Real estate appraisal plays a key role in the commercial property market.  Because green building is constantly evolving, many appraisers do not keep up with the latest green building practices.  An appraisal manager who is an expert in green building can work together with a local appraiser for on-site inspection and basic modeling, to appraise a high-performance building.  An increase in building value of 2% to 4% can often be justified in the appraisal, compared to a conventional building in a similar market.  Further increases may be available based on years of actual utility bills, clear operations and maintenance (O&M) records, and actual rates for vacancy and lease value.

Most appraisers use a standard software model for multi-tenant investment properties.  The model uses a 10-year holding period for a new building, and a market value that is strictly based on direct benefits to the building owner.  There may be a dozen different variables in the model to optimize for green building.  For instance, the discounted cash flow is affected by the speed of lease-up, quality of the tenants, etc.  The stabilized vacancy assumptions may change, with green building certification as a market differentiator.  The rollover vacancy assumption and rate of subsequent lease-up may change, if existing tenants love the building or have a mandate for LEED-certified space, and can’t find any comparable empty space nearby.  Changing tenants is a significant expense: six months of lost rent plus tenant improvements can very easily cost more than a green retrofit.

The UC Berkeley working paper “Doing Well by Doing Good?:  Green Office Buildings” (2009) by Piet Eichholtz et al, studied the rental rates and selling prices of Energy Star and LEED-rated office buildings versus conventional control buildings, 10,000 buildings altogether.  Green rental rates were 3% higher, while “ceteris paribus” effective rents were 6% higher because of lower vacancy.  Actual selling prices were 16% higher.  While these numbers are averages, the market performance of a particular building is largely determined by its energy efficiency performance. According to the report, “one dollar saved in energy costs… yields roughly 18 dollars in the increased valuation of an Energy-Star certified building,” although the effect is smaller in prime locations where building values are already very high.

This data suggests that for a typical sales price of $120/SF, a green retrofit in an office building could increase the appraised value by $4/SF and the market selling price by $20/SF.  The revenue from the increased selling price would cover the cost of a reasonable green retrofit, and might or might not yield some profit.  Further profit could be generated by increased occupancy rates, and by a small increase in rent, for instance an increase of $1/SF, from $23/SF to $24/SF.

As Energy Star Portfolio Manager expands rapidly to more commercial buildings, especially in California and New York, more data will become available for studies like this of actual market value, in other sectors of commercial buildings.  Also, over time, the appraisal model may be updated to reflect more accurately the market values of high performance buildings.