Green Buildings in Commercial Mortgage‐Backed Securities: The Effects of LEED and Energy Star Certification on Default Risk and Loan Terms

Abstract

We study the impact of green building on loans in the CMBS market. A hazard model shows green buildings carry 34% less default risk, all else equal. A matched‐sample analysis gives similar results. We attribute the effect to a loan‐to‐value channel, where risk is lowered by a green price premium. The benefit comes at least partly from the level of green achievement, not only the label itself. Loans on buildings that were green at loan origination have slightly better terms than loans on nongreen buildings. That difference is growing over time, but the effect is economically small compared to default risk.

How Do Lenders Price Energy Efficiency? Evidence From Personal Consumption Loans

“…We find a green discount in 2016, but not in 2015. This result is consistent with the notion that financial agents increasingly value environmental aspects, as recently substantiated by An and Pivo (2018) in the US market for commercial mortgages and Karpf and Mandel (2018) in the US market for municipal bonds. Regarding the price discrimination, we observe it in both 2015 and 2016, however, to a larger extent in 2016.…”

“…A wellfunctioning credit market should therefore offer lower interest rates for energy efficient projects (hereafter "green projects") than for projects devoid of that attribute but otherwise similar (hereafter "conventional projects"). This simple prediction has recently been proved valid in the US market for commercial mortgages by An and Pivo (2018). Using ex post data from a loan programme, the authors find that those buildings that were certified green at loan origination obtained slightly but statistically significantly better loan terms than did their conventional counterparts.…”

“…The data were retrieved every week, for two years, from loan simulators made available online by 15 institutions which cover the near totality of the French market. Our approach differs from that of An and Pivo (2018) in several respects. First, we consider a different market.…”

“…Second, and perhaps most importantly, our data are immune from sorting bias, as the online simulators which they originate from do not query any information about the prospective borrower's characteristics. We therefore avoid the selection issues faced by An and Pivo (2018). Third, these facilitating features come at the cost of handling ex ante, rather than ex post, data.…”

“…While most research into the issue has focused on behavioural factors on the demand side (Gillingham et al, 2009;Allcott and Greenstone, 2012;Gerarden et al, 2017), we focus on less-studied supply-side factors. Specifically, we add to the scarce literature on energy efficiency loans (Palmer et al, 2012;Kaza et al, 2014;An and Pivo, 2018) by emphasizing the interaction between the green attribute and other dimensions of the underlying asset. Given the high sensitivity of loan demand to loan terms (as estimated in credit cards by Gross andSouleles, 2002, andPonce et al, 2014), removing premia on interest rates could significantly increase investment in home energy retrofit.…”