Property Appraisals: ENERGY MATTERS!

In early May, I joined over 900 real estate, facilities, and sustainability professionals in attending the Department of Energy’s Better Buildings Alliance Summit to learn about the latest in high-performing and “green” buildings. One of the most interesting sessions was Show Me the Value: Appraising Green, where presenters discussed ways that sustainability and green buildings add value to real estate, and the key role that appraisers and property valuation professionals play in determining that value. It illustrated the rapidly changing landscape of the commercial real estate market, and the emerging importance of a key question, “Are green buildings more valuable?”

Higher property values are one of the most significant and compelling ways in which sustainability and energy efficiency can create value in real estate. It is widely understood that reducing energy consumption can lead to reduced costs, which in turn can increase net operating income (NOI) and facilitate higher asset values. But even far greater impacts can emerge through reduced risks, improved competitive positioning, higher rents, and greater tenant attraction and retention. As fiduciaries, it is our responsibility to understand, quantify, and act on this knowledge on behalf of our clients and investors.

Assessing the exact nature and scale of the “green premium” has proved challenging for the industry. But recent initiatives and research are seeking to bring greater clarity and insight to this issue, and provide new information, training, tools, and resources to enable a more informed assessment of the value of green buildings.

For example, last year the Appraisal Foundation (TAF) and their Appraisal Practices Board (APB) released advisories with voluntary competency guidelines for evaluating energy and building performance when estimating market value. Among other considerations, the advisories specify that appraisers should assess how a local market recognizes green certifications, should be able to review and understand energy modeling reports and projections, and how key sustainability nomenclature such as energy use intensity (EUI) and new property characteristics can describe and contribute to sustainability performance.

Further, the Appraisal Institute — the largest industry association in the appraisal industry — the Department of Energy (DOE), the U.S. Environmental Protection Agency (EPA) and many other groups are developing new resources meant to educate the marketplace, and cultivate better understanding of the impacts of energy efficiency, sustainability, and high-performance on asset values. Recently, the DOE and CoStar announced a partnership that will result in the first large-scale display of energy ratings and eventually property-level greenhouse gas emissions on real estate listings. Building on this momentum, the DOE has also partnered with Earth Advantage to develop and deliver Energy Matters! New Training for Commercial Building Valuation.

Within Principal Real Estate Investors, we are engaging with and monitoring these initiatives, as well as ensuring that our own internal team has the latest information and knowledge to guide our real estate decisions. We recognize that this is an emerging topic, and an important one for our investors and clients. After all, investment performance is directly related to a property’s value, and I am encouraged by these industry efforts to better understand and quantify this relationship. Through these initiatives and our work, we will continue to strive to be at the forefront of understanding – and capturing – the value of green buildings. Energy really does matter!


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