A recent study has added a new value proposition for energy efficiency in commercial buildings: efficient buildings are less likely to default on their mortgages than their more energy-intensive peers.
The study by Lawrence Berkeley National Laboratory and the University of California, Berkeley, reviewed mortgage default rates and energy performance in six major metro areas from 2000 to 2012. It found that commercial buildings with higher energy consumption or higher energy costs had a higher default rate than more energy-efficient buildings. The study also found that the higher a building’s Energy Star score (i.e., the more energy efficient the building), the lower the likelihood that the building would default on its mortgage.
While the energy expenses for a building are typically up to 30 percent of its operating cost, energy intensity and cost have not historically been included in the building appraisal or pro forma. As a result, mortgage underwriters have not generally included this information in the underwriting process. With building energy data and benchmarking data becoming more and more available (25 of the largest U.S. cities and California all now require energy disclosure), it will be easier for appraisers and underwriters to include these data in their evaluation process.
If energy efficiency can be correlated to mortgage default rates, it could have a significant impact on energy disclosure and possibly even mortgage interest rates. Underwriters on new projects may consider requiring energy disclosure before issuing a new loan, or charging a higher interest rate (all else being equal) for energy-intensive properties. Mortgage companies looking to reduce their default risk may also look to engage their current portfolio in strategies to improve their energy efficiency.
An increasing number of cities across the United States are passing energy disclosure requirements for commercial buildings, requiring owners to share the energy consumption and energy use intensity (EUI) of their properties. Cities have been sharing these data with the public to help tenants make informed choices regarding the buildings they lease, and to encourage continuous improvement in energy efficiency across the commercial building sector.
Through its Greenprint Center for Building Performance, ULI has been working to drive energy benchmarking and energy efficiency for nearly a decade. Over the past seven years, Greenprint members have leveraged energy and water efficiency to reduce operating expenses by more than $30 million per year across more than 8,500 properties. Energy tracking, benchmarking, and a sharing of best practices in energy efficiency have been key components of the program’s success.
ULI has also partnered with the City Energy Project, a national initiative of the Natural Resources Defense Council and the Institute for Market Transformation to cut energy waste in large buildings and make American cities healthier and more prosperous through energy efficiency. More on the City Energy Project is available at www.cityenergyproject.org.