Environmental Performance and the Cost of Capital: Evidence from Commercial Mortgages and REIT Bonds

Working paper (March 2018), together with Piet Eichholtz, Nils Kok (Maastricht University) and Erkan Yönder (Oyzegin University).


The increasing societal focus on environmental issues leads to important questions about the relationship between corporate environmental (ESG) performance and financial performance. Research on the impact of environmental performance on firms' cost of capital remains especially scant. The real estate sector offers a laboratory to address the relationship in two distinct manners, while specifically addressing concerns about endogeneity. We first investigate the spreads on commercial mortgages collateralized by real assets, some of which are environmentally certified. We then study spreads on corporate debt of property companies (REITs), both at issuance and while trading in the secondary market. The results show that loans on environmentally certified buildings command lower spreads than conventional, but otherwise comparable buildings, varying between 26 and 32 basis points, depending on the specification. At the corporate level, REITs with a higher fraction of environmentally certified buildings experience lower bond spreads in the secondary market. These results are robust to different estimation strategies, and signals that the debt market efficiently prices in environmental risk.

On the Value of Environmental Certification in the Commercial Real Estate Market

My paper with Nils Kok (Maastricht University) is accepted for publication in Real Estate Economics. The abstract is included below and the full paper can be downloaded by clicking the button at the bottom of this post.


A significant part of the global carbon externality stems from the real estate sector. Environmental certification is often hailed as an effective means to resolve the information asymmetry that may prevent markets from effectively pricing the energy performance of buildings. This study analyzes the adoption and financial outcomes of environmentally certified commercial real estate over time. We document that nearly 40 percent of space in the 30 largest U.S. commercial real estate markets holds some kind of environmental certification in 2014, as compared to less than 5 percent in 2005. Tracking the rental growth of 26,212 office buildings, we measure the performance of environmentally certified real estate over time. We document that certified office buildings, on average, have slightly higher rental, occupancy and pricing levels, but do not outperform non-certified buildings in rental growth over the 2004-2013 period. Further performance attribution analysis indicates that local climate conditions, local energy prices and the extent of certification lead to significant heterogeneity in market pricing. On aggregate, these findings provide some evidence on the efficiency of the market in the adoption and capitalization of environmental characteristics in the commercial real estate market.

Energy Efficiency and Economic Value in Affordable Housing

One of my research papers has been accepted for publication in Energy Policy, this is joint work with Piet Eichholtz (Maastricht Univeristy) and Andrea Chegut (MIT):


Strong rental protection in the affordable housing market often prohibits landlords from charging rental premiums for energy-efficient dwellings. This may impede (re)development of energy efficient affordable housing. In the Netherlands, affordable housing institutions regularly sell dwellings from their housing stock to individual households. If they can sell energy efficient dwellings at a premium, this may stimulate investments in the environmental performance of homes.

We analyze the value effects of energy efficiency in the affordable housing market, by using a sample of 17,835 homes sold by Dutch affordable housing institutions in the period between 2008 and 2013. We use Energy Performance Certificates to determine the value of energy efficiency in these transactions. We document that dwellings with high energy efficiency sell for 2.0–6.3% more compared to otherwise similar dwellings with low energy efficiency. This implies a premium of some EUR 3,000 to EUR 9,700 for highly energy efficient affordable housing.

Full paper: Chegut, Eichholtz, Holtermans (2016)

The Economic Effects of Owner Distance and Local Property Management in U.S. Office Markets

One of my research papers has been accepted for publication in the Journal of Economic Geography, this is joint work with Piet Eichholtz (Maastricht University) and Erkan Yönder (Oyzegin University):


Using a large dataset of U.S. offices we analyse the relationship between investors' distance to their assets and the effective rent of these assets, and study the extent to which property managers can influence this relationship. We construct hedonic rent models to control for other known rent determinants. It turns out that proximity matters: holding everything else constant, investors located closely to their office buildings are able to extract significantly higher effective rents from these assets, especially if these buildings are of low quality. This effect is due to significant differences in occupancy levels. Interestingly, property managers can affect this relationship, mitigating the adverse effects of investor distance on effective office rents. Especially if the owner does not reside in the same state as the building, external property management is of importance, most prominently so for class-B office buildings.

Full paper: Eichholtz, Holtermans, and Yönder (2016)