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Energy Efficiency’s Effect on Building Valuation

February 11, 2014 | 2 comments

Did you know that energy use is many times the largest single line item on an expense statement, according to Schneider Electric?

Because of its potential impact, reducing energy use not only helps lower operating expenses, but it can also increase commercial building valuation. As energy efficiency increases, so can a building’s asset value. By saving energy, net operating income increases (thanks to higher rents, improved occupancy rates, and lower operating expenses). According to the Institute of Building Efficiency, green buildings experience an average net operating income that’s 5.9% higher than a traditional building.

According to the U.S. Department of Energy (DOE), commercial buildings waste an average 30% of the energy being paid for. The latest figures, which were published in 2007, estimate that to be $60.7 billion. In an example from U.S. DOE, $60.7 billion of wasted energy expenses represent $750 billion in asset value at an 8% capitalization rate. In a 200,000-square-foot office building with energy costs of $2 per square foot, a 10% reduction translates to $40,000 in additional net operating income. With the 8% capitalization rate referenced earlier, that new net operating income becomes a building valuation increase of $500,000.

Another example of increased building valuation as a result of green upgrades: As part of the Better Building Case Competition, college students worked with Cassidy Turley to develop real-world energy-efficiency solutions for commercial buildings. As a case study, the team implemented energy upgrades on a 12-story, 300,000-square-foot facility built in New York City in 1963. These upgrades save up to 5,204 MMBtu per year (or $520,000 annually). Most of the upgrades also had a payback period of less than five years. The energy conservation measures, along with LEED certification, provided a projected 12% jump in building valuation for the owner. An increased valuation is part of why the building owners agreed to spend money on green upgrades; they looked beyond ROI and saw potential to increase their building’s asset value. Many simple energy-efficiency upgrades, such as window film installation, high-efficiency lighting, or low-flow plumbing fixtures, can offer this benefit.

If you’re facing an upcoming commercial property valuation, it can help to explain some of the benefits of a sustainable building to appraisers. Real Property Analytics says the field of appraising green buildings is still relatively new, and providing hard data to appraisers can prove helpful. It’s also important that appraisers understand which characteristics of green buildings accrue to the tenant vs. the building owner.

After making green upgrades, have you had your building’s asset value appraised? What were the results?


2 Comments


  1. derek clements-croome
    February 21, 2014

    This supports evidence from McGraw Hill Construction and also Jones Lang LaSalle. The other added value is that green sustainable buildings are in general healthier and productivity tends to be higher.


  2. Vista
    February 25, 2014

    Derek, thanks for your note. You are absolutely correct! We’ve done blogs less focused on how green affects building valuation and more about the added benefits. You can read them here and here.


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