Capturing the Value of Green Buildings

October 6, 2014 | John Miller

Talk to any green building expert and he or she will tell you that high-performance buildings—those that save energy and water—can be built with modest or no increases in cost. And the list of benefits for doing so is long: lower utility bills for owners and tenants, healthier work environments, and a more valuable asset for owners (and investors), among other positives. So what’s stopping high-performance buildings from becoming the norm?

For those unfamiliar with this debate, stubborn barriers exist. In the commercial sector they include split incentives, short investor hold periods, a knowledge gap, and others—you can find out more about these barriers in the first chapter of IMT & MIT’s (yes, you read that correctly) Guide to Energy Efficiency Finance for Cities.

A key barrier in the residential sector is proper appraisal. An inherent part of real estate is internal valuation (as in, hands rubbed together eagerly: how much is my building worth?). Real estate appraisers are in a critical position to translate an owner’s hard work on green upgrades into hard currency and developers and owners need to work more conscientiously with appraisers to highlight the value of energy-efficient features.

IMT recently set out to address all of these barriers in the metropolitan Washington, D.C. market—and to understand which actions and players in its building sector are helping to create (and capture) the value of green buildings. We conducted extensive interviews with appraisers and related groups to understand where connections exist—and how various real estate professionals can assist in value creation related to green properties. Initial conversations focused on three groups: owners/developers, lenders, and appraisers—although this list then expanded to include contractors and private equity/investors. Here are some key takeaways from our interviews:

Owners and Developers are busy people, but are always hunting for new opportunities, so they are interested in high-performance buildings and valuation, particularly the idea of improving returns for assets under management—especially when this value can be wrung from improvements they’ve already made.

Appraisers are perhaps consistently the most interested group in the opportunity to analyze the green attributes of buildings, in particular because of the increased prevalence of buildings with high-performance attributes.

Lenders are also interested in green building technologies and the property value implications of high-performance buildings. However, considerations in underwriting for green buildings are, is in the words of one lender, “down the list” of priorities.

Investors vary in their interest in green properties. For investors who may want to stay in the asset long-term, energy efficiency may make more sense than someone with a shorter investment horizon. For example, an investor funding a higher-risk construction loan with a two-year turn-around may care less than a pension fund with publically-stated sustainability commitments.

Contractors are cautious of high-performance building features which deviate from tried-and-true practices. Conversations with multiple companies indicated they were wary of additional costs—and the potential learning curve. “That sounds expensive” one contractor said, while another explained, “I don’t want to pay my subcontractors to learn how to do this on the job.” Education for this group is crucial so that their pre-construction estimates (and bids) support best practices.

Taken as a whole, the work of all these professionals can have a major effect on creating value that will show up at the appraisal—and aligning the work of each group around the opportunity to build green is crucial to improving our national building stock. Looking across this ecosystem, a push to change business practices must come from building owners, who are in the biggest position to benefit—and who are writing checks to all of the other players—and appraisers, who have a chance to translate the work into value.

Future efforts at IMT will continue to focus on building the knowledge of all of the groups, and pointing them in the direction of creating value with high-performance buildings.

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John Miller

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