DEGREE PROJECT M.Sc. REAL ESTATE AND CONSTRUCTION MANAGEMENT BUILDING AND REAL ESTATE ECONOMICS MASTER OF SCIENCE, 30 CREDITS, SECOND LEVEL STOCKHOLM, SWEDEN 2017

KEY CONSIDERATIONS WHEN SELECTING ENVIRONMENTAL RATING SYSTEM

DECISION-MAKING ANALYSIS FROM LANDLORD AND TENANT PERSPECTIVE

DZMITRY SAUCHYK

TECHNOLOGY

DEPARTMENT OF REAL ESTATE AND CONSTRUCTION MANAGEMENT

ROYAL INSTITUTE OF TECHNOLOGY

DEPARTMENT OF REAL ESTATE AND CONSTRUCTION MANAGEMENT

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Master of Science thesis

Title Key Considerations When Selecting Environmental

Rating System − Decision-Making Analysis from Landlord and Tenant Perspective

Author(s) Dzmitry Sauchyk

Department Department of Real Estate and Construction

Management

Master Thesis number TRITA-FOB-ByF-MASTER-2017:56

Archive number 514

Supervisor Björn Berggren

Keywords Sustainability measurement tools, Environmental Certification, Analytic hierarchy process, multi-criteria analysis

Abstract It is estimated that nearly 100 various environmental product certification rating tools are implemented in the United States construction and real estate industries. Choice of a certain building sustainability measurement tool depends on the specific need for reflection of buildings’ impact on the natural and urban environment as well as its tenants. Selection of the appropriate rating system is a decision-making process performed by the project client (landlord of the building, potential or current tenant) which can be affected by clients’ insufficient knowledge or otherwise be biased. The result of selection decision has significant consequences for the project design, construction process complexity and entire life-cycle of the building. In this work, an effort is made to facilitate decision-making process of best environmental rating alternative selection for a “green building” project. The analytic hierarchy process is used to perform unbiased decision making on the environmental rating selection. The decision process has been evaluated from the landlord and the tenant perspectives. The findings of this study show that for the landlord, it would be enough to be certified with a single-attribute rating that covers only one characteristic of building sustainability and, according to AHP analysis, satisfies all significant landlord’s requirements for the environmental rating system. The main conclusion of the study is that selection of environmental rating is a multicriteria problem that should take into consideration the requirements from landlord and tenant as well as the environmental ratings characteristics but not based on the distinct assessment of the mentioned factors.

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Acknowledgement

This Master Thesis is the final stage of my master program studies at the KTH Royal Institute of Technology in Stockholm.

I am very grateful to Björn Berggren for his insightful input, excellent supervision and mentoring as well as valuable feedback. The creative environment was maintained throughout the entire process of writing this paper.

I would like to thank my family and friends for their patience, support, and belief.

Thank you, Hanna, Roman, Roger and my “personal trainer” Pavel.

I wish to thank the Swedish Institute for their trust and financial support, without their help my study in Sweden would not be possible.

I am happy to have finally made it.

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Table of contents 1 Introduction ............................................................................................................................. 1  

1.1 Aim and purpose ............................................................................................................... 2  

1.2 Disposition ........................................................................................................................ 3  

2 Background ............................................................................................................................. 4  

2.1 Sustainability measurement tools ..................................................................................... 4  

2.1.1 LEED method overview ................................................................................................ 5  

2.1.2 BREEAM method overview .......................................................................................... 6  

2.1.3 Energy Star method overview ....................................................................................... 7  

2.2 Principles of prioritization in the environmental rating selection process ....................... 7  

2.2.1 Costs of green buildings ................................................................................................ 7  

2.2.2 Marketing and public relations rewards ........................................................................ 8  

2.2.3 Financial benefits of sustainable real estate .................................................................. 8  

2.2.4 Landlord and tenant relations ........................................................................................ 9  

2.2.5 Sustainability effect on tenants ...................................................................................... 9  

2.2.6 A new corporate organizational structure .................................................................... 10  

3 Methodology ......................................................................................................................... 11  

3.1 Overview of common methods in environmental rating selection ................................. 11  

3.2 Analytic hierarchy process ............................................................................................. 12  

3.3 Data collection ................................................................................................................ 15  

4 Selection of environmental rating using the AHP methodology ........................................... 16  

4.1.1 Hierarchical structural model ...................................................................................... 16  

4.2 Structuring the problem of rating selection as hierarchy ................................................ 16  

4.2.1 Criteria selection process ............................................................................................. 16  

4.2.2 Alternatives selection process ..................................................................................... 18  

4.3 Elicitation of pairwise comparisons ............................................................................... 18  

4.3.1 Comparative review of available empirical characteristics ......................................... 18  

4.3.2 Pairwise comparison judgments based on the comparative review ............................ 21  

4.4 Establishing of the global priorities of the alternatives .................................................. 25  

5 Multi-criteria decision analysis ............................................................................................. 26  

6 Conclusions ........................................................................................................................... 30  

6.1 AHP method as decision-making tool ............................................................................ 30  

6.2 Factors that influence decision making .......................................................................... 30  

6.3 The best alternative ......................................................................................................... 30  

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6.4 Implication of the study findings and recommendations for the industry ...................... 31  

6.5 Implication of the study for other countries ................................................................... 32  

7 References ............................................................................................................................. 33  

List of Figures Figure 1. Decomposition of the standard selection problem into a hierarchy .......................... 13  Figure 2. Landlord and tenant priority vectors ......................................................................... 26  Figure 3. Landlord’s and Tenant’s priority pyramids .............................................................. 27  Figure 4. Local priorities for environmental rating alternatives .............................................. 27  Figure 5. Alternatives global weight for landlord and tenant .................................................. 28  Figure 6. Cooperation model for environmental solution alternative selection ....................... 31  

List of tables Table 1. The fundamental scale (Saaty, 1987) ......................................................................... 13  Table 2. Global summary of Green Buildings cost studies (Dwaikat and Ali, 2016) .............. 18  Table 3. Characteristics of environmental ratings .................................................................... 21  Table 4. Pairwise comparison matrix for level 1 landlord (Dulaney and Bernstein, 2009; Cushman & Wakefeld Inc, 2013) ............................................................................................. 21  Table 5. Priority vector computation landlord ......................................................................... 22  Table 6. Pairwise comparison matrix for level 1 for tenant (Dulaney and Bernstein, 2009; Cushman & Wakefeld Inc, 2013) ............................................................................................. 22  Table 7.Priority vector computation for Tenant ....................................................................... 23  Table 8. Comparison matrices and local priorities for Cr.1 and Cr.2 ...................................... 23  Table 9. Comparison matrices and local priorities for Cr.3 and Cr.4 ...................................... 24  Table 10. Comparison matrices and local priorities for Cr.5 and Cr.6 .................................... 24  Table 11. Comparison matrices and local priorities for Cr.7 and Cr.8 .................................... 24  Table 12. Global priorities assessment matrix for landlord ..................................................... 25  Table 13. Global priorities assessment matrix for tenant ......................................................... 25  

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Nomenclature AHP Analytic hierarchy process BREEAM Building Research Establishment Environmental Assessment Method BSRIA The Building Services Research and Information Association C.I. Consistency index C.R. Criterion consistency ratio CBRE Coldwell Banker Real Estate Cr. Criterion DEES Designed to Earn the ENERGY STAR DOE Department of Energy ECA Enhanced Capital Allowance EPA Environmental Protection Agency ETL Energy Technology List GSA General Services Administration ISO International Standards Organization ITACA Istituto per l'innovazione e Trasparenza degli Appalti e la Compatibilità a

Ambientale LCC Life Cycle Cost LEED Leadership in Energy and Environmental Design MCDA Multiple-criteria decision analysis RICS Royal Institution of Chartered Surveyors U.S. The United States UK The United Kingdom USGBC United States Green Building Council WL Landlord priority vector

WT Tenant priority vector CSO Chief sustainability officer

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1 Introduction Sustainability measurement tools for construction and real estate industries are a growing phenomenon driven firstly by stakeholders demand to rate different aspects of building performance, and secondly by the requirements for results presentation in a certain format (AlWaer, Sibley and Lewis, 2008). Personalized results presentation becomes crucial for property valuation professionals, insurance companies, investors, and real estate management companies with the purpose to integrate obtained ratings into decision making and risks assessment processes (Lützkendorf and Lorenz, 2006).

Selection of environmental certification, standard or rating system is a very complex task for the business that has a triple-bottom line covering economic, environmental, and social aspects. It involves multiple conflicting criteria and is dependent on the decisions of stakeholders participating in the analysis and selection processes. It is often challenging for a specialist in a particular area to evaluate economic, social and environmental aspects of various assessment systems available on the market and choose the best standard based on the business requirements or predefined company strategy (Lützkendorf et al., 2012).

The decision to use sustainability measurement tools for the new development or major renovation project requires assessment framework that incorporates sustainability measures with traditional performance measurements such as main project performance parameters: financial and market measures, customer satisfaction, flexibility, productivity, quality, delivery and process time (Presley and Meade, 2010).

Environmental and sustainability compliance ratings become a part of the ordinary landlord-tenant lease agreement negotiation process in commercial real estate sectors: leisure, retail, office and industrial. There is, however, a number of obstacles to environmental rating implementation reported by the industry experts. The first obstacle relates to the substantial difference in rating systems and ratings’ levels provided. Another complication is associated with sharing of financial benefits from lower expenses linked to energy-efficiency and project costs allocations between the parties (Kremer and Nicholas, 2012).

Starting from 1980s construction industry in cooperation with real estate sector developed a set of methods aiming to mitigate the criticism of buildings design and materials toxicity, its impact on the environment, to reduce water and energy usage and to utilize buildings potential to minimize the impact on global warming. Currently, the former methods are represented as green building certification programs, standards, and rating systems. With the help of rating promises on the future sustainable building, functioning is converted from

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being estimations to real environmental benefits since the first green project was introduced.

There are many environmental standards available for potential investors on the market. The broad range of offered services struggles from the lack of options to evaluate the benefits, assess risks and returns, align the goals and objectives for project investors or potential tenants.

1.1 Aim and purpose This thesis is, therefore, an effort to facilitate decision-making process of best environmental certification rating alternative selection for a “green building” project. The study focuses on an alternative selection from the perspective of landlord and future tenants. In the scope of present thesis, analytic hierarchy process (AHP) methodology is applied to assess the decision making from both landlord and tenants perspectives. The results, obtained with AHP method, are analytically evaluated further in the thesis project. Based on the results of the present study the conclusions are made on the applicability of the AHP decision-making in the rating system selection for a “green building” project. Additional insights are obtained out of the comparison between the decision making from the client and the tenant perspective.

The main objective of the present thesis is to assess the applicability of AHP method, in the decision-making process of environmental certification rating selection. This study is limited to the three main environmental ratings available for the commercial real estate sector in the United States which are LEED, BREEAM and Energy Star. Reliable data is available to support decision-making process for a variety of representative environmental ratings. The focus of present thesis can be extended to other property types if relevant data can be acquired in respective sectors.

Primary Questions: • Which factors are considered by developers when choosing an environmental measurement solution for new development or major renovation project? What is the significance level of these factors in the decision-making analysis? • Which method can be used to simplify decision-making process of environmental measurement solution selection? • What is the best alternative for landlord and tenant among the LEED, BREEAM, and Energy Star environmental ratings?

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1.2 Disposition Following the Introduction, the rest of the thesis work is organized in 6 Chapters.

In Chapter 2, the background to the work is given: an introduction to the main literature sources relevant to the studied problem is provided; the main sustainability measurement ratings are introduced, and prioritization principles in the environmental certification rating selection process are discussed.

Chapter 3, describes the research methods used in the previous chapter, research methodology as well as the model applied in this thesis.

Chapter 4 is dedicated to the description of the model’s structure, chosen criteria as well as well as quantitative analysis using the AHP methodology. The computation process is done from landlord and tenant perspective. The chapter concludes with establishing of global priorities of the alternatives that are considered in the analysis.

Chapter 5 provides the empirical study of the results obtained in the previous Chapter with discussions of the findings. This Chapter describes the results of AHP analysis and demonstrates the differences between landlord and tenant perspectives.

The main conclusions of the work are stated in Chapter 6 which presents the findings of the study and provides answers to the primary questions of the research. The conclusion is supported by the model of possible implication for investors into environmental development.

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2 Background

This chapter gives a general overview of the environmental measurement tools available for construction as well as real estate industries and contains a discussion of the benefits of environmental assessment of the buildings.

Several topics on benchmarking the green buildings as opposed to conventional buildings, environmental certification standards differences, benefits and weaknesses of assessment methodologies, and performance issues are broadly discussed by academics and industry professionals in real estate sector. Market demand for relating sustainability with industrial and economic sectors explains the growth of environmental certifications, ratings, and standards. Based on the environmental ratings investors, facility managers, and real estate companies project their financial expectations from the future performance of the construction structure in a long run perspective up to 20 - 60 years forward.

Recent academic works on sustainability management in construction and real estate industry have been reviewed:

a) to understand measurement methods and their benefits, b) to study decision-making criteria taken into consideration by landlord and tenant’s

approach c) to assess the significance of these criteria for economic, social and environmental

aspects, d) to identify landlord’s and tenant’s sustainability improvement strategies and

prioritization principles for the occupied space.

2.1 Sustainability measurement tools Vierra (2016) recognized three major sustainability measurement instruments to control the entire life cycle of the buildings. These are green building standards, certificates, and rating systems that guide through the methods to reduce the impact of construction materials on the environment and improve the efficiency of energy and water resources consumption. The tools have different objectives and usage purposes with the general focus on materials, equipment and construction processes.

Green building standards are designed for common and repeated use such as building rules, municipalities and governmental organizations guidelines for sites, design and construction phases, operations or particular building characteristic. Most green building standards available on the market are either branded or locally developed regulatory standards which are different from the International Standards Organization (ISO).

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Green building certifications are focused on single or multi-scope building characteristics and used as a prerequisite for standards or rating systems assessment. Manuals and guidance documents for rating systems and standards have references to certain certificates and use them as criteria for a status award.

Green building rating systems have wider scope compared to standards or certificates and accumulate project parameters and building characteristics as an assessment object. The purpose of the rating systems is to evaluate project and building compliance or performance with particular environmental standard, target or requirement.

Leadership in Energy and Environmental Design (LEED), Building Research Establishment Environmental Assessment Method (BREEAM) and Energy Star are types of ratings that use quantitative valuation approach with the aim to provide explicit and measurable instructions for designers, architects, engineers, and appraisers. LEED and BREEAM are types of rating systems that have set of requirements which must be met to earn credits and be rated. Energy Star is a green building rating system which uses benchmarking method for recognition of collected building's energy and water consumption parameters on an annual basis. The results of case studies from major U.S. real estate companies show that buildings accompanying with LEED certificates and the Energy Star labels have higher occupancy levels, lease rates, and sales prices than non-green buildings.

2.1.1 LEED method overview The LEED is volunteering green building rating system developed in 2000 by the nonprofit organization the United States (U.S.) Green Building Council (USGBC). The rating consists of a set of minimum and maximum requirements for building design, and life cycle performance with the aim to decrease the impact on the U.S. regionally critical environmental categories defined by the U.S. Environmental Protection Agency (EPA). The rating is promoted for common usage worldwide but is criticized for lack of regional elasticity (Suzer, 2015).

Initially, LEED certification was designed to help reduce environmental impact and satisfy customers’ demand for an assessment tool of the social, economic and environmental performance of the entire project. Under LEED rating system, a building can accomplish environmental certificates on four levels (Certified, Silver, Gold or Platinum) depending on the number of credit points accumulated. Points allocated by appraisers are based on the technical documentation submitted to the USGBC for the project characteristics revision process. The current version of the certification LEED v4 was launched in November 2013, with the six following impact categories: location and transport, sustainable sites, water efficiency, energy and atmosphere, materials and resources, as well as indoor environmental quality. The LEED v4 is separated in five systems to fulfill different needs from construction and real estate sectors. These are building design and construction,

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interiors design and construction, building operations and maintenance, neighborhood development, building design, and construction: homes and midrise (USGBC, 2014).

LEED assessment method is based on the “to be built” approach for the project design documents submitted to USGBC at the moment of development project registration. The final certification level awarded after the project is completed and inspected (DeLisle, Grissom and Högberg, 2013). The ability to achieve project client requirements for rating level depends on the experience of a designer and a LEED associate specialist. Label level provides the capacity to compare certified facilities within LEED rating systems but does not support comparison with any other environmental ratings. Another disadvantage of LEED requirements framework is that it does not help with economic aspects estimates of environmental solutions. Instead, it assigns this part to the particular project that should determine what the most reasonable alternatives for the customer or tenant (Zimmerman and Kibert, 2007) are.

2.1.2 BREEAM method overview BREEAM was developed in the United Kingdom (UK) by the Building Research Establishment (BRE Global Ltd.). The method aggregates environmental standards for the construction industry, the best practices of sustainable design into the project development manual as well as an evaluation framework. BREEAM evaluates and measures characteristics of the building performance and its impact on the environment from the following perspectives: governance, social and economic well-being, resource and energy, land use and ecology, transport, as well as movement. The method is voluntary and is available for most types of facilities: courts, education, industrial, healthcare, offices, retail, prisons and multi-residential buildings. In 2009 International assessment method for commercial facilities was introduced. The international version of BREEAM is based on the same valuation methodology and categories as it is core version. The method could be implemented during design and development stages as well as for existing buildings. The facility can be certified by BREEAM after construction is carried out based on the building performance benchmarking against the technical requirements of the method. The assessor does not take part in the design and does not cooperate with the BREEAM design team. The method includes regional standards and country-specific schemes, has a clear grade-requirement system with the references to ISO and UK standards. The competitive advantage of the BREEAM assessment is a possibility to use domestic standards for an international project, performance measurement comparison to the national building rules. (BRE Global, 2016).

The one distinctive feature of BREEAM from other certification systems is a requirement of the Life Cycle Cost (LCC) analysis in management category. LCC analysis needs to be carried out during the early stages of planning and cover the following stages: construction, operation, maintenance and end of life evaluation. BREAM requires a 60 years analysis in

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real and discounted cash flows for potential improvements identification. Analysis has a reference to operational examination based on ISO standard for buildings life cycle cost planning. The idea is to identify the options with the lowest discounted LCC and apply them during the design stage. There are several areas of improvement proposed by BREEAM: energy consumption reduction, maintenance cost reduction, replacement intervals for infrastructure and highest facility recycling options. LCC has to be updated on the post construction stage based on the final design and attached to the BREEAM application together with the preliminary LCC analysis (BREGlobal, 2009). In addition to LCC analysis, BREEAM can illustrate cost efficiency in energy and water categories, which can be applied for energy consumption reduction during the more detailed technical design stage.

2.1.3 Energy Star method overview In 1995 EPA and Department of Energy (DOE) launched ENERGY STAR as a voluntary benchmarking program for energy use intensity of buildings and plants. ENERGY STAR system compares the energy consumption of the whole building against the similar structures. The building might be rated with Energy Star label if it is outperforming 75% of similar buildings in the country. There are no certification levels available under this method, but it offers two types of labels. “ENERGY STAR” label for buildings more than one year in operation and “Designed to Earn the ENERGY STAR” (DEES) for project design and construction phases as well as buildings less than one year in use (Reeder, 2010).

ENERGY STAR rating system is available only in the U.S. for the following building categories: banks, courthouses, dormitories, financial centers, hospitals, hotels, schools, medical offices, offices, churches, retail stores, supermarkets, and warehouses (Reeder, 2010).

2.2 Principles of prioritization in the environmental rating selection process

2.2.1 Costs of green buildings The costs of being sustainable and environmentally-friendly as well as the cost for design, certification, and construction are among the constant concerns raised by building owners and investors. Case studies show that expenditure on environmental certification increases development costs due to additional planning and equipment costs (Kats et al., 2003; Yudelson, 2008; Hwang and Tan, 2012).

The targets for new development and renovation projects are to reduce and optimize the main items of energy consumption and area of spending heating, lighting, and cooling. The number of case studies grows from year to year and shows a positive trend in reduction of

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energy consumption. Smart solutions, new technologies, and level of experience help to reach these goals.

2.2.2 Marketing and public relations rewards Corporate tenants working on sustainability aspects of their companies look upon the facility they occupy as being a part of corporate assets that should meet environmental requirements. From a marketing point of view, companies think that it is beneficial to use well-known labels as LEED and BREEAM (Yudelson, 2008). Analysis of the common assessment systems shows a high correlation of regional environmental concerns prioritization with the categories of the rating evaluation framework. This leads to the limited flexibility and possibility for localization of well-known labels in some areas of the world (Suzer, 2015). Nevertheless, international investors choose to use the globally recognized systems on multinational projects in combination with the national sustainability valuation schemes (Cole and Jose Valdebenito, 2013).

Advancement of a corporate image is another broadly promoted benefit of the environmentally certified facility that might profit both project’s parties: developer and tenant. Corporate tenants that work on sustainability aspects of their companies look on the facility they occupy as a part of corporate assets that should meet environmental requirements. Corporations declare number and levels of environmentally certified facilities in their portfolio in yearly reports to strengthen the company image. From marketing and public relations point of view, companies think that it is beneficial to use well-known labels such as LEED and BREEAM (Yudelson, 2008).

2.2.3 Financial benefits of sustainable real estate Third-party real estate industry advisors developed hypotheses of economic efficiency and financial benefits of sustainable properties. These hypotheses have been investigated by academics and have been tested by investors in the environmentally friendly real estate. The problem is a small number of sustainable projects when compared to traditional projects. There are several ways proposed to assess the economic efficiency of green buildings.

The general approach to show life-cycle, operational and maintenance costs reduction benefits is a comparative analysis of expenditures with ordinary technology implementation and expenditures with advanced/efficient solutions. Maintenance benefits assessment based on the time before equipment or technology will require changeover (Kats et al., 2003).

Wiley, Benefield and Johnson (2010) provide another set of broadly discussed benefits of environmental certification such as higher rental and occupancy rates on the example of LEED and Energy Star office buildings (Wiley, Benefield and Johnson, 2010).

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Tax deductions and government incentives for environmentally certified green facilities are applied mainly to the taxpayer or property owner. This incentive is primarily driving the investments in developing and owning green buildings but not expanded on the tenants (Kubba, 2010).

2.2.4 Landlord and tenant relations There are examples of cases when a landlord wants to be certified with the certain rating system or certain level that is different from tenant requirements or vice versa where the tenant has own needs for the standard or certification to be used for assessment. To avoid such conflicts industry specialists, recommend consulting with legal, construction and sustainability advisors at the beginning of lease agreement discussions on the environmental rating options for the area, building and cost implications.

Landlord and tenant might face numerous other potential obstacles when converting a building into the green facility when space is already leased. The design of lease agreement might potentially impact tenant’s facility usage behavior (responsible or irresponsible) and create complexity for the landlord to maintain the environmental rating.

The tenant might require evidence of the environmental, financial and social benefits for decisions on the project, potential costs of “green” operating and need to audit them. The landlord is also dependent on tenant responsibility for the sustainable operation to maintain the rating or certification (Kremer and Nicholas, 2012).

If the landlord would try to compensate investments in energy efficiency through rent increase the risk of lease agreement termination occurs in such case. To reconcile the landlord-tenant problem, it would require for the landlord to demonstrate the additional benefits of investments in sustainability features of the building to the tenant. (Greenough and Tosoratti, 2014)

In the case of a net lease of green property, a landlord shares a part of property taxes, insurance, and maintenance with the tenant. A problem of benefits sharing from investments made in sustainability, energy efficiency, and water usage reduction might occur between landlord and tenant (Nelson, 2008).

2.2.5 Sustainability effect on tenants Financial performance and turnover of the company depend on the employees’ productivity, satisfaction, as well as their health status and attendance rate (Huselid, 1995; Altomonte and Schiavon, 2013). Many building characteristics, included into green building design framework, have a direct effect on such aspects as interior planning, indoor temperature, ventilation, material quality and lightening.

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Investors in the indoor sustainability expect to retain current employees and attract new ones by the improvement of the company’s reputation in general. Analysis of the indoor environmental quality parameters done by Lee and Kim (2008) has shown a higher occupants’ satisfaction for LEED-certified commercial space because of thermal comfort and indoor air characteristics, quality of furnishings and interior design materials, as well as cleanliness and facility service. However, the study of Lee and Kim (2008) and the one conducted by Altomonte and Schiavon (2013), focused on the occupant satisfaction, did not show significant outperformance of LEED buildings over the non-LEED in such categories as enhanced zonal planning, lightening, and acoustic quality. These studies also highlighted that in many projects technical solutions for water and energy efficiency have a conflict with the indoor design. Accordingly, landlord should support collaboration between designers and engineers to avoid the negative effect on a tenant satisfaction.

2.2.6 A new corporate organizational structure Dulaney and Bernstein (2009) revealed that the enhancing of corporate social responsibility and integration of sustainability agenda into the corporate strategy has changed the traditional structure of business management. Consequently, a new role of Chief sustainability officer (CSO) has emerged in corporate organizational structure. Chief sustainability officer has an influence on various decisions made by the chief executive office and helps to follow the responsible and sustainable development as well as investment strategy.

The responsibility of CSO is to manage internal and external communications on sustainability compliance aspects, efficiency and innovation as well as to drive strategic initiative of the company towards the environmentally friendly business model. Therefore, it can be stated that the task of environmental rating system selection for real estate asset falls to the focus area of CSO. CSO is expected to be able to tackle the task from the triple-bottom-line perspective with respect to cost savings and financial benefits, carbon-dioxide emission, thus, contributing to sustainability and tenant’s satisfaction. To cover all the aspects of environmental labeling, it is necessary for CSO to have buy-in across all the functions within the organization.

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3 Methodology

This section describes the research methods used in the previous chapter, research methodology as well as the model applied in this thesis.

3.1 Overview of common methods in environmental rating selection Academic literature provides different approaches for benchmarking the environmental, social and economic benefits of green buildings with certain advantages and disadvantages. The most commonly used method for environmental rating system evaluation is a comparative review of similar rating systems. The comparative review includes assessment of rank awarding approaches, finding similarities in rating measurement categories and post-project performance of the building (AlWaer, Sibley and Lewis, 2008).

Due to the lack of empirical evidence, a few researchers attempted to measure the effect of environmental ratings on financial aspects of the real estate asset using quantitative methods. The majority of the studies are analyzing what should be the economic benefits rather than calculating the effects based on the observations. Fuerst and McAllister (2011) performed an empirical test using hedonic price model for the existence of a price and rent premium for LEED and Energy Star rated buildings that demonstrated the rental and price premium for certified findings. Their findings were in line with the majority of analytics papers published by industry specialists (Fuerst and McAllister, 2011).

A comparative analysis of the buildings evaluated with U.S. LEED and Italian ITACA ratings in Italian conditions does not show a significant difference in valuation technique. Both methods are developed based on the international standards, but a normalized rank of assessment plan shows the higher weight of site sustainability category with LEED approach, that makes one rating system more competitive over another one under different conditions. In other words, the same design of the building might achieve a different level of sustainability rank depending on where it will be located (Asdrubali et al., 2015).

The methods applied in the studies mentioned above mostly demonstrate premiums of one rating over another from a single viewpoint or using one criterion for analysis. The surveys and interviews of construction and real estate industries stakeholders are focused on the general topics of buildings sustainability.

As per Presley and Meade (2010), combining of sustainability rating’s performance parameters with traditional project performance parameters will benefit analysis of construction project and will provide the possibility for benchmarking.

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The conducted literature review provides that selection of environmental rating is a complex problem that does not have a unique optimal solution since it incorporates preference information into the decision-making process and is based on the unrelated or contradictory criteria. Thus, the problem can be solved with multiple-criteria decision analysis (MCDA). Analytical hierarchy process (AHP) is one of the commonly used methods for MCDA. The advantage of the AHP method is its capability to compare incommensurable factors in a rational and consistent way. AHP method is widely applied in operation management and strategic planning in both governmental and business sectors in situations when group decisions are required.

3.2 Analytic hierarchy process Analytic hierarchy process (AHP), as developed by Saaty (1987), is used in this study to solve a problem of environmental ratings’ selection for the building’s evaluation. AHP method helps to solve the problem of converting psychological events into numerical indexes that can be used for decision making over the wide range of the problems. AHP is applied to the decision making on the environmental standard selection and incorporates the following steps (Saaty, 1990):

• structuring of the problem as a hierarchy; • elicitation of pairwise comparison judgments; • establishing the composite (global) priorities of the alternatives.

In AHP, "participant satisfaction" is the main objective of decision-making (Saaty, 1987) In the present study, there are two participants to be satisfied with the result of the selection process: the landlord and the tenant.

Following AHP methodology, the problem of rating selection is structured as a hierarchy model. The goal of selecting the environmental rating is placed on the top level of the hierarchy, Figure 1. At the second level, there are eight criteria which are assessed to contribute to the goal. The third level of the hierarchy consists of three alternative standards which are evaluated by criteria on the second level.

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Figure 1. Decomposition of the standard selection problem into a hierarchy

The pairwise trade-offs between a set of environmental ratings’ criteria have been facilitated with the results of studies and surveys of potential investors, developers, and tenants on the post-occupancy performance of certified buildings. The pairwise comparisons of chosen environmental rating alternatives are made based on the analysis of ratings’ performance and characteristics, where knowledge is available.

The results of the surveys were ranked and converted into numerical values to elicit judgments on the relative importance of the environmental rating selection criteria on the overall goal of selecting best environmental rating. The fundamental scale, developed by Saaty (1987) and presented in Table 1, is used for criteria ranking in a range from 1 (beneficial) to 8 (extremely beneficial).

Table 1. The fundamental scale (Saaty, 1987)

Intensity of importance on an absolute scale

Definition Explanation

1 Beneficial Two activities contribute equally to the objective 3 Moderate importance of

one over another Experience and judgment strongly favor one activity over another

5 Essential or strong importance

Experience and judgment strongly favor one activity over another

7 Very strong importance The activity is strongly favored, and its dominance demonstrated in practice

9 Extremely beneficial The evidence favoring one activity over another is of the highest possible order of affirmation

2, 4, 6, 8 Intermediate values between the two adjacent judgments

When compromise is needed

Environmental rating selection

CriterionCr.1

CriterionCr.2

CriterionCr.3

CriterionCr.4

CriterionCr.5

CriterionCr.6

CriterionCr.7

CriterionCr.8

Rating 1 Rating 2 Rating 3

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The scale of the priorities (also known as weights) for the given criteria is derived. The weights vector wi can be generated for the matrix of judgments in Table 4 and Table 6 by normalizing the vector in each column of the matrix by dividing each entry in the column by the column total (Equation 1) and averaging over the rows of the resulting matrix (Equation 2). The calculation results are presented in Table 5 and Table 7.

(1)

(2)

The consistency of the pairwise comparison matrix needs to be checked in order to ensure the consistency of the input values for the analysis. The consistency check process follows the AHP methodology in detail described in (Saaty, 1987). First, the principal eigenvalue λmax is obtained from the Equation 3.

(3)

Solving Equation 3 λmax is obtained. Next, the consistency index C.I. is calculated using Equation 4.

(4)

Finally, the consistency ratio C.R. is calculated as a ratio of C.I. to the random consistency index R.I., which for the 8x8 matrix (n=8) is known to be 1.41 (Saaty, 1987). A similar process is applied to the pairwise comparison of the alternative ratings with respect to each of the analyzed criteria. A deep analysis of the three alternatives was performed to facilitate the judgments on ratings’ characteristics advantages. Commercial real estate development projects from the U.S. and UK were studied to gather characteristics of environmental rating alternatives. Main properties of the three alternative ratings are summarized in Table 3.

At the final stage, the global priorities of the alternative rating are calculated by summing up the results of the local priorities of the alternatives with the local priorities of the criteria, for the landlord (Table 12) and tenant (Table 13). As a result, the alternatives might be simply ranked based on the weight of pairwise criteria.

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3.3 Data collection Real estate companies and industry researchers regularly conduct qualitative interviews with engineers, surveyors, architects, developers, building owners, general contractors and project managers to gain insight into green building agenda and measure the influence of sustainability on the industry in the whole.

The data used in this study is collected from different sources and contains two groups of data: qualitative and quantitative measurements of construction, and real estate industries sustainability.

The main source of qualitative data is obtained from the research done by Dulaney and Bernstein (2009) focused on implementation of sustainability into the corporate’s strategy. The research has also supported the U.S. corporations on the topics of business benefits, motives for building green, companies’ strategies and market opportunities. The similar research was conducted later by Rebellius and Bernstein (2012). The survey showed more confidence in measuring the financial benefits as well as in metrics used for the calculations.

The secondary sources of qualitative data are surveys provided by Jones Lang LaSalle, CoreNet Global (2009) addressing the challenges of the sustainability implementation as well as willingness to pay premiums for environmental labeling, survey by RICS (2009a, 2009b, 2009c) on the primary drivers of sustainability for investors and tenants, as well as survey by Cushman & Wakefeld Inc ( 2013) on the landlord’s experience of managing real estate portfolios.

The results of data analysis are presented in Table 4. and Table 6. The quantitative data related to LEED, BREEAM, and Energy Star ratings’ characteristics is described in the chapter 4.3.1, and it was gathered from the literature review and the case studies analysis.

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4 Selection of environmental rating using the AHP methodology

This chapter is dedicated to the description of the model’s structure and chosen criteria as well as well as quantitative analysis using the AHP methodology. The computation process is done from landlord and tenant perspectives. The chapter concludes with establishing of global priorities of the alternatives that are considered in the analysis.

4.1.1 Hierarchical structural model To fulfill the aim of the current study, the AHP methodology presented in the previous chapter is applied in the current chapter. The problem of environmental rating selection for a commercial building is structured as a hierarchy and presented in Figure 1. The model consists of three levels with the overall goal of selection of the best environmental rating alternative on the first level. On the second level, there is a group of important criteria for the rating: low upfront costs, higher rental rates, lower operating costs, tax and government incentives, lower water and energy consumption, environmental benefits, employee productivity and health benefits, public relations and marketing. Lastly, the third level represents a group of alternative environmental certificates for commercial buildings: LEED, BREEAM, and Energy Star available on the US market.

The design of the model’s hierarchy is chosen based on the knowledge gained from the literature review, environmental system market research and the results of surveys on the matter of sustainability in the real estate and construction industries.

4.2 Structuring the problem of rating selection as hierarchy

4.2.1 Criteria selection process A set of criteria was selected based on the principle of mixed goals for the environmental ratings: social, economic and sustainability. At the same time chosen criterion represent aspects of different objectives and its importance for the landlord when he/she acts as a client of the environmental development project. The same set of criteria was pairwise compared from the perspective of the tenant to detect the difference in significance from the ones obtained from the landlord. These criteria are:

Low upfront costs, Cr.1 Per the surveys, to keep the upfront cost on the level of the non-green project is one of the main concerns for project’s clients and investors (Jones Lang LaSalle and CoreNet Global, 2009; Cushman & Wakefeld Inc, 2013). The increase of project cost has an impact on return on investment, rental and vacancy rates. On the other hand, increasing investments in

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sustainability increase possible benefits. Certified projects show different cost increase depending on chosen standards (Dwaikat and Ali, 2016).

Higher rental rates, Cr.2 Investors consider future cash flows from rental rates premium as an offset of the higher construction costs (Wiley, Benefield and Johnson, 2010). Apparently, the criteria are beneficial for landlord only and depend on the willingness to pay a premium for the sustainability by the tenant (Cushman & Wakefeld Inc, 2013).

Lower operating costs, Cr.3 Based on the design of the lease agreement there are at least three scenarios depending on how parties can benefit from lower operational expenses. Possible scenarios are the following: tenant obtains all cost benefits, both sides share benefits, and landlord keeps all benefits of savings related to investments in efficiency from green technology and sustainable building usage (Kremer and Nicholas, 2012).

Tax and government incentives, Cr.4 Tax and governmental incentives are communicated as benefits by the major rating systems, but investors in sustainability do not consider it as a significant element during decision making. This criterion is taken into consideration because it is necessary for rating systems benchmarking.

Lower water & energy consumption, Cr.5 Energy efficiency and lower water consumption criterion are ranked as top mentioned expected benefit by tenants due to the net operating savings and positive impact on the asset value (Cushman & Wakefeld Inc, 2013). The tenant’s responsible property operation is a key factor for the criterion to be beneficial and reimburse the investments in green technologies.

Environmental benefits, Cr.6 Improvements of environmental aspects of construction and the entire buildings life cycle management are the initial purposes of implementation of environmental certificates, rating systems, and standards. This criterion is included in the analysis to test its significance weight as opposed to business goals of the certification and contribute to the best alternative selection.

Employee productivity and health benefits, Cr.7 Applying green buildings standards in the design of high-performance work environment boosts employee productivity (Delmas and Pekovic, 2012) that is crucial for the successful

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performance of the company (Huselid, 1995). Improvements of indoor and surrounding environment minimize negative influence on physical and psychological health and lead to reductions in sick leave reported absenteeism. (Singh et al., 2010). Advancement of work environment becomes necessary for the tenants in the case when the cost of employees is higher than the budget for rent payments. (Kats et al., 2003; Chappell and Corps, 2009). The landlord might deprioritize the criterion due to the lack of evidence. However, it is a highly important element for the tenant.

Public relations and marketing, Cr.8 According to the survey of the largest corporations in the U.S., customer retention and attraction are ranked by corporate respondents in the United States as top expected benefits (Dulaney and Bernstein, 2009). This criterion is beneficial for both parties with a different significance level for the landlord and tenant depending on the type of the business and interaction model with the customers.

4.2.2 Alternatives selection process

LEED and Energy Star are the most popular environmental rating solutions in the U.S. among the corporate business and governmental organizations. BREEAM rating is a competitor to LEED rating in Europe and just recently entered the U.S. market of environmental solutions for the construction industry. Thus, the ratings were selected as alternatives for the landlord and the tenant available in the U.S.

4.3 Elicitation of pairwise comparisons

4.3.1 Comparative review of available empirical characteristics

Upfront cost of environmental certification

According to the summary of studies presented in Table 2, the differential cost between green and conventional buildings varies between -1 and 21 percent depending on the rating system, location and the level of the label (Dwaikat and Ali, 2016).

Table 2. Global summary of Green Buildings cost studies (Dwaikat and Ali, 2016) No. Green cost premium (%) Number of studies 1 Less than 0 2 2 Equals 0 5 3 More than 0 13 4 More than 5 8 5 More than 10 5 6 More than 20 2

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Several studies in the U.S. show on average 2 to 4 percent projects’ cost increase for buildings designed with LEED rating (Kats et al., 2003; CBRE, 2009). Commercial buildings designed under BREEAM requirements had costs uplift up to 10.1 percent for the outstanding level and 1 to 2 percent for the “very good” and “excellent level” (Buxton, 2011). The budget of the ENERGY STAR can vary widely from building to building, but it will be smaller compared to LEED and BREEAM ratings since it focuses only equipment for energy and water efficiency (Linda Reeder, 2010).

The effect of environmental certification on rental rates

Continues increase of tenants demand and limited offer on the property market drive upwards rental rates for environmental labeled real estate (Nelson, 2008; Nelson, Rakau and Dörrenberg, 2010). According to the CoStar report, tenants are willing to pay up to 35 percent rent premium for LEED, and up to 25 percent for Energy Star labeled properties (Burr, 2008; CoStar, 2014). Analysis of documented transactions with BREEAM labeled commercial properties in London shows up to 20 percent rent premium compare to the conventional buildings. (Chegut, Eichholtz and Kok, 2013). There is no yet much evidence available on the rental rates premium for BREEAM labeled buildings in the U.S. since the rating entered the U.S. market in 2016. This limitation is not considered as critical for the overall success of the study.

Operating costs

Performance analysis of occupied LEED buildings demonstrates up to 19 percent of savings on overall operations cost compared to typical buildings (Fowler et al., 2011). Meanwhile, energy bills of Energy Star labeled commercial buildings are on average 35 percent lower on a yearly basis compared to baseline buildings selected by EPA (Kats and Perlman, 2006). Analysis of the building’s operation performance integrated into the BREEAM assessment process for certification. According to the Building Services Research and Information Association (BSRIA) survey, BREEAM certification can decrease operating costs 11 percent on average (Parker, 2012).

Tax incentives and governmental benefits

In the U.S. Energy Star certified commercial buildings eligible for federal and local tax deductions to offset the costs of energy efficient equipment. Moreover, in some states property must be Energy Star certified to be leased to state agencies (Energy Star, 2017). LEED certification has a minimum energy performance requirement for 75 points of Energy Star rating, that automatically makes LEED certified facilities qualified for Energy

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Star tax incentives and government benefits in the U.S. There are no references on the tax incentives especially for BREEAM certified buildings in the UK, neither in the U.S. Nonetheless, the BREEAM design instructions for energy category contains a reference to equipment with tax incentive from Energy Technology List (ETL) by the UK government's Enhanced Capital Allowance (ECA).

Water and energy consumption

According to the post-occupancy study by Fowler et al.,(2011) about two-thirds of LEED and Energy Star certified buildings consume 11 percent less water compared to the General Services Administration (GSA) baseline. Per the same study, applying ratings’ energy savings solutions helps to reduce energy consumption by 25 percent for LEED and up to 35 percent for Energy Star methods. Design technique proposed by BREEAM improves energy and water efficiency up to 15 percent on average. (Soulti and Leonard, 2016)

Environmental benefits

The recent studies on carbon dioxide equivalent emissions from the certified buildings show up to 35 percent less emission for Energy Star buildings (Energy Star, 2017), up to 29 percent less for LEED labeled buildings (Fowler et al., 2011), and near 22 percent for BREEAM occupied commercial properties (Soulti and Leonard, 2016). The advantage of lower CO2 emission by Energy Star facilities is due to the less number of categories included in the impact assessment analysis and benchmarking.

Work environment and occupants’ satisfaction LEED and Energy Star case studies show that green buildings solutions for temperature control and ventilation improve overall workers’ productivity up to 11 percent, and up to 23 percent improved satisfaction from the interior design and lightening solutions (USGBC, 2013). LEED indoor environmental quality category weights comparison versus BREEAM health & wellbeing category shows the equal importance of these categories in design and certification process (Suzer, 2015). Therefore, we assume that both BREEAM and LEED equally impact employees’ productivity and overall satisfaction of the building. Conditioning and lightning are the primary focus for Energy Star rating, therefore, productivity, and tenant satisfaction improvements are not significant and fluctuate between 0 to 3 percent (USGBC, 2013)

Popularity and marketing

Energy Star is the most recognized label on the U.S. construction and real estate market with more than 25000 certified buildings and plants (Energy Star, 2017). BREEAM rating has about 25000 of certified commercial buildings in their portfolio with the majority of

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them located in the UK (BRE Global, 2016). LEED has about 32500 commercial buildings certified globally with half of which located outside of the U.S. (USGBC, 2014)

Collected data represents quantitative measurements of environmentally labeled buildings and it is structured in Table 3 for the local priorities of rating systems elicitation.

Table 3. Characteristics of environmental ratings

Ratings’ characteristics LEED BREEAM Energy Star

Project cost increase, up to % 21 10 5 Rental rates premium, up to % 35 20 24.5 Operating costs reduction, up to % 19 11 35 Tax and governmental incentives, rank 2 3 1 Water usage reduction, up to % 11 15 35 Energy consumption reduction, up to % 25 15 35 CO2 emission reduction, up to % 34 22 35 Productivity increase, up to % 11 11 - Worker satisfaction, rank 23 23 3 Public relations and marketing, rank 2 3 1

4.3.2 Pairwise comparison judgments based on the comparative review

To find the best alternative or a set of good alternatives for project client or potential tenant AHP method requires information on their preference. In this paper, preferences were taken from the set of available surveys on Green Building subject.(Dulaney and Bernstein, 2009; Jones Lang LaSalle and CoreNet Global, 2009; RICS, 2009a, 2009b, 2009c; Cushman & Wakefeld Inc, 2013).

As described in the previous paragraph environmental certification standards have different benefits. At first, landlord and tenant priorities vectors are established for the main criteria by comparing two relatively important criteria. This is considered to be more important with respect to the overall goal of landlord satisfaction. The results obtained from the computations based on the pairwise comparison matrix Table 4 are presented for the landlord in Table 5.

Table 4. Pairwise comparison matrix for level 1 landlord (Dulaney and Bernstein, 2009; Cushman & Wakefeld Inc, 2013) Criterion Cr.1 Cr.2 Cr.3 Cr.4 Cr.5 Cr.6 Cr.7 Cr.8 Low upfront cost, Cr.1 1.00 0.50 0.33 4.00 0.20 0.14 7.00 2.00

Higher rental rates, Cr.2 2.00 1.00 0.20 7.00 0.33 0.50 7.00 5.00

Lower operating costs, Cr.3 3.00 5.00 1.00 3.00 1.00 1.00 4.00 3.00

Tax incentives, Cr.4 0.25 0.14 0.33 1.00 0.14 0.20 2.00 1.00

Low water and energy consumption, Cr.5 5.00 3.00 1.00 7.00 1.00 1.00 7.00 5.00

Environmental benefits, Cr.6 7.00 2.00 1.00 5.00 1.00 1.00 5.00 7.00

Productivity and worker satisfaction, Cr.7 0.14 0.14 0.25 0.50 0.14 0.20 1.00 0.50

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Public relations and marketing, Cr.8 0.50 0.20 0.33 1.00 0.20 0.14 2.00 1.00

Landlord preferences matrix, presented in Table 4, is the result of the nontrivial comparison of Cr.1 vs. Cr.2...Cr.8, Cr.2 vs. Cr.1, Cr.3...Cr.8 and so on. In the position (1,6) criterion “Environmental benefits” have very strong importance (7 times, in accordance with the fundamental scale Table 1) for landlord over the criterion “’low upfront cost” with the reciprocal value 1/7 or 0.14. Each comparison has an answer on the question which criterion is more preferred for the landlord in the pair, using the fundamental scale values from Table 1.

Table 5. Priority vector computation landlord Criterion Cr.1 Cr.2 Cr.3 Cr.4 Cr.5 Cr.6 Cr.7 Cr.8 Priority

vector WL

Low upfront cost, Cr.1 0.05 0.04 0.07 0.14 0.05 0.03 0.20 0.08 8.4% Higher rental rates, Cr.2 0.11 0.08 0.04 0.25 0.08 0.12 0.20 0.20 13.6% Lower operating costs, Cr.3 0.16 0.42 0.22 0.11 0.25 0.24 0.11 0.12 20.4% Tax incentives, Cr.4 0.01 0.01 0.07 0.04 0.04 0.05 0.06 0.04 4.0% Low water and energy consumption, Cr.5 0.26 0.25 0.22 0.25 0.25 0.24 0.20 0.20 23.5% Environmental benefits, Cr.6 0.37 0.17 0.22 0.18 0.25 0.24 0.14 0.29 23.2% Productivity and worker satisfaction, Cr.7 0.01 0.01 0.06 0.02 0.04 0.05 0.03 0.02 2.8% Public relations and marketing, Cr.8 0.03 0.02 0.07 0.04 0.05 0.03 0.06 0.04 4.2%

λmax=8.047, C.I.=0.007, C.R.=0.5%

Table 5 is a normalized landlord preferences matrix computed using Saaty’s method to determine the maximal eigenvector. Consistency check shows that the evaluation of landlord preferences is consistent because of the C.R. for the comparison matrix is 0.5% which is less than 10%.

Table 6. Pairwise comparison matrix for level 1 for tenant (Dulaney and Bernstein, 2009; Cushman & Wakefeld Inc, 2013) Criterion Cr.1 Cr.2 Cr.3 Cr.4 Cr.5 Cr.6 Cr.7 Cr.8 Low upfront cost, Cr.1 1.00 3.00 1.00 3.00 1.00 0.20 0.11 0.25 Higher rental rates, Cr.2 0.33 1.00 0.14 0.33 0.20 0.11 0.11 0.20 Lower operating costs, Cr.3 1.00 7.00 1.00 1.00 1.00 0.50 0.20 0.33 Tax incentives, Cr.4 0.33 3.00 1.00 1.00 0.20 0.33 0.14 0.14 Low water and energy consumption, Cr.5 1.00 5.00 1.00 5.00 1.00 1.00 0.20 0.33 Environmental benefits, Cr.6 5.00 9.00 2.00 3.00 1.00 1.00 0.20 0.33 Productivity and worker satisfaction, Cr.7 9.00 9.00 5.00 7.00 5.00 5.00 1.00 3.00 Public relations and marketing, Cr.8 4.00 5.00 3.00 7.00 3.00 3.00 0.33 1.00

For the tenant, pairwise comparisons are made for the same matrix of judgments Table 6 with the purpose to compare weights of the relevant decision criteria. Each comparison has an answer on the question which criterion is more preferred for the tenant in the pair. The C.R. of tenant’s preferences is consistent since it is equal to 9.6% what is less than 10%.

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Table 7.Priority vector computation for Tenant Criterion Cr.1 Cr.2 Cr.3 Cr.4 Cr.5 Cr.6 Cr.7 Cr.8 Priority

vector WT

Low upfront Cost, Cr.1 0.05 0.07 0.07 0.11 0.08 0.02 0.05 0.04 6.1% Higher rental rates, Cr.2 0.02 0.02 0.01 0.01 0.02 0.01 0.05 0.04 2.1% Lower operating costs, Cr.3 0.05 0.17 0.07 0.04 0.08 0.04 0.09 0.06 7.4% Tax incentives, Cr.4 0.02 0.07 0.07 0.04 0.02 0.03 0.06 0.03 4.1% Low water and energy consumption, Cr.5 0.05 0.12 0.07 0.18 0.08 0.09 0.09 0.06 9.2% Environmental benefits, Cr.6 0.23 0.21 0.14 0.11 0.08 0.09 0.09 0.06 12.7% Productivity and worker satisfaction, Cr.7 0.42 0.21 0.35 0.26 0.40 0.45 0.44 0.54 38.3% Public relations and marketing, Cr.8 0.18 0.12 0.21 0.26 0.24 0.27 0.15 0.18 20.1%

λmax=8.945, C.I.=0.135, C.R.=9.6%

The outcome of pairwise comparison are numerically defined preferences of landlord and tenant for the ratings The resulting priority vectors (vector of relative weights) are landlord priority vector WL = (0.084, 0.136, 0.204, 0.040, 0.235, 0.232, 0.028, 0.042) and tenant priority vector WT = (0.061, 0.021, 0.074, 0.040, 0.040, 0.127, 0.383, 0.201). Criterion Cr.6, Cr.5, and Cr.2 are determined as three most important criteria by AHP in the rating selection process for the landlord, while for tenant the most important criteria are Cr.7, Cr.8, and Cr.6.

The next step of the AHP is to evaluate environmental rating alternatives with respect to the criteria presented in sub-chapter 4.2.1. LEED, BREEAM, and Energy Star ratings are evaluated separately from each criterion perspective, and their local priorities are presented in the Tables 8-11 below

Table 8. Comparison matrices and local priorities for Cr.1 and Cr.2 Cr.1 LEE

D BREEAM Energy

Star Priority vector

Cr.2 LEED

BREEAM Energy Star

Priority vector

LEED 1 3.00 0.20 19.3% LEED 1 5.00 3.00 64.8% BREEAM 0.33 1 0.14 8.3% BREEAM 0.20 1 0.50 12.2% Energy Star

5.00 7.00 1 72.4% Energy Star

0.33 2 1 23..0%

λmax=3.06, C.I.=0.00, C.R.=0.6% λmax=3.00, C.I.=0.02, C.R.=0%

Table 8 presents the results of the pairwise comparison of the alternative environmental certification which is standard for criteria Cr.1 and Cr.2. For instance, in respect to criterion Cr.1 (low upfront cost), Energy Star clearly superior to LEED and BREEAM ratings while LEED is superior to BREEAM and Energy Star in respect to Cr.2 (higher rental rates).

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Consequently, in the pairwise comparison between the analyzed ratings, and applying the fundamental scale of AHP method, Energy Star rating is assigned a relative importance value of 5 if compared to LEED rating, and relative importance value of 7, if compared to BREEAM. Similarly, with respect to the criterion Cr.2, LEED is assigned a relative importance value of 5, if compared to BREEAM rating, and a relative importance value of 3 when compared to Energy Star.

Table 9. Comparison matrices and local priorities for Cr.3 and Cr.4 Cr.3 LEE

D BREEAM Energy

Star Priority vector

Cr.4 LEED

BREEAM Energy Star

Priority vector

LEED 1 2.00 0.33 23.0% LEED 1 3.00 0.20 18.0% BREEAM 0.50 1 0.20 12.2% BREEAM 0.33 1 0.11 7.1% Energy Star

3.00 5.00 1 64.8% Energy Star

5.00 9.00 1 74.8%

λmax=3.004, C.I.=0.002, C.R.=0,3% λmax=3.029, C.I.=0.015, C.R.=3%

The rest of the pairwise comparison with respect to the assessed criteria Cr.3...8 in Table 9…Table 11 are performed similarly and in accordance with the AHP methodology. However, for the landlord, the weight of criteria Cr.1, Cr.4, Cr.7 as well as Cr.8 are insignificant and might be ignored. As for the tenant, Cr.1...Cr.5 might be ignored in the computation of level 2.

Table 10. Comparison matrices and local priorities for Cr.5 and Cr.6

Cr.5 LEED

BREEAM Energy Star

Priority vector

Cr.6 LEED

BREEAM Energy Star

Priority vector

LEED 1 3.00 0.20 18.8% LEED 1 1/3 1/9 7.0% BREEAM 0.33 1 0.14 8.1% BREEAM 3 1 1/6 16.6% Energy Star

5.00 7.00 1 73.1% Energy Star

9 6 1 76.4%

λmax=3.065, C.I.=0.00, C.R.=6.8 λmax =3.05, C.I.=0.03, C.R.=0.05

The C.R. for evaluation of environmental rating alternatives with respect to selected criteria is below 10% showing that the calculations are consistent.

Table 11. Comparison matrices and local priorities for Cr.7 and Cr.8 Cr.7 LEE

D BREEAM Energy

Star Priority vector

Cr.8 LEED

BREEAM Energy Star

Priority vector

LEED 1.00 1.00 7.00 48.7% LEED 1 1/3 1/9 7.0% BREEAM 1.00 1.00 5.00 43.5% BREEAM 3 1 1/6 16.6% Energy Star

0.14 0.20 1.00 7.8% Energy Star

9 6 1 76.4%

λmax=3.01, C.I.=0.006, C.R.=0.01 λmax=3.05, C.I.=0.03, C.R.=0.05

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4.4 Establishing of the global priorities of the alternatives The third step of AHP method is to create global priorities of the environmental ratings for the landlord and tenant. The global priority (desired) vector is calculated as the multiplication of priorities vectors WL and WT, disposed in a matrix with respect to Cr.1...8, by the local priority of the corresponding criterion.

Table 12. Global priorities assessment matrix for landlord Cr.1

(0.084) Cr.2 (0.136)

Cr.3 (0.204)

Cr.4 (0.040)

Cr.5 (0.235)

Cr.6 (0.232)

Cr.7 (0.028)

Cr.8 (0.042)

Global priority vector

LEED 0.193 0.648 0.230 0.180 0.187 0.444 0.487 0.643 34.6% BREEAM 0.083 0.122 0.122 0.071 0.098 0.084 0.435 0.074 10.9% Energy Star 0.724 0.230 0.648 0.748 0.715 0.472 0.078 0.283 54.5%

Table 13. Global priorities assessment matrix for tenant Cr.1

(0.061) Cr.2 (0.021)

Cr.3 (0.074)

Cr.4 (0.040)

Cr.5 (0.040)

Cr.6 (0.127)

Cr.7 (0.383)

Cr.8 (0.201)

Global priority vector

LEED 0.193 0.648 0.230 0.180 0.187 0.444 0.487 0.643 43.9% BREEAM 0.083 0.122 0.122 0.071 0.098 0.084 0.435 0.074 22.1% Energy Star 0.724 0.230 0.648 0.748 0.715 0.472 0.078 0.283 34.0%

Energy Star rating, that is the least diversified and focuses only on the energy and water efficiency of the building, has the largest priority for the landlord in Table 12, while for tenant Energy Star it has the second priority after LEED in Table 13. The results are unique to chosen ratings’ characteristics and potential customers surveys and are likely to be different when they are applied to other local and global priorities.

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5 Multi-criteria decision analysis

This chapter combines empirical study of gathered results in the previous chapter as well as discussions of the findings. This chapter describes the results of AHP analysis and demonstrates their difference for both landlord and tenant.

The environmental rating selection process has been assessed using the AHP method applied in the previous chapter. Table 5 and Table 7 show the detailed breakdown of the position of decision-making factors for landlord and tenant. As visible in Figure 2, only three factors are significant for the landlord in the final evaluation of the environmental rating while all the other criteria give very comparable results and do not have a major impact. As shown in Figure 2, these factors are “low water and energy consumption”, “environmental benefits”, and “lower operating costs” with the priority weight 23.5 percent, 23.2 percent and 20.4 percent respectively. For the tenant, selected factors are positioned in a different order than for landlord. The only close match is the factor of environmental benefits. As it is seen in Figure 2 the top two prioritized factors for the tenant are “productivity and worker satisfaction”, and “public relations and marketing” with the priority weights of 38.3 percent and 20.1 percent respectively. Variations of criterion ranking in the results for landlord and tenant indicate that the importance judgment process is seen differently depending on the point of view.

Figure 2. Landlord and tenant priority vectors

Project upfront cost increase due to certification and tax incentives are the least important factors for the landlord and tenant. The results, indicated by presented analysis, are not expected as per Dulaney and Bernstein (2009) and Cushman & Wakefeld (2013), an increase of initial project cost is the biggest obstacle for the growth of environmental measurement tools usage.

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Figure 3. Landlord’s and Tenant’s priority pyramids As shown on the landlord’s and tenant’s priority pyramids (Figure 3) the top priority criterion for the tenant is productivity and worker satisfaction, which has the lowest priority for the landlord in the environmental rating selection process. That indicates a conflict of strategies between the tenant and landlord for the ratings’ categories prioritization. Most probably the landlord will prioritize achievement points in the assessment categories related to energy and water savings while tenant would prioritize indoor environmental quality and social well-being.

Evaluation of environmental rating alternatives with respect to the chosen criteria has shown (Figure 4) that Energy Star Rating is the best alternative for 5 out of 8 criterion, LEED is the best alternative for 3 out of 8 criterion.

Figure 4. Local priorities for environmental rating alternatives

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Table 12 presents the results of the AHP analysis for the landlord and Table 13 presents the results for the tenant. Numerical data is presented graphically in the Figure 5. As for the landlord, an environmental rating of choice is Energy Star, even though LEED has received high judgmental values in important criterion Cr.2 “Higher rental rates”. The main reason why Energy Star has got an advantage over other environmental ratings is a combination of three rating’s characteristics: lower energy consumption, operation costs, and carbon dioxide emissions. However, the tenant would require other motives than energy and operational cost savings to pay higher rent for environmental rating.

When looking at the priority of the tenant with respect to the environmental rating alternatives the tenant prioritizes LEED, whereas Energy Star is the second choice, and BREEAM is the least prioritized. LEED would be the best alternative for the tenant due to the rating advantage in productivity and worker satisfaction, and public relations and marketing criterion.

BREEAM alternative is the less preferable option with 10.9 percent weight in the global priorities assessment matrix for the landlord and 22.1 percent in assessment matrix for the tenant. The reason of this is the low weight of alternative in the local priorities matrices (Table 8…Table 11).

Figure 5. Alternatives global weight for landlord and tenant

In addition to the qualitative results, the strength of the AHP method in relation to the goal of this study is that it provides a quantitative assessment of the environmental rating. The results in Table 12 show that for the landlord the best alternative Energy Star rating is 5 times preferable than BREEAM, and 1.55 times more than LEED alternative.

It can be seen, that the obtained comparison results are unbiased as they exclude personal subjective judgments and impression of landlord and tenant about environmental ratings. The results, indicated by presented analysis, are somewhat not expected if assessing the

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environmental ratings qualitatively by the similarity of the ratings’ assessment process or amount of valuation categories.

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6 Conclusions

This chapter presents the findings of the study and gives answers to the primary research questions of the research. The conclusion is supported with the model of possible implication for investors into environmental development.

6.1 AHP method as decision-making tool This study supports the previous research papers in the area of green buildings. It has been emphasised that the landlord, when considering environmental certification of the new development, or major renovation project, performs a feasibility study from the triple-bottom-line perspective that consists of financial analysis, social impact assessment, and environment consequences. Therefore, it can be stated that green building rating selection process falls into the area of multiple­criteria decision analysis which is a sub­discipline of operations research. As illustrated by the present study, AHP can be a feasible alternative to currently used tools. AHP helps to mitigate the problem of personal subjective judgments by combining conflicting and heterogeneous criteria. The outcome of AHP is a personalized best alternative based on the landlord’s and the tenant’s preferences for environmental rating and its characteristics.

6.2 Factors that influence decision making This study illustrated the cost of green buildings, financial benefits, marketing and public relations, tax incentives and environmental benefits as the main factors taken into consideration by investors when choosing between green and conventional buildings. Nevertheless, analytical hierarchy process shows that factors have different importance weight for decision makers and are different from potential tenant preferences for green buildings. The study revealed that the difference in preferences for environmental rating lead to the variance of the best alternatives for landlord and tenant.

Additionally, present thesis indicated that the differences in environmental ratings’ characteristics are necessary to include into the scope of the decision-making process by investors. It would be beneficial to use industry expert knowledge on the environmental assessment products available on the market. The expert view can help assess rating’s methods credibility and relevance to a certain project requirements.

6.3 The best alternative The outcome of the study is that it is appropriate to compare the features of the environmental certificates, standards, and ratings as opposed to the needs of the landlord

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and tenant instead of advantages or disadvantages of the precise method. Investment in the multi-attribute environmental rating systems such as LEED and BREEAM, rather than in single attribute Energy Star, is a great instrument to enhance landlord image as well as to keep or attract new tenants. This argument can be used for stakeholders to justify investment decision into the more costly option.

6.4 Implication of the study findings and recommendations for the industry The following recommendations can be given based on present research and analysis to avoid conflict of interest when applying for environmental rating. It will be rewarding for the landlord to define tenant preferences for the environmental ratings, think how “to sell” environmental features to the tenant, take into account part of the lease agreement on the way of sharing energy savings and operations costs benefits.

The findings of the thesis can be presented in the format of cooperation model, as shown in Figure 6.

Figure 6. Cooperation model for environmental solution alternative selection

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Sustainability officer of the investor’s team acts as a driver for environmental improvements of real estate portfolio and proposes options and strategies to the management. The management assesses the company’s possibilities and opportunities of environmental labeling and submits business requirements to the project management. In the case when the landlord has potential tenants for developing the project, it is worth to share plans for environmental labeling with them and get requirements and preferences for the labeling. The lease agreement should be pre-agreed at the same time to avoid any conflict between the landlord and the tenant after project completion. Using AHP method a project team can assess the importance of the management’s and the tenant’s requirements and prepare a specification of preferences for environmental labeling. In the case when the developer has no experience in environmental solutions available on the market, it would be useful to get support from an external consultancy on the alternatives available for the project.

Application of the proposed model can help the landlord to avoid conflict with tenant on the matter of sharing environmental benefits and cost of implementation. The model directs the landlord towards the optimal environmental product alternative from the cost, complexity and needs perspectives. The model provides the landlord with a chance to overcome the obstacles of environmental development and, as a result, a chance to reduce carbon dioxide emissions by the industry.

6.5 Implication of the study for other countries Decision-making framework presented in this study is universal and might be applied to any geography where empirical data for the rating alternatives is available. In Sweden, this approach is feasible to be applied for such alternatives as Miljöbyggnad (Sweden), LEED (U.S.) and BREEAM (UK). There are more than 400 projects certified with LEED rating and BREEAM in Sweden that can be empirically tested for the necessary characteristics by landlords and tenants to select the best alternative.

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