How failed US climate legislation hurts commercial property investors

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“Absent very unlikely changes in federal law, this task will fall to fifty state legislatures, governors, and utility commissions,”

Yikes.

If you know any nationally-active real estate investor who’s leery of climate legislation, tell them that now -  even with climate legislation dead for 2010 - is definitely not the time to relax. Then pass along this story from Monday’s New York Times, laying out how the lack of a unified national climate and energy policy is only expected to make the US’s already feudalistic energy policy patchwork even more complex for building owners. After they read it, give them a Tylenol for their headache.

In a nutshell, US energy policy has always been driven regionally by ideology, state self-interests and political winds of the moment. In former times, readily available, cheap fossil fuel meant that buildings and businesses felt no impact. In current times, fragmented policies can make already costly energy more expensive because it will push the job of coordinating for the highest energy efficiency directly onto the real estate industry.

The Times doesn’t mention any detriment to commercial real estate by name, but you can figure with buildings being responsible for 76% of US electricity use, that these forces can be particularly brutal on a nationally-active investor with assets “in the wrong place at the wrong time”.

Not only does the current retreat from climate legislation point to sharpened regionalist state energy policies, experts fully expect those states with traction on renewables and energy efficiency, to march ahead with various regional carbon cap-and-trade regimes.

So, in addition to managing building efficiency without adequate public support in some regions, investors will have stay abreast of regional cap-and-trade programs that other states do belong to.

Real estate investors are must be vigilant in monitoring regional energy policy developments

Today, with national climate legislation off the table for 2010, the risks associated with the currently fragmented patchwork of energy policies are becoming even more fragmented against a more volatile national and global energy market. Commercial real estate investors need to remain vigilant over the evolution of regional energy policy within the areas where they are active to avoid ‘risk creep’ within their portfolios.

They should not rely on arguments such as “energy is cheap during a recession”, “energy futures are currently flat” or think of energy costs in historic terms. The Times story lays out how US regions have already set on very different paths to manage their energy needs, and the current regulatory, ideological and economic winds can provoke radically different policy responses in the different regions - which can mean differing cash flow results for the investors’ efforts.

The New DOT/HUD Partnership That Will Influence Your Green Investments

Uncle Sam is drilling down on the hidden costs of poor transportation options, high transportation costs and lack of access to affordable housing — which means that (sooner or later) real estate investors who want to stay relevant in their communities will be doing the same thing, if they haven’t started already.

Case in point:

The US Department of Transportation and US Department of Housing and Urban Development announced a new task force on community sustainability that will attack the interrelated problems of energy costs, transportation options and housing affordability.

We’ve posted before about the fact that most of us real estate professionals, despite being consumers ourselves, are not aware of the extent to which fuel prices, long commutes, lack of transportation options and lack of access to affordable housing erode the finances of tenants in our properties, their employees, not to mention community viability.

The announcement points out that the average working American family spends nearly 60 percent of its budget on housing and transportation costs.

And we posted awhile back about Ken Rosen’s comments on these topics:  US consumers have been “importing” higher inflation than domestic US levels. Low income individuals are particularly affected, paying 7%-10% inflation rates due to their exposure to fuel and food price increases combined.

Interesting is a snippet within the announcement, which deals directly with the “business case” argument for American families:

[The HUD/DOT task force will]…redefine affordability and make it transparent. The task force will develop Federal housing affordability measures that include housing, and transportation costs and other costs that affect location choices. Although transportation costs now approach or exceed housing costs for many working families, Federal definitions of housing affordability don’t recognize the strain of soaring transportation costs on homeowners and renters who live in areas isolated from work opportunities and transportation choices.

When we’re working with clients on their green investment strategies, we tell them to make sure they understand how project siting and design decisions affect the business case of tenants and other stakeholders. Even if the clients are not directly involved with HUD housing, the federal government’s influence (and stimulus funding) on these issues will help state and local governments highlight the same areas within their own jurisdictions.

So the task force’s scope, in so many words, becomes the new scope of real estate development when interacting with local officials. We think that the best way real estate investors can manage that enlarged scope is to make sure the interrelationship between transportation costs, access to housing affordability and community viability figure just as prominently in any sustainable project’s business case as their own.

Photo credit: Flickr/Cocoi-Urban Sprawl, Las Vegas

Finance Industry Spin or Denial on Sustainability?

I thought I’d share some of the latest that has made its way over to my inbox over the past  few days. Take a look and let me know what you think. Is it spin? Denial? Spinial?

The Mortgage Bankers Association on Green Lending: “We’re already underwriting green.”

MBA research director Jamie Woodwell put out an article in the March 2008 issue of Mortgage Banking, their trade magazine, titled “Class G–The New Class A” (sorry, folks, no link, it was sent to me from a subscriber). Within a piece that includes decent info on the greenwave hitting finance, begins a decent lead-in to the MBA’s take on green lending:

“For most lenders, green lending is simply a new shade of their traditional lending programs.

As with any request for financing, a lender approaches the financing of a green building by developing an underwriting of the property that takes into account property-specific income, expenses, property value and costs. The extra challenge in financing green buildings has been the degree to which the underwriting associated with a building’s green features differ from those of a standard building.

But the commercial/multifamily lending industry is accustomed to heterogeneity in the same properties it underwrites. No two properties have the same location, tenants, lease rolls, rents expense mix, purchase price and cap rate — think, for example, 1970’s New York office tower, 1980’s Sacramento, California, industrial park; and 1990’s Atlanta apartment building. The industry has become extremely adept at recognizing these differences through underwriting — a process in which a property’s unique circumstances are researched, assessed and factored in.”

And that leads to this:

“As a result, in most cases, the existing commercial/multifamily lending paradigm already takes into account a property’s green characteristics. When fully revealed, a full underwriting and appraisal discounted cash flow (DCF) takes into account, for example, that a green property’s initial cost may be higher, its rents  higher, its utility expenses lower, its lease rollovers shorter and its terminal value higher. The result is that economic costs and benefits inherent in a green building can be recognized in, and will generally flow through its underwriting.”

Green Journey Take: Two observations: 1) Green buildings in total make up only about 2% of the entire real estate market, and 2) the nationwide credit crunch has been going on for much of the time that sustainability has been getting traction within commercial real estate. There are lots of deals out there that are not getting done. Nevertheless, the MBA has already counted so many private sector green loans being underwritten, not to mention confirming the underwriting on those loans as being ‘green’, that it can publish “typical” underwriting standards.

At the time of this writing, two major industry coalitions, the Green Building Finance Consortium, and the Market Transformation to Sustainability, are still pushing hard for leading institutions, some of whom are named in the article as green lenders, to adopt a common set of underwriting protocols for sustainable real estate. Also note that there are some major lenders cooperating with these efforts — they’re just not quite ‘there’ yet. Real estate investors are filling conferences, looking for elusive ‘green finance’ packages.

But you can prove me wrong and educate all of us: How many commercial real estate loans have you done with your lender, where they’ve already given you economic underwriting credit for the green features on your investment property? Please share your comments here, as there are many in the industry who would like to know. Plus these pacesetters deserve to get credit where credit is due.

The Mortgage Reports: Even $150/Barrel Oil Doesn’t Matter — Consumers Will Keep Drivin’

I dig Dan Green. He gives some of the most consistently straight-up download on the residential finance market. And he’s big on the crunchy technicals, which is good. Regular Green Journey readers also know that I’ve got a “thing” about energy price risk’s negative effects on US real estate.  Actually, it is fair to say that quite a few of us in the real estate industry do. Now read Dan’s recent post about oil prices and consumers.

You make the call: Is Dan tellin’ it like it is or like it ain’t?  Are US consumers really going to keep up their current driving habits no matter how high gas prices rise?

Please tell us what you think.