Heard at the Fisher Center: Connecting Energy Price Risk with Real Estate Values

 

So I was at the Annual Fisher Center Real Estate Conference today, where the focus was “the state of real estate” from both an academic and practitioner point of view. The slant was residential, with high quality data and insights. A good bit of the perspectives  highlighted themes that are spurring the rise of interest in green development.

Robert Edelstein, Co-Chair of the Fisher Center, moderated a panel this morning on the state of the housing market. The panelists were James Saccacio of RealtyTrac, Bill Sumski of Paladin Pacific and Scott Ouellette of LandCap Partners. This question from the audience caught my attention:

“Do you think energy prices are impacting real estate values?”

Here’s a composite of the panelists’ responses:

“Yes, energy price risk has already been affecting consumers in significant ways. In the current wave of foreclosures, rising interest rates were the main reason that homeowners lost their homes.  Many people do not know the second reason - that the rising cost of gasoline and home energy also made the cost of homeownership too expensive, forcing people to give up their homes.”

“Energy prices are also forcing homeowners to reexamine the cost of their auto commutes. A panelist stated that he felt that homeowners are already starting to think that the tradeoff for a longer commute to be way less compelling.”

Ken Rosen, of Rosen Consulting, provided his usual in depth economic analysis of U.S. real estate. Some of his comments also drew a thick black connector line between energy price increases and the threat to consumer and business viability. Highlights of his comments:

“Oil price increases are like tax increases. With oil prices at $122/barrel today, this is a huge tax increase on the consumer.”

“A year ago (April 2007), oil was $62/barrel, so its cost to the consumer has basically doubled in the past 12 months. At the same time in 2002, it was $20/barrel, a little over 1/6th of today’s price.”

“Official ‘core’ U.S. inflation is being reported at just below 2% currently. However, U.S. consumers, via buying so many products from abroad, are ‘importing’ a real inflation rate of 4%-4-1/2% p.a.. Part of that rate includes energy price increases. So the actual impact of energy price increases on the U.S. consumer and businesses is far greater than what is being measured and reported via the “official” data sources.”

But wait, (sadly) there’s more:

“For low income individuals, the real inflation rate is 7%-10% p.a. due to their greater exposure to food and energy price increases combined.”

So yes, the opinions were that real estate, including its value, is being directly and indirectly affected by consumers and businesses paying more for energy. This whole discussion did not even touch upon the increased cost of energy consumption of the buildings themselves.

A central thesis behind high-performance building is that the way a building gets built and is operated can lower its risk and preserve its value. Today I heard energy price increases  being called a direct tax on consumers and businesses. So to the extent real estate investors are tolerating energy inefficiency within their control, then they are also accepting a tax on their own return and forcing it on their tenants and shareholders. And this type of cost has a direct impact on a building’s ability to maintain or grow in value.

A green building may not totally eliminate the “energy tax”, but the methodology goes a long way in helping owners and tenants get smarter about operating and managing their real estate in a way to minimize negative impacts on their cash flows and property value.