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A Speedometer for Sustainability Efforts in Buildings

Published: Jan 9, 2014 Blog Post

Achieving transformational change in how the commercial building sector uses energy requires improving both the way buildings are made and how we value the results. One effective way to make this transformation is to enhance the way we appraise buildings. In conjunction with the Appraisal Institute, IMT has co-authored a new guide to appraisal for commercial real estate owners and developers—Green Building and Property Value.

A companion to the 2012 guide written for practicing appraisers, this new, short handbook asks owners to work more closely with appraisers to include green and energy-efficient attributes in traditional appraisals.

The new guide asserts that today’s buildings are different—designed, marketed, and built to new standards—and that in response, building owners must also recalibrate their approach to traditional financial and due-diligence instruments. As in all things real estate, there’s money on the line. And without a nuanced approach to appraisal, owners will stand to pay for green features – required by better energy codes and voluntary green building standards like LEED – and not fully reap the benefits.

These value opportunities of green properties are grouped in four key areas roughly following a standard operating statement: revenue, operating expenses, occupancy premiums, and risk.

Revenue:

Multiple national studies show that green and high-performance buildings are commanding higher rents, as tenants seek to make sustainability commitments and attract the best employees.

Occupancy:

Green buildings are also showing occupancy premiums . If owners can demonstrate that their green buildings have higher stabilized occupancy rates, faster absorption, and shorter downtime between tenants, appraisers may be able to assign additional value.

Operating Expenses:

By design, high performance buildings should save money on utility bills and maintenance. At appraisal, these savings are magnified. For example, lowering energy use by 10 percent on a 100,000 square foot office paying $2.50 per square foot for energy every year can translate into $25,000 in net savings, or $313,000 in value at an 8 percent cap rate under the income capitalization approach to value.

Portfolio Risk:

Recognizing risks of holding a portfolio of “brown” buildings, owners are recognizing the value of green buildings. Green building value also can accrue from the risk-mitigating attributes of these buildings, as best-in-class buildings are future-proofed in anticipation of changing consumer tastes, laws, and energy prices. One major insurer currently offers discounts for green buildings.
 

From IMT’s perspective, recognizing the superior financial performance of green buildings creates an important feedback loop that encourages investment in high-performance buildings. In many ways, the appraisal process is analogous to a speedometer for building sector sustainability efforts, as owners will only invest so much capital until they see the value ‘needle’ moving.

By providing a real-time snapshot of market value, appraisals can provide owners with the confidence to make increasingly meaningful investments in green and efficiency measures in these buildings and throughout their portfolios.

To help integrate green features into the traditional appraisal process, the guide highlights the need for owners to work actively with both lenders and appraisers, providing them with background on the performance metrics and data that can be used to assign value.