Inefficient Buildings May Signal Default Risk on Commercial Mortgages

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Inefficient Buildings May Signal Default Risk on Commercial Mortgages

A study released by the University of California at Berkeley, and Lawrence Berkeley National Lab showed a correlation between poor energy efficiency in buildings and CMBS default risk.

If your eyes have already glazed over, (or if you think this is just an angle for us to smugly justify our work) here’s why it matters. In the uber capitalistic world of commercial real estate, metrics matter. Factors that increase default risk impact both lenders (2016 total CMBS issuance reached $68.8 billion, according to Trepp), as well as the secondary CMBS market. CMBS securities (particularly investment grade products) are popular with institutions like insurance companies and pension funds, who invest on behalf of individuals like us.

Using statistics from benchmarking ordinance data for Boston, Chicago, Minneapolis, New York, Philadelphia and Washington, D.C., the study evaluated the impact of actual energy use and prices on default performance of CMBS loans between 2000 and 2012. The study included seven case studies that illustrate how the findings of the study are applied to individual buildings.

Ancillary real estate functions like lending and appraisals have have traditionally been slow to incorporate energy efficiency into their evaluations. This study is part of a necessary trend towards equipping the entire market with data that demonstrates the impact of building performance on asset values.