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Investors fueling hike in green valuation

By Steve Schleider, MAI, LEED-AP BC+D, president,
Metropolitan Valuation Services

As a commercial real estate appraiser — and the only one in New York City with a LEED-AP — I have long been both a proponent of green real estate best practices and in the forefront of valuing green real estate, a complex and relatively new area of appraisal.

Steve Schleider

Steve Schleider

The appraiser’s job is to reflect the thoughts and actions of real estate investors who finance new construction, major renovation projects and property purchases in their analyses of what a building is worth.

Over the past year, we have seen a marked increase in commercial appraisal assignments where green technologies are noted with significance in the initial Request for (valuation work) Proposal stage – and with good reason. There aren’t any corporate citizenship advantages for not embracing sustainability.
And, as annual reports for publicly traded financial institutions are increasingly touting their green-friendly corporate leanings, it seems self-evident that banks do see an advantage with green properties as a growing percentage of their collateral.

Additionally, green property development tends to be regarded as a marketing advantage – with expected superior market acceptance viewed as mitigating some lease-up risk.
With the City moving smartly and swiftly with regard to sustainability initiatives, the challenge for appraisers is to keep pace with the rapidly changing (and improving) green landscape in order to understand both the why and how to value green and sustainable buildings for their lending and investor clients.
As one example of progress: development costs associated with green construction have come down, and appraisers are now seeing more architectural plans and concept drawings highlighting sustainable building materials and features.

In a few short years, the City’s PlaNYC initiatives have served to make the city’s buildings safer, healthier, more energy efficient and sustainable.
Energy efficiency – a significant bottom line item in commercial real estate valuation – was the focus of The Greener, Greater Buildings Plan including four Local Laws: 84 (energy benchmarking), 85 (meeting NYC Energy Conservation Codes), 87 (energy audits & retro-commissioning) and 88 (lighting upgrades and sub-metering).

The City Council has also been progressive. On the recommendation of the New York City Green Codes Task Force (GCTF) a group of experts from the design and real estate community tapped by the Urban Green Council to recommend changes and improvements to the City’s massive number of regulations including construction, electrical, building, mechanical and health codes, 51 of the 111 proposals made by the GCTF have been enacted.

The Green Codes Task Force has recommended changes ranging from energy and water consumption to landscaping and reducing toxicity. According to PlaNYC, the GCTF proposals are “the most comprehensive effort of any U.S. city government to green the codes and regulations that impact buildings.”

Among the GCTF proposals already enacted are those that address environmental protection in construction; streamlining approval for green technologies and projects; six that address building resiliency during floods and power outages; and the largest number focusing on energy efficiency, carbon emissions and health and toxicity.

As witnessed by the many changes in New York City’s laws, codes and sustainability incentives, progress has been constant and swift, requiring vigilance on the part of appraisers, lenders and investors.
As a firm, our banking, finance and investor clients have a good working understanding of the market advantages for positioning green properties and their operations and maintenance. Their originations and underwriting teams are experienced with green property lending.

The issues facing the appraisal community are documenting and illustrating the incremental revenue benefits, as well as supporting efficiencies in energy use and projects savings for those lenders looking to start and/or expand their book of lending for green properties if their origination team is new to this asset attribute.
The challenge for monetizing sustainability in portfolio collateral is writ large. However, support information is developing quickly as more longitudinal studies are published, especially on energy cost savings.

It is heartening that “doing the right thing” has progressed to doing the wise thing with regard to committing to and investing in sustainability, whether required by new laws and codes, or simply because green best practices have provided documented proof of cost savings.
Valued-added benefits that contribute to property value, making them more desirable with regard to financing and investment, is a driving force in real estate.
As I believe it is only a matter of time before lenders require that their due diligence underwriting consider financing risks associated with non-green assets, appraisers must diligently keep pace to accurately reflect the value of green properties.

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