It’s Not Easy Being Green. . . Or Is It? eing environmentally conscious is not just for the idealist anymore. Commercial real estate builders, developers, lenders and investors have woken up to the fact that “being green” can have a positive effect on profitability, marketability and value. A recent study conducted by McGraw Hill Construction1 shows an increase in the level of green construction and planning incorporated by builders of new multifamily projects from 2011 to 2013, with the trend projected to continue through 2018. The study predicts that by 2018 there will be a 30 percent increase in builders utilizing over 61 percent of the available technologies and materials to make their projects more sustainable or green. Exhibit 1 Involvement in Green Activity Over Time (Builders of New Multifamily Projects) In today’s market of compressed cap rates, every penny counts. Energy efficiency can lead to increases in profitability, values, marketability and stability. According to the Environmental Protection Agency (EPA), a 10 percent decrease in energy use can result in a 1.5 percent increase in net operating income for a multifamily property. This means that if a 400,000 square foot building pays $1 per square foot in energy costs, cutting its consumption by 10 percent adds $40,000 to NOI. Using a cap rate of 5percent, this translates to potential value boost of $800,000. In addition to increases in NOI from cost savings, firms building new multifamily projects have reported that a majority of tenants are willing to pay higher rents for green features. CRE Finance World Winter 2015 10 Exhibit 2 Additional Amount Customers Are Willing to Pay for Green (According to Firms Building New Multifamily Projects) Source: McGraw Hill Construction, 2014 Tenants prefer energy efficient windows, appliances and features that lead to stable and affordable utility bills. Having the ability to market your building as energy efficient is a competitive advantage that leads to consistently higher occupancy and a loyal tenant base. According to McGraw Hill Construction’s 2014 Survey1, 68 percent of renters report a willingness to pay some amount of premium for green features. Building a Standard Lenders and investors have developed and used many different methods of assessing green properties. They range from formal certifications such as the Leadership in Energy and Environmental Design (“LEED”) to in-house analysis and underwriting. Evaluation criteria usually encompass a range of categories such as: sustainability of building sites, water efficiency, construction/building materials, resource consumption, indoor environmental quality, recycling programs and design. Many of these models, however, set up complex and rigid requirements that may reduce focus on the overarching goal of energy conservation. In 1992, the EPA established ENERGY STAR to help businesses and individuals save money and protect the climate through superior energy efficiency. ENERGY STAR is best known as the little blue label that signifies energy-efficient products, like appliances and electronics. However, through ENERGY STAR, EPA also certifies top-performing residential, commercial, and industrial buildings. To support energy efficiency in existing buildings, the ENERGY STAR team developed Portfolio Manager, an online tool used to B Leena Amin Manager, Multi-Family Capital Markets Freddie Mac Mitch Resnick Vice President, Multi-Family Capital Markets Freddie Mac
CREFW-Winter Edition
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