IMT recently hosted a roundtable event to discuss new ideas and shared experiences about high-performance buildings and how they fit into the current real estate market in Washington, DC—a city that’s consistently listed at the top for green building and has been at the forefront in creating policies to encourage efficiency. The event was attended by local DC real estate stakeholders—including private equity representatives, appraisers, bank lenders, building managers, energy service companies, and government officials from the local and federal level.
In this blog post I’ll do my best to summarize a few of the big questions that were raised and key points that were made by attendees, whose identifies we agreed to keep anonymous. We kicked things off by asking everyone a simple question: Why do they think high-performance features have yet to become the standard in DC’s commercial real estate market?
One attendee said investors and major office and multifamily developers do not yet see high-performance features as cost-effective investments. Another representative mentioned that asset managers want building features that have a three- to five-year simple payback. This time frame cuts out many higher-performance features, even those that can save hundreds of thousands of dollars and that have internal rates of return higher than investment alternatives. Investors are more concerned right now with top line rental income growth than perceived smaller reductions in operating costs.
The ABC’s of Commercial Real Estate
High-performance features are the standard in the Class A central business district (CBD) market due to the tenant expectation of the highest-quality buildings, which are typically LEED or ENERGY STAR-certified. The Class B and C building markets have yet to fully embrace high-performance features simply due to the nature of the tenants: people who are looking for a functional and affordable building space. This tenant market does not seek to add long-term value to the building and is usually constrained to the low-hanging fruit like switching to LED lighting and basic operational solutions such as turning off the heat or air conditioning during off hours.
According to our participants, tenants are still typically willing to pay more for cosmetic upgrades than for guaranteed energy performance. Roundtable participants agreed that tenants like the idea of leasing in an efficient building, but amenities (such as Turkish Slate in the lobby) have added visual value and create the illusion of quality, despite adding no real performance value to the building.
How can we make efficiency a higher priority for tenants? One industry leader cited the successful branding of luxury cars and the consequential consumer demand, where high-performance products need to be successfully branded as luxury with everyday convenience applications such as more worker productivity and providing a healthier environment which will boost the building’s dollar value and rental income.
Another challenge is that the industry continues to struggle with valuing high-performance features. Appraisers, bank underwriters, and originators neither have the experience nor the qualifying education to properly asses how much value energy efficiency features add to a building’s total value. Roundtable participants suggested that education for bank lenders and appraisers must be more widely available if high-performance buildings are to become the industry standard. In cases where there are energy efficiency improvements, it is incumbent on the owner to provide the relevant information to the appraiser.
One representative group from the roundtable, building managers, sees first-hand the benefits of high-performance features every day . The building management firm that participated in our meeting credited high-performance features for keeping operating costs low by reducing call backs, cutting down maintenance costs from antiquated and inferior systems, helping to achieve a higher EPA ENERGY STAR score, and increased marketability that puts a spotlight on their successful building management for future business clients.
Key takeaways for what’s needed to increase energy efficiency in DC’s commercial real estate:
- Mass advocacy for tenants and tenant education in Class B and C building markets
- Better market branding for high-performance products
- Quantified data for appraisers, bank lenders, and investors in order to properly assess building value.
As IMT’s finance intern, Tyler played a key role in organizing this roundtable of local stakeholders to discuss high-performance commercial buildings. In addition to his work on green commercial appraisal and valuation, Tyler researched technical assistance providers for multifamily energy efficiency programs as well as national, regional, and local commercial lenders for a future IMT lender survey. He also assisted with DC’s benchmarking help center.