Pending Seismic Rating System will Improve Commercial Property Reslience and Value

CRE Finance World, Winter 2013

Pending Seismic Rating System Will Improve Commercial Property Resilience and Value Principal Co-FounderEvan Reis, SEEric Von Berg, CMB Newmark Realty Capital, Inc. U.S. Resiliency Council H the effects of high winds and flooding was evident by that although they were built to surpass modern structural codereasons for this, including lack of awareness by owners and tenantswho are not provided with this information, and a perceived lackof importance relative to other value metrics. In downtown SanFrancisco, there are examples of new high-rise office buildingsurricane Sandy’s impact on the New York metropolitanarea is a sobering reminder of the potential destructiveforce of natural disasters. The need for commercial realestate developers and owners to plan for and mitigate the destruction left in Sandy’s wake. requirements, they are achieving only the same rents as a well- located, well-maintained building from the early 1970s. Building Commercial buildings are also susceptible to another type of codes have changed considerably since the 1970s, making major disaster — earthquakes. Earthquakes of magnitude 6.5 or greater leaps in building resilience by incorporating the knowledge learned have occurred in the U.S. in Alaska, California, South Carolina, from recent earthquakes. The new buildings may be equivalent to the Intermountain West, the Central U.S., and New England. today’s NHFTA five-star rated cars with side impact panels, front Earthquakes as large as magnitude 9 have occurred in the Pacific and side airbags, crumple zones and back-up video cameras. The Northwest. A 2003 Earthquake Engineering Research Institute 1970s high-rise might remain standing but may take more than a (EERI) report estimated that a single large earthquake in a major year to be made functional, and may even need to be torn down. U.S. urban area could result in economic losses between $100 This older building is the equivalent to the vilified Corvair or Pinto, billion and $200 billion.1 but not priced accordingly in rent or cap rate. The creation of the U.S. Resiliency Council comes at a time when “These ratings will likely affect Unlike in the U.S., the the federal government, through FEMA and the DHS is stressing rents and cap rates before the commercial leasing the need for long-term planning for resilient infrastructure, critical end of the 10-year projected market in Japan rewards facilities and communities. Engineers and government authorities holding period, used to make buildings that can promise have been working for many years toward the development of many commercial property business continuity better metrics to measurably improve the performance of buildings purchase and loan decisions.” after a major earthquake. subject to severe ground shaking. Basic seismic safety was achieved by the Building codes largely emphasize life safety, with little consideration upgrade to the Japanese buildings code in 1981, and validated by given to limiting economic losses. Furthermore, most current seismic the performance of Post-81/82 buildings in Sendai in the 2011 evaluation procedures focus on the performance of a building’s Great Eastern Japan Earthquake. With safety well addressed, structural elements. This can lead engineers to design primarily the Japanese commercial real estate market is focused on the to this one point of measurement, which may not optimize the business-continuity benefits provided by different “anti-seismic” building’s overall performance. For example, as described by Bob design technologies such as base isolation. Tenants and brokers McIntire, partner at the construction management firm Nova Partners: are aware of the various brands of seismic resilient features that “For some of the light-weight steel frame building designs we provide performance above code minimums. According to a recent reviewed for clients, the frame may be quite flexible. After a major Wall Street Journal article and figures from the real estate brokerage quake the frame may perform well, with minor damage, but the Miki Shoji Co, “Buildings in central Tokyo open for less than one occupants and contents will be thrown around violently and the year, which can offer the latest technology in earthquake protection, façade, ceilings, walls, and fire sprinkler piping are likely to be are now commanding average leasing rates that are 40% above damaged to a point that it might take six to twelve months to clear the level for older buildings.”3 out the soggy mess and rebuild the interior.” A seismic rating system that covers safety, repair costs and downtime The deficiencies with the current state of the PML process have gives the commercial real estate marketplace and lending community been well documented; significant concerns being that several the information needed to demand and reward resilient building methods do not use a sound technical basis, or are “gamed” to design. An educated and aware commercial real estate market over achieve a PML beneath the required threshold.2 Thus, the PML time will compensate owners for seismic improvements, which will process is not considered by many to be a reliable measurement eventually result in cities and states with better economic resiliency. of risk or of resilience, but rather little more than a necessary checkbox to be filled in on a lender’s due diligence form. The U.S. Resiliency Council® (USRC) was formed in 2011 as a 501(c)3 nonprofit organization to establish a rating and accreditation The consequence of these issues is that a building’s probable system for certifying the resiliency of buildings to natural and seismic performance is not reflected in its rents. There are several man-made hazards. The USRC will award Certification of Resilient A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 39


CRE Finance World, Winter 2013
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