Even in a tough economy, it makes sense to go green.
Property improvements for increased energy efficiency make financial sense. Real estate managers have realized energy efficiency improvements are a proactive approach to increase net operating income through 1) the reduction of energy-related expenses for gross leases or 2) the ability to collect higher rents for efficient spaces under net leases. While most real estate investors are not specifically targeting green buildings for their portfolios just yet, some are. And some favorable short-term market indicators and financial mechanisms will boost the number of savvy property owners implementing efficiency measures.
Although a large percentage of commercial and multifamily loans came due during 2012, anticipated market setbacks never materialized. In fact, the commercial real estate market saw increasing occupancy rates, property values and net operating incomes, and delinquency rates for all major classifications of lenders actually declined in the last quarter of 2012.
According to a Deloitte study on factors affecting the real estate market in 2013, new construction is still at record low levels so increases in occupancy rates are to be expected. Lodging, apartments, industrial, retail and offices are all enjoying decreased vacancy, which is beginning to drive growth in the office, industrial and retail sectors. The next two years appear to be relatively safe as the percentage of commercial loans that will be maturing is relatively low, and even when 10-year loans come due in 2015, multiple factors hold promise to stave off default.
To help building owners save money while riding out the shifting market tides, financial mechanisms are now available to make undertaking building energy improvements easier to swallow. One mechanism, Property Assessed Clean Energy (PACE), allows building owners to use voluntary property tax assessment to spread out the cost of improvements and acquire a reduced loan rate. The PACE financial incentive is available in many cities and counties across the country. PACE legislation has passed or is in process in 28 states. For example, in California, PACE financing is currently available in San Francisco, Sacramento and Los Angeles County. In Oregon, Multnomah County is piloting a PACE program.
We’ll continue this conversation, so look for our next installment on real estate trends.