Study Links Commercial Mortgage Defaults and Energy Efficiency

Can a commercial property’s energy efficiency (or lack thereof) play a role in its loan default probability? According to a recent Department of Energy-funded study released by the University of California at Berkeley and Lawrence Berkeley National Laboratory, the answer is a qualified yes.

 

The study, which covered 2000 to 2012, examined the impact of actual energy use and prices in six metro areas—Boston, Chicago, Minneapolis, New York, Philadelphia and Washington, D.C.—on default performance of commercial mortgage-backed securities loans. In this analysis, the study concluded that building-level energy use and price were statistically and economically linked to commercial mortgage defaults, although the severity of the effect was more difficult to measure owing to limits in the type of debt being measured and the locations and varying types of property under examination.

 

“Commercial mortgages currently do not fully account for energy factors in underwriting, valuation and asset management, particularly as it relates to the impact of energy costs on net operating income,” said Dr. Paul Mathew, a Staff Scientist and Department Head of Whole Building Systems at Lawrence Berkeley National Laboratory. “As a consequence, energy efficiency is not properly valued and energy risks are not properly assessed and mitigated. Commercial mortgages are a large lever and could be a significant channel for scaling energy efficiency investments.”

---