Efficient Buildings Sustainability
in real estate
Improved working Reduced building Reduced facilities
Greater capital cost
environment operating cost maintenance costs
129
Greater demand for Lower operating Lower operating and/or Causes lower initial
space expenditure capital expenditure return on capital
Higher rents, less Increases the net Increases net income or

vacancies income decreases capital
Figure 3.
Positive impact on Positive impact on Positive impact on Negative impact on Key benefits of
value value value value sustainability and impact
on value
Source: Boyd (2006)
Sustainable Tenant Perceived Capital improvement and Overall

feature demand Expenses risk management programs expected effect
Energy Positive Neutral or Positive Positive Neutral or

efficient positive positive
Transit Positive Neutral Positive Not applicable Neutral or
oriented positive Table IV.
Urban Neutral or Neutral or Neutral or Not applicable Neutral or The relationship between
regeneration positive positive positive positive sustainability features
and drivers of investment
Source: Pivo and Fisher (2009) return
on the analysis of actual evidence from the markets. Empirical studies of note that
investigate the relationship between sustainability and market value began with
Lorenz et al. (2006, 2007), who investigated the relationship with sales prices and
sustainability using hedonic pricing approach in residential units in Germany. These
studies identified key considerations and issues in the use of hedonic pricing models and
regression models in the provision of discrete values, as follows:
. Results can be plausible and useful, however, they are reliant on the quality of
transaction data (Lorenz et al., 2006).
.
Better clarification of sustainability levels and real estate improvements in the
data sets would improve the results (Lorenz et al., 2006).
.
Location is still the predominant variable affecting price, outperforming all other
categories (Lorenz et al., 2006).
.
In valuation practice, the ability to categorise sustainable design features in the
model meant there were limited issues surrounding valuer knowledge,
judgement, and experience (Lutzkendorf and Lorenz, 2006).
JPIF More recently, the commercial real estate market has also used the hedonic regression
30,2 analysis technique to investigate the relationship between green (sustainable)
certification and rents, prices, and value for commercial real estate in the USA (Fuerst
and Mcallister, 2008a; Eichholtz et al., 2008, 2009; Miller et al., 2008a; Pivo and Fisher,
2009). The relevance of quantitative measures and analysis in being able to determine
and prove the value of sustainability in commercial real estate has been long awaited
130 by the commercial real estate market (Muldavin, 2008a). These quantitative studies
have utilised the upgrades to the CoStar and National Council of Real Estate
Investment Fiduciaries (NCREIF) databases, which have identified green or
sustainable properties in the USA. This has enabled quantitative research to be
undertaken in order to identify whether a relationship exists between sustainability
and market value in commercial properties – the parameters of the studies are
highlighted in Table V. Several releases of the same study were identified, and the
results varied with the revisions. All studies found a positive relationship between
sustainability, and rents and values.
The reporting of results from the different studies has yielded considerably varied
results. The identification of premiums for rents and values demonstrate an

uncertainty around the value premium for green or sustainability in the commercial
Classifications Rent
and sample increases
Author Approach Database size (%) Values Result
Miller et al. Hedonic CoStar N-G 2,077 50.5 9.9% Sustainability

(2007, regression LEED 580 8.9 5.3% increases rents,
2008a, b) Energy 643 reduces occupancy
and increases value/
squre feet
Fuerst Hedonic for CoStar N-G 3,626 18.9 (11.6a) 31.4% Certified properties
and sales and LEED 350 9.7 (9.2a) 10.3% have a rental
McAllister weighted-least- Energy 1,015 11.8 premium and the
(2008a, b) square Green 1,365 higher the rating, the
regression higher the rent
premium and higher
transaction prices
Eichholtz Regression CoStar N-G , 10,000 2.8-3.5 Rental premium and
et al. analysis Green 494 0 capitalisation rate
(2008, LEED 3.5 (8.9a)
2009) energy
Pivo and Portfolio NCREIF Energy Star NI 5.9 MV Net income and
Fisher analysis, Delphi Transit NI 4.5 13.5% market values
(2008, and regression urban NI 2 2.4 MV affected,
2009) analysis regeneration 10.4% capitalisation rates
MV up to 50 basis points
1.1% overall impact on
Table V. return
Quantitative studies
investigating the value of Notes: aRegression analysis; N-G – non-green building; LEED– LEED certified building; Energy –
sustainability in Energy Star certified building; transit and urban regeneration as classified by Pivo and Fisher (2009);
commercial real estate MV –market value as defined in Pivo and Fisher (2009); NI – net income
real estate market. Observations by Lorenz et al. (2006) are certainly applicable in the Sustainability
analytical critique of these studies, particularly with regard to sample size and in real estate
verifiability, treatment of the data, and the assumptions and judgement made by the
researchers. Variation in econometric modelling, regression, and hedonic pricing
models is not unusual, and the result is often dependent on the mindset of the
researcher, investigating either a negative relationship (cost concerned) or positive
relationship (value creation) creating a bias in the assumptions and assessment within 131
the modelling process (Wagner, 2001).
In identifying the impact of sustainability on rents and values, the results of these
studies by Miller et al. (2008b), Eichholtz et al. (2008), Fuerst and Mcallister (2008a) and
Pivo and Fisher (2009) have identified positive relationships, albeit by varying
percentages. Earlier findings of these studies also suggest more variability and, in some
cases, differing values (Miller et al., 2008a; Fuerst and Mcallister, 2008b). The most
consistent finding among the studies was the positive effect of Energy Star certification
on rents and values. However, Fuerst and McAllister (2008a, b) comment that the price
premiums for LEED and Energy Star may be a result of the hot market, which is
indicative of short-term demand in an under-supplied market. Therefore, larger data
samples are required in order to identify the true value differential. Another factor for
consideration, were findings from a concentrated market study of the Chicago office
market which found Energy Star properties did not transact as frequently as other
properties and the researchers observed this was likely a result of long-term investment
which may affect the price premiums observed in the market for those properties
(Dermisi and Mcdonald, 2009). The classifications of certifications are not examined on a
level of sustainability, and only refer to whether the real estate has received either a
LEED or Energy Star certification without reference to any level which limits the
comparability of the data. Miller et al. (2008b) observe the results received are from a
variety of properties, in different locations, of different attributes, and different
certifications which cannot be explained explicitly by the real estate data available.
There is evidence to suggest possible relationships; however, the large variance in the
data means the results cannot be considered statistically significant with confidence.
The studies by Miller et al. (2007, 2008a, b), Fuerst and McAllister (2008a, b) and
Eichholtz et al. (2008, 2009) all used data from transactions in the market from the
CoStar database. However, effective analysis was undertaken in some studies based on
real estate occupancy that demonstrated stronger statistical significance in the
findings (Miller et al., 2008a, b). The strongest data evidence is focused on California
where other factors may be influencing the market, like government policies. On the
other hand, Pivo and Fisher (2009) used the NCREIF database which allowed access to
market valuation of the properties. This meant there were no issues with appraisal
smoothing (Geltner, 1991; Fisher and Geltner, 2000) and the comparison and analysis of
these values in regression meant a closer “like-with-like” comparison (Pivo and Fisher,
2009) compared to the CoStar studies, which utilised sales and rent transaction data.
However, the experience and judgement of the valuers who valued these NCRIEF
properties are not examined. Nevertheless, location was identified as the major
contributor affecting value, but there is evidence to suggest there are relationships
between sustainability, and rents and values. However, this does not necessarily infer
that the real estate is going to automatically generate higher investment returns
(Pivo and Fisher, 2009), and the assessment of market value is highly dependent on
JPIF market dynamics (Fuerst and Mcallister, 2008a). The valuation models used in practice
30,2 and heuristics used by valuers based on their strategic knowledge of sustainability and
expert intuition will, consequently, play a role in the identification of a relationship
between sustainability and market value (Lorenz et al., 2006).
These quantitative studies provide a strategic and informative opinion based on
empirical analysis of current data. However, these studies do not provide the
132 framework from which valuers are able to utilise the information to accurately assess a
relationship between sustainability and market, as the reliability and communication
of the specific quantitative results of these studies are incomplete and inadequate for
use in practice (Muldavin, 2008a).
There are certainly indications from hypothetical analyses, case studies, and
quantitative assessments of a relationship between sustainability and market value.
This has provided sufficient drivers for stakeholders in the industry to take on the risks
of uncertainty and endeavour to implement and incorporate sustainability in
commercial real estate. However, from a valuation perspective, the use of
performance-based tools focused on cost-benefit analysis, residual analysis, and
economic assessment are not appropriate measures of market value from a valuation
practice perspective (Whipple, 1995). The approaches used to justify the effect of
sustainability on value have been undertaken using inappropriate methods of
calculation for valuers when addressing the relationship between sustainability and
market value.
Sustainability and value: valuation methodology

The adoption of sustainability is not happening at a very rapid rate inspite of all the
evidence being presented. The direction of blame is directed at the valuation
profession, as valuers are thought to be reflecting the effects of sustainability in
commercial valuation. This has led to suggestions that existing valuation
methodologies may not be appropriate in addressing the multi-dimensional
characteristics of sustainability. In response, there have been suggestions of ways of
modifying current valuation techniques to incorporate sustainability, and also to use
advanced valuation techniques in order to determine value. However, discussions are
continuing as to the appropriate sustainability metrics and how they should be
incorporated into valuation practice. This broadening research field is developing
considerable knowledge. However, the actual implementation of this knowledge within
valuation practice presents considerable barriers because of valuers’ reliance on expert
intuition and their hesitant approach to examining sustainability in the commercial
real estate market strategically.
Traditional valuation methodology usually comprises the three traditional
approaches known as the market comparison approach, the cost approach and the
income approach. Each of these methods has been discussed relating to their use in the
valuation of commercial real estate. Consequently, when analysing some of the studies
undertaken which utilise these methods to identify a relationship between
sustainability and market value, there are notable issues, namely:
.
inappropriate use of the approach in application;
.
inappropriate assumptions and judgements; and
.
application issues in practice.
Some studies utilised the cost approach and its theory to sum the cost of the real estate Sustainability
and inferred this value as being equivalent to market value. In the case of sustainable in real estate
commercial real estate, this is an inappropriate use of valuation methods. In practice,
this method is commonly used for either insurance assessments or properties that do
not have a market and comparable transactions (Whipple, 1995). Properties considered
to be more sustainable, in theory, are still commercial real estate as they provide the
same benefits and utility as any other commercial real estate, except there are different 133
technological parameters. As a result, comparisons can be made between the
fundamentals of the real estate and, in particular, location which is considered to be a
key factor in the level of rents and market value (Dermisi and Mcdonald, 2009;
Lorenz et al., 2006). Therefore, the studies investigating relationship between cost and
value of sustainable real estate are not applicable in the investigation of the
relationship between sustainability and market value as they address a different
concept of value.
Differing concepts of value can also be related to the residual land value analysis,
which utilises an analysis of a hypothetical development undertaken on hypothetical
sustainable real estate, which found sustainability increased the net residual value of
the real estate (Robinson, 2005). Although a positive relationship was found, the
assumptions used were based on normative theory, and increases in rent based on
better productivity levels misdirected the concept of value in this study. Primarily, this
approach is used in feasibility analysis for development projects, residential and
englobo developments (Whipple, 1995). It is not an appropriate approach for
ascertaining the market value of sustainable commercial real estate.
There were a number of studies which endeavoured to use traditional commercial
valuation methods, primarily the capitalisation of income and DCF approaches in
analysing the relationship and effect of sustainability on market value, for example, see
JLL (2004, 2006) and Bowman and Wills (2008). However, the application of these studies
used these methods in a hypothetical sense, although often using actual case studies.
They are hypothetical because, for a true analysis of the market value, comparisons need
to be drawn from the market in order to assess and make assumptions around particular
parameters required in valuation practice. Although finding positive correlations
between sustainability and market value, the processes required in practice may not lead
to the same conclusions. In practice, assessment of market value requires a particular
level of heuristics and expert intuition to form appropriate assessments, judgements,
and assumptions in the application of valuation techniques to real estate which are
based on historic information and trends. There are limited evidence and mechanisms in
the market to help address and identify a relationship between sustainability and
market value. Consequently, the industry and “green wash” has further prevented a
clear relationship between sustainability and market value being drawn in valuation
practice (Lutzkendorf and Lorenz, 2006). Value has traditionally been judged in terms of
location, quality, function, and aesthetics. There is now a wider contingent of factors,
however, on how to identify the value in these factors which still remains a key barrier
for the industry (Bartlett and Nigel, 2000). There are those who believe for sustainability
to be assessed, and a relationship between sustainability and market value identified,
modified, and improved valuation tools and methodologies are required (Ellison et al.,
2007). However, valuers are challenged in identifying the “right” sustainability metrics
in which to examine and compare real estate attributes and characteristics. The range of
JPIF rating tools and systems available complicate matters further by having complex and
30,2 often arbitrary assessment methods, which lead to levels of certification being achieved,
albeit by completely different parameters (Warren-Myers and Reed, 2009).
A number of case study analyses have utilised traditional income approaches in
assessing the relationship between sustainability and market value; however,
incorporations of sustainability into the actual valuation methodology have been
134 attempted by Sayce and Ellison (2003a, b). The valuation process, namely, the income
approach adopted, required the defining of sustainability and its relationship with
different valuation variables. This was undertaken based on normative theories and
industry consultation. The sustainability attributes identified were then weighted as to
their relationship and level of effect on particular valuation variables. The application of
this adapted valuation model to a series of case studies identified a devaluing of the
properties when sustainability was incorporated in the assessment approach; although
this method certainly identified the effect of incorporating sustainability assessment
into valuation and the impact on real estate market values. The arbitrary assessment and
treatment of sustainability variables and the impact on market value was not developed
from market evidence and trends evident in the market place. Consequently, this model
is a theoretical interpretation of the relationship between sustainability and market

value. However, for implementation in practice, the relationship and quantification of the
effect of sustainability on market value needs to be ascertained from market dynamics
and evidence prior to the use of a model of this type within general valuation practice.
More advanced valuation techniques have also been suggested as a more
appropriate mechanism to identify a relationship between sustainability and market
value. The hedonic pricing method has been suggested as an applicable form to
estimate economic values for ecosystems or environmental services and house prices,
and provides the application to ascertain value based on evidence (Lorenz et al., 2006;
Muldavin, 2008a). The hedonic pricing model allows for analysis of the characteristics,
in this case, of real estate with a variety of sustainable attributes, to determine value
based on these characteristics. Therefore, hedonic pricing suggests the value of the
individual attributes of real estate will be determined by how the price buyers are
willing to pay changes when the attributes change. The advantage of this methodology
is that the value is based on actual market choices and market perception. However, the
data, particularly the volumes required for this type of analysis, are not easily
accessible to valuation firms practising valuation. There is considerable reliance on
large, comprehensive databases with adequate information regarding sustainable
attributes and the characteristics of the real estate; however, information of this extent
is not commonly found in databases (Lorenz et al., 2007; Fuerst and Mcallister, 2008b).
The complexity of this method would require a high level of statistical expertise, time,
accessibility to data, and would probably not be easy for the valuation profession to
develop and include in their valuation process due to the lack of facilities and skills
(King and Mazzotta, 2000). Valuers, in practice, do not generally use the hedonic
pricing methodology in the assessment of value because of the advanced techniques,
the time-consuming practice, and the large data sets required (Lutzkendorf and Lorenz,
2006). Statistical and advanced valuation models have been identified as primary
approaches which would be able to prove the effect of sustainability on market value.
However, the applicability in valuation practice is doubtful and these studies need to be
considered with caution in practice (Muldavin, 2008a).
Considerable issues can be identified with the practical incorporation of the Sustainability
information obtained from quantitative studies and its integration into professional in real estate
practice. There is a general perception that quantitative studies are able to provide
definitive answers to a relationship and the effect of sustainability on market value.
However, in the context of valuation practice, quantitative studies are meant to provide
strategic-based knowledge to the valuation profession, shown in Figure 4 (Lorenz, 2008),
and do not provide the appropriate reporting mechanism. Quantitative studies do not 135
provide the answer or the “market value” of real estate with sustainable attributes; they
provide an assessment based on the modelling of a vast array of transactions. The
limited traditional elements of valuation are lost in the vast statistical analysis of the
transactions, particularly those pertaining to unique nuances within a market based on
location, real estate characteristics, or other elements which may affect the assessment of
market value in a traditional context. The reliance of valuation practice on the
comparative approach and analysis is somewhat lost in the vast number of variables
available in quantitative analysis.
The issues in using advanced valuation techniques like hedonic pricing models and
regression analysis, as evidenced by the studies undertaken investigating the
relationship between sustainability and value, are:

.
the variation in results, as a consequence of various techniques, individual
experience and expertise of the researchers, and the heuristics used in analysis;
.
the extent of data requirements for analysis;
.
the level of comparability available within data sets pertaining to age, location,
tenant profile, leases and aspects, among other elements;
.
the limited comparability as a result of broad generalisations regarding
sustainability certifications;
Traditional Approaches
Data Application
Report of
Analysis of traditional
defined
(i.e. market valuation
Identification value and/or
analysis and approaches
range of
highest and best and value
use analysis) values
judgement
Valuation Input into

Data
problem
Quantification
Data Analysis of
(i.e. application relationships/
Identification of advanced Interpretation
value
valuation estimates/
approaches) visualisation Figure 4.
The valuation
Advanced Approaches
methodology: traditional
and advanced methods
Source: Lorenz and Lutzkendorf (2008) Figure 3
JPIF .
treatment of data, in particular, the assumptions and adjustments used in
30,2 analysis, for example, the use of effective rents based on real estate occupancy
levels (Miller et al., 2008a, b);
.
indefinite analysis of sustainability levels apart from certified versus
non-certified;
.
inadequate sampling, limited data, issues with significance testing and control of
136 variables (Salzmann et al., 2005);
.
interpretation and misinterpretation of results by the industry (Muldavin, 2008a);
and
.
the inappropriateness of these studies to be used in valuation practice for the
assessment of market value (Whipple, 1995).
Further to the issues with the comparability of the quantitative studies, the treatment of
comparable properties within the studies is questionable for valuation practice. For truly
comparable real estate, one would need both certified and non-certified real estate in an
almost identical location that appealed to the same type of market and of similar quality,
height, aspect, age, lease and tenant configuration, and so forth (Muldavin, 2008a). Some
of the quantitative studies developed to date had properties up to a quarter of a kilometre
away from the sustainable real estate, for instance, in Eichholtz et al. (2009). The use of
hedonic pricing models for heterogenic real estate cannot conclusively indicate a
relationship between sustainability and market value, or the effect of sustainability on
market value. Even with more universal concepts like funds or stocks, it has been
demonstrated there can be large variances in findings on the relationship between
sustainability and value (Stenstrom and Thorell, 2007).
Sustainability and value: still no conclusion

For a number of years now, progress has been made by early adopters who have
invested in sustainability in the development and implementation of sustainability in
their portfolios, however uncertain the return. These early adopters have enabled
empirical quantitative studies to be undertaken in order to identify whether a
relationship exists between sustainability and market value. As is common with new
products, the price point is often higher, and potential inflation of values may be
perceived in a market where there is considerable demand and limited supply (Fuerst
and Mcallister, 2008b). Although the quantitative studies presented here are the most
advanced currently available, from a statistical and real estate practice perspective, they
lack the reliability in the data and assessment methods to be used as evidence for
valuation practice.
It has been suggested that further research into the micro markets is required in order
to gain a better picture and understanding of the relationship between sustainability and
market value (Muldavin, 2008a). This would, in turn, be a more useful analysis for real
estate professionals in that market. From the analysis of a number of markets in a similar
micro manner, it may be possible to ascertain through quantitative research a
relationship between sustainability and market value. However, reliance by the industry
on this information must be taken with caution. As quantitative studies have the
objective of using empirical data to identify relationships within the data, there may be
generalisations that are not applicable to other specific markets. There is considerable
reliance on quantitative studies in the scientific, medical, and engineering professions. Sustainability
As a common basis, people tend to rely more on the information portrayed within an in real estate
empirical quantitative analysis than a qualitative analysis (Pope and Mays, 2006). Due
to the nature of human beings, we want to “be sure” and to have the ability to comfort
ourselves through the use of quantitative studies, as being the most scientific and
statistical way to analyse information and ensure the smallest possibility of error.
However, from a valuation perspective, quantitative studies do not provide a market 137
value assessment (Whipple, 1995). Lorenz (2008) identified the role quantitative models
have in informing valuation practice. Rather than directing practice and eliciting the
value, they provide a level of strategic information to valuers, in order for valuers to
develop the heuristics required in practice. Quantitative methods cannot definitively
identify the value of real estate (Muldavin, 2008a). Lorenz (2008), in opposition to his
earlier comments, clearly identifies quantitative methods as support material for valuers
in the process of assessing market value. However, there has been little research
undertaken into how valuers are treating sustainability in valuation practice and the
market they perceive. There may be other barriers preventing the reporting of a
relationship between sustainability and market value.
The increasing role of sustainability in commercial property has implications for

valuation practice, now and in the future. At this point it has been well noted that there
is an evolving body of research and information pertaining to normative theories of a
relationship between sustainability and market value. However, a lack of knowledge
and understanding of sustainability in the commercial property market, and limited
evidence to support normative theories on sustainability, may lead to sustainability
being ignored altogether, or inappropriately addressed in property valuation.
Valuers are not a barrier to the industry’s desired relationship between sustainability
and market value. Certainly, for valuers to value sustainable properties, there needs to be
considerable evolution in their knowledge and techniques for assessing the level of
sustainability in commercial real estate. However, valuers are currently ill-equipped to
deal with the changing market. Valuers lack appropriate assessment techniques, which
is compounded by their limited evidence, expertise and knowledge of sustainability in
commercial property. The reliance of valuers on heuristics and expert intuition teamed
with evidence-based analysis requirements in assessing market value of commercial
property, hinders the ascertaining of any relationship between sustainability and
market value.
The review of literature and research to date has highlighted some of the
inappropriateness for the valuation profession of research into the relationship
between sustainability and market value. Valuers have an ultimate legal responsibility
to clients to provide an unchallengeable assessment of the market value of a property,
based on market evidence and the valuers’ own knowledge and understanding of the
market and trends (heuristics). It is their responsibility, through valuation, to reflect
changes in the market which may affect the market value. However, valuers need to
rely on evidence of the effects of market changes. Valuers use expert intuition based on
experience, the repetitive nature of assessment, and the intuitive knowledge gained
through known and intrinsic knowledge of the market and defined trends – a heuristic.
Consequently, valuers’ lack of strategic intuition to develop new heuristics, means they
are relying on outdated heuristics and expert intuition, which may be resulting in
incorrect reports of values.
JPIF Sustainability presents a rapidly-changing dynamic which has varying, complex
30,2 assessment criteria which cannot be easily measured and quantified. Increased
development of strategic knowledge is necessary for the valuation profession to
develop the appropriate and more accurate heuristics base required to assess a
relationship between sustainability and market value in commercial property. The lack
of historical evidence, data or information on the quantifiable effects of sustainability
138 on market value, a new trend in the commercial property market, leaves the valuation
profession uncertain as to the existence of a relationship between sustainability and
market value. Currently, valuers risk interpreting strategic research incorrectly, and
making inappropriate adjustments or comparisons because of their lack of knowledge
and limited sustainability assessment skills. Attention needs to be paid to attitudes and
investment strategies within their own particular market, as the verifiability of some
studies and relevance may be particular to those markets and not the subject in which
the valuers are practising. Although there is a developing body of anecdotal evidence
and investigations into sustainability trends on prices, rents, and market value, this
research is yet to provide irrefutable evidence of a relationship between sustainability
and market value in any given commercial property market. The problem will only be
solved through further market evolution and clear differentiation of the effects of
sustainability on market value through extensive analysis of unbiased evidence-based
research in individual and broader markets. Thus, the need for unbiased research is
clear. The global push for sustainability and the emotional and moral requirements
that sustainability necessitates make it difficult to develop research demonstrating
unbiased opinions and market observations. From a valuation perspective, it is
difficult to ascertain the level of bias in publications of the effects on prices, rents, and
market values; which only makes the valuers’ role more difficult and also confuses the
investors.
Valuers need to constantly address the many issues that may affect their liability
and responsibility to their clients. In particular, further research, strategic knowledge
development and market-specific investigation are all required to develop valuers’
heuristics. As the market changes and develops, valuers need to develop their opinions
and understanding concurrently with the market.
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Corresponding author
Georgia Warren-Myers can be contacted at: g.warrenmyers@deakin.edu.au
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