In my tenure with IMT (the Institute for Market Transformation), I have been surprised that owners of green and energy-efficient multifamily buildings have not insisted that the appraisals of their buildings reflect the value of their inherent benefits — lower operating expenses, faster absorption, lower vacancies, and even capitalization rates. For sophisticated owners, it is becoming a less relevant excuse to say that the appraiser just "didn't get it" or wasn't appropriately trained, since a number of green certified appraisers exist in most major cities.
Our conversations with owners and appraisers lead to a conclusion that owners aren't aware how to commence and conduct an appraisal process that values green attributes, such as NGBS Green certification. To address this gap, we teamed with The Appraisal Institute and consulted with industry experts to develop Green Building and Property Value: A Primer for Building Owners and Developers — a usable guide to approaching such engagements. The underlying premises are that the lender and owner must be involved in the process, the scope of work for the appraiser must explicitly include energy efficiency, and the owner must be able to document the technical and market benefits of the improvements.
This need is especially great as a result of innovations in new multifamily buildings. Today's newer buildings are becoming very different from their predecessors, with improved technical features, green amenities, and indoor air quality improvements that lead to better tenant health, satisfaction, and comfort. Existing building owners, particularly in gateway markets, are seeing the need to upgrade their buildings, and being able to justify greater value can provide the proceeds to pay for such improvements. Many cities also have or are contemplating building rating programs, which could further help identify and spur energy upgrades.
The potential valuation metrics of green properties are grouped in four key areas following a standard operating statement: Revenue; Operating Expenses; Occupancy Premiums; and Risk.
Multiple national studies have shown that green and high-performance commercial buildings are commanding higher rents as tenants seek to make sustainability commitments and attract the best employees. This trend is now being seen in multifamily developments. A recent study by Property and Portfolio Research (PPR), a subsidiary of CoStar, surveyed attributes for which renters are willing to pay a premium, and found that green certification was the second most important feature, second only to a CBD location.
Green office space is showing occupancy premiums, and I expect that multifamily buildings would show the same trend in the future. As evidence begins to accumulate, multifamily owners can also demonstrate to appraisers that their green buildings have higher stabilized occupancy rates, faster absorption, and shorter downtime between tenants, which can lead to additional value.
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 20,000 square foot of common space paying $2.50 per square foot for energy every year can translate into $5,000 in net savings, or $62,500 in value at an 8 percent cap rate under the income capitalization approach to value.
Recognizing risks of holding a portfolio of less efficient buildings, investors and owners are increasingly 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 better positioned to adapt to changing consumer tastes, laws, and energy prices. One major insurer also currently offers discounts for green buildings in recognition of their lowered risk profile.
From IMT’s perspective, recognizing the superior financial performance of green multifamily buildings creates market recognition that encourages further investment in high-performance buildings. In many ways, the appraisal process is analogous to a speedometer for building sector sustainability efforts, as most owners will only invest so much capital until they see the value "needle" moving.
In summary, banks—and appraisers—cannot maximize valuation for green and high-performance buildings without active engagement from the owner. Importantly, valuing a high-performing asset should mean an expanded scope of service in the appraisal that accounts for the complexity of high-performance buildings. 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.
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