Appraisers have been slower to recognize the value of energy efficiency and other green features that many owners, property managers and investors now factor into the inherent worth of a building. The gap in perception can complicate project financing, make asset managers wary of allocating funds for upgrades and/or effectively understate portfolio performance.
Adherents of sustainability’s positive economic spinoffs say it’s time to update the appraisal model so that high-performance attributes can be classified as revenue generators. Leading real estate industry players participating in a discussion at Greenbuild, the joint Canada-U.S. Green Building Council conference and exposition recently held in Toronto, suggest such a realignment of professional thinking could push a broader class of investors to embrace buildings with reduced environmental footprints and heightened quality of space for occupants.
“The proof from the institutional investment side is in the appraisal,” said Nicholas Stolatis, director, global sustainability and enterprise initiatives with the U.S.-based financial services provider, TIAA-CREF. “The sustainability piece hasn’t really made it into the evaluation. It has to be validated.”
Philip Payne, president and CEO of the major U.S. rental housing provider, Ginkgo Residential, was even more adamant in criticizing what he sees as financiers’ onerous requirements for proof of payback on energy conservation measures and other green projects.
“Nobody has ever once asked me what the return on investment is going to be on a granite countertop or a crown moulding,” he quipped. “Wall Street is totally missing the point in terms of (asking for) return on investment. It’s just wrong. It’s not the way we do any other calculation of value.”
Rents and retention
Nevertheless, it appears the market is already making the case that sustainability has its own intrinsic value. Green building proponents anticipate further evidence as more high-performance buildings are sold and less sophisticated buildings fail to compete.
“It’s hard to put an absolute number on it,” acknowledged Bob Ratliffe, executive vice-president with Bentall Kennedy LP, a prominent provider of development and management services in both Canada and the U.S. “I can’t say, ‘This building is going to sell for 35 per cent more because it’s LEED (Leadership in Energy and Environmental Design) gold.’ But we think we can show good rental increases we’re getting or tenants we’re getting because they have to be in a LEED building.”
Tenants with corporate responsibility and sustainability (CR&S) mandates and/or carbon footprint and emissions reduction targets have been an influential driver of the demand for greener office space. Many institutional investors carry the same obligations, which likewise get passed through to their real estate holdings – particularly given the real estate asset class as a whole is a significant contributor to greenhouse gas emissions.
In sync with profit motive
Panelists agreed sustainability would never be the sole or even the primary reason for an acquisition but it’s an important element of the business case. A green building could promise lower operating costs along with potential for higher rent income and superior tenant attraction/retention. Alternatively, a poorly performing building could offer room for value enhancement through energy retrofits and other improvements.
Bentall Kennedy assesses green and energy-efficient features as part of an acquisition checklist that also gives weight to traditional measures of value and performance. Meanwhile, when starting from scratch, the company sets a minimum benchmark for new development.
“We’re not going to build anything that’s not LEED silver or higher going forward. We think anything that doesn’t have those features is going to be obsolete,” said Ratliffe.
In contrast, Payne’s company, Ginkgo Residential, deals with a completely different tenant base and, he submitted, a different bias from his lenders. Although he endorses the philosophical three Ps – people, planet and profit – of responsible property investment, practical realities have tempered his approach.
“I can tell you not all the Ps are equal. The profit ‘P’ is the capital ‘P;’ the rest are small Ps,” he said. “They are not in sustainability for sustainability purposes. They are in it because I am convincing them it’s a way to get their returns.”
That said, he argues returns are easy to find in aging buildings that are “sucking energy at a level that is hard to comprehend” and upgrades can bring pass-through savings that significantly benefit the occupants.
Operation cost impacts
TIAA-CREF’s Stolatis similarly pooh-poohed the assumption that short-term holders of real estate won’t benefit from energy efficiency upgrades.
“Anyone who tries to flip, the expectation is that you are going to do something to enhance the value differential to make your profit. Sustainability is in that mix,” he said. “The people who say they don’t care about (energy costs) are not in the business. Asset management (and) ownership is always about running properties efficiently.”
Notably, TIAA-CREF has set a portfolio-wide target to reduce energy intensity by 15 per cent from the 2007 consumption level, and to reduce water consumption by 10 per cent by the end of 2013.
Bentall Kennedy reports a 35 per cent reduction in energy costs in older buildings that have achieved LEED EB:O&M (Existing Buildings: Operations and Maintenance) certification, and the company anticipates still more savings.
Barbara Carss is editor-in-chief of Canadian Property Management magazine.
