Green Buildings: What’s the Difference?

There has been a lot of talk about green buildings these days. Articles, news releases, twitter feeds, all speaking to the popularity of this kind of structure, be it residential, industrial, or commercial. There have also been many published articles in which builders, brokers, and owners speak about appraisers “undervaluing” green properties. As we all know, appraisers don’t create the market, they reflect the actions of the market. But perhaps in the case of green buildings, both sides are correct: green building advocates don’t understand the appraisal process as well as they could, and appraisers don’t understand green buildings.

Green building is relatively new in many parts of the country, but it has been around for decades. Why the interest recently in it? There are several different reasons. First, rising energy costs have made green building more attractive, but as we will see, energy efficiency is only one aspect of green building. Increased awareness of the principles of sustainability is another reason. Also, governmental support of green building measures, from stormwater management codes to energy efficient appliance incentives, have helped move green building into the mainstream.

But just what is green building? One of the difficulties in understanding it is the lack of an all-encompassing definition. It can be considered though as a way of building that considers a structure’s entire life, from its design through its occupancy and deconstruction, that focuses on being resource efficient and healthy for its occupants.

Viewing a building through its entire life cycle is not a new idea, but it can lead to different choices in the way it is put together, and this is part of what separates green buildings. These choices tend to gravitate to the following areas, which can be referred to as the elements of green building: site, water, energy, materials, and indoor air quality. While these elements are not exclusive to green building, the way in which green buildings address them is different from conventional buildings. By understanding these elements and how they differentiate green buildings, appraisers cannot only understand them and value them accurately, but also participate in the growing conversation surrounding them.

This article will introduce some of the elements of green building and the ways in which they may relate to appraisal practice. This is a very large field, so the list is not exhaustive, but it does provide a place to start understanding green buildings.

Site

Overriding site concerns are the preservation of open space and habitat protection where possible. In addition, green site planning and development focuses on proximity to transportation and other linkages, access to sun and/or shade as the climate dictates, and placing the building on the site to take advantage of its resources, be they solar, water, or wind oriented.
Appraisal Practice: The traditional view of location applies here, in terms of access to amenities, but with additional emphasis on proximity to mass transportation, increased density, and greenspaces. This is because proximity to mass transit can lowers fuel and energy consumption during occupancy of the building and increased density can help protect open space.

Water

Water is a resource that is actively managed in many green buildings. Water that comes to the property from the local provider is conserved as much as possible inside and outside the building. Stormwater is all the water that falls on the site as precipitation. In some cases, stormwater is captured and retained for reuse, either inside or outside the building. Drought tolerant landscaping is also encouraged.

Appraisal Practice: In theory, water consumption and cost can be measured and thus quantified in most cases. Especially in arid portions of the country or areas with high sewage disposal costs, savings from reducing and reusing water in some cases can lead to operational savings.

Energy

Energy comes to most buildings in the form of natural gas or electricity. While it is only one of the elements of green building, it gets a lot of attention. This is because it is measurable, both in terms of consumption and cost, and because there are many incentives available for energy efficient materials, systems, and appliances. Unlike some of the other elements of green building, energy efficiency appears to be on the mind of buyers in some areas of the country.

Appraisal Practice: Like water, energy consumption is measurable, so if less energy is consumed by a property, that savings may be a benefit that accrues to the property. It is also a benefit that will keep paying forward throughout the life of that building or that particular energy efficient system or appliance.

Materials

Green building materials have become more mainstream in many areas of the country over the past several years. These materials again focus on resource efficiency: in their composition, like being made of recycled materials; in their production, such as being locally made or minimally processed; or in their use, meaning that they can lead to less energy consumption while in place in a building.
Appraisal Practice: Some green materials may be more durable than their conventional counterparts, leading to less maintenance over time. This can lead to lower operational costs and also perhaps to a longer physical life. The proper material to use, green or not, depends on the application.

Indoor Air Quality

IAQ has been getting a lot more attention lately, but it has always been an integral part of green building. Particularly with commercial and governmental buildings, landlords, tenants, and owners have become interested in the effects of good IAQ on workers. Studies are also looking into the effects on student performance in school buildings with superior IAQ.

Practice: If IAQ becomes measurable in some way, then its positive effects on occupants may enter into the appraisal process.

When integrated effectively, the elements of green building have been said to lead to several benefits: less harmful to the environment than conventional buildings, beneficial to society, and less costly during occupancy. But currently, not all of the benefits of green building appear to be quantifiable or to accrue to a particular property. Because of this, and because green building remains in its infancy in many areas of the country, in some cases it is difficult to determine market reaction to these buildings and to shape appraisal practice to address the differences between them and traditional buildings.

The emergence and development of green building though in many parts of the country has led to more attention being paid to it by appraisers than ever before. This in turn has led to some interesting appraisal practice questions that are worthy of keeping an eye on moving forward, including: How will mandates such as local code changes for energy efficient buildings be reflected in the market? How do incentives for green buildings affect builder costs, and how do appraisers reflect this in the appraisal process? What are the regional and local buying trends for green properties, and how do appraisers best access and analyze this information?

The key to answering these questions and arriving at reliable valuations for green properties lies in appraisers being able to first identify the salient differences between green and conventional buildings and how those differences relate to possible benefits. As is the case with any other appraisal problem, this requires the appraiser to fully understand the particular issues related to the problem and the local market reaction to those issues.

It is an exciting time to be interested in green buildings. Their benefits are leading to changes in buyer attitudes in many areas as well as legislation and code changes around green building issues. It is likely that because of this that green building will take an ever larger share of the construction market moving forward. It is thus incumbent upon appraisers to follow this trend, how it affects the areas in which they practice, and to gain competence in appraising these complex properties.

Is Smaller Better?

To begin with, some numbers: the average floor area for homes in 1950 was 1,000 square feet. In 1970 it was 1,500 square feet, and in 2000 it was 2,200 square feet. At the same time the average people per household in America dropped from 3.37 people in 1950 to 2.62 people in 2000. Our home sizes were growing while our families were shrinking¹. But as USA Today reports, in 2009, the average square footage of single-family homes under construction fell dramatically, from 2,629 in the second quarter to 2,343 in the fourth quarter, Census data show.

To what can we attribute this 11% drop? Obviously, the economic downturn is responsible for the majority, if not all of this decline. Though there may be some profit in the land and its development, modern residential builders primarily make money off of the improvements. And in residential new construction lending, the site to improvement ratio needs to be such that the lender is putting forth the majority of the money in the improvements. Thus, in an appreciating market the increased value or price of the land leads to a commensurate rise in the value, price, or cost of the improvements, which leads to larger homes. In our current depreciating markets, not only can buyers afford less, as land prices and values decline, then what a builder needs to put into the improvements can also come down, leading to smaller homes.

From the perspective of sustainability, according to a report by the Oregon DEQ on life-cycle costs, building a smaller home is the single most impactful decision a builder can make on a project. So while the current economy is the driver for the first shrinking of average home size in decades, it may be that the current growth in market for green homes could keep downward pressure on this trend. Look for more information on home sizes, green market trends, and construction methods in upcoming posts.

ADU: The Accessory Dwelling Unit - What to do?

Residential appraisers are sometimes confronted with an unusual property due to its having an Accessory Dwelling Unit (ADU). They go by different names, such as a mother-in-law apartment or granny flat, but ADUs all share similar characteristics. Namely, they each are an independent unit on an existing single-family site. ADUs can be attached or detached, and as an article in the most recent Realtor magazine states, "they're a way for people to help cover their mortgage in a hard market." The entirety of the article can be viewed here: http://www.realtor.org/rmohome_and_design/Articles/2010/1002_home_profitablehome

More than just the tough economic times are pushing the development of ADUs. Higher-density zoning in many areas can make the addition of an ADU more attractive, but the retiring of the baby boom generation is increasing the need for homes that meet the needs of many current homeowners that want to downsize. An ADU not only can meet the need of a family with no children at home, it can also allow grandparents to live near, but not in the same home with, their children and grandchildren.

Though there are some obvious benefits of ADUs in the residential market, how is an appraiser to handle them when appraising one? In many cases, the subject ADU will may be the only one in the area, and in a time of limited market activity, this problem may be intensified. The cost approach may not a be a good indicator of value either, as the land is shared with the main residence. However, a legal ADU would likely have income producing potential. If this is the case, then the income approach to value may be the best indicator of market value for these kinds of properties.

Greensight Value is currently engaged in a study of ADUs using the income approach to value in an attempt to measure the income value of representative ADUs. Please stay tuned for updates on the results and publication dates of the study.

Greenbuild 2009

Phoenix, AZ - 11/12/2009

Greenbuild, hosted by the United States Green Building Council, is the world's largest green building conference. This year, there are approximately 25,000 attendees from all continents of the globe. Historically, green building has focused more on commercial construction, but for the second year there is a Residential Summit, which is a conference within the larger conference that focuses on residential building. While most of the several hundred educational sessions and panel discussions have to do with issues relating to the LEED (Leadership in Energy and Environmental Design) building standards that USGBC developed, there have been some discussion of ideas of importance to green residential valuation.

The Residential Summit's opening panel featured a CFO of a Real Estate Investment Trust, the President of Shea Homes (a large corporate builder), Tedd Benson (a custom builder), and was moderated by Dave Thomas, the host of Renovation Nation. The converstion turned continually to the current lack of adequate financing mechanisms for green homes. As was explained, at times, building green or efficient homes is more costly than building the same home to code standards. This additional cost is spent on the more efficient home envelope and HVAC systems, but as many builders state, these costs are in many cases offset through reductions in the cost of finishes or other components of the home so that the home has a competitive budget. One of the obvious advantages to an efficient home are the lower utility bills that the home will generate over its lifetime. However, these lower costs are not a part of the current valuation of homes in many cases. Further, current mortgage underwriting practice does not figure the lower operations cost into a mortgage arrangement with a borrower (outside the currently underutilized Energy Efficient Mortgage products currently on the market). This leaves the borrower of homebuyer incurring these costs in the home with no recognition of the value of these costs, even though lower energy use is good for the homeowner, is good for the utilities supplying the energy, and in many cases is a community good.

All panelists recommended that citizens put pressure on their governmental leaders as well as the heads of of HUD, Fannie Mae, and Freddie Mac to reorder mortgage underwriting standards on this different type of housing stock that reflects its value in these areas. When asked a specific question on the role of real estate appraisers in this picture, the President of Shea Homes remarked, "we have to take the time to educate the appraiser," because in many cases, appraisers do not understand the contruction techniques and systems used in these homes that builders, brokers, and buyers recognize as valuable. The panelists then called on the National Association of Realtors to lend their considerable influence to this effort. The NAR national conference begins tomorrow, 11//13, in San Diego, and Greensight Value will be there as part of a panel on green appraisal, helping to make this connection.

Rethink appraisal with us at Greensight Value. Read the most current data available on green building and valuation, and follow the most recent developments in the field. Our next update will be from the NAR conference.

‘Green’ construction is the fastest growing sector in the industry

The annual U.S. market in green building products and services was more than $7 billion in 2005, $12 billion in 2007 and is projected to increase to $60 billion by 2010. While green construction remains a niche, it is growing rapidly in spite of the 2007 downturn.

The growth of the green construction industry and the momentum behind it cannot be ignored. Green, energy efficient construction will likely become the norm for residential construction in the future, and this growth and how it will affect us is the primary reason that we are here in this class. What has been happening on the ground in residential construction has quickly outpaced the appraisal and financing industries' understanding of this newer housing type.

Builders state that buyers are coming to them with interest in green building, and that they are producing homes that respond to that interest. Market demand is growing, and additional pressure to build green is coming to bear on the construction industry from other sources. Many governments--federal, state, regional and local--are mandating that all new buildings meet energy efficiency standards. Current legislation in the Congress, such as House Bill 2336, looks to fundamentally alter the way lenders and appraisers view green homes, mandating that appraisers apply special valuation techniques to appraisals of green homes.

Builder, trade, and business groups are promulgating green building programs, and state and local building codes are becoming more rigorous on energy efficiency standards and renewable materials selection. All of these factors are pushing green construction ahead, and the appraisal and finance end of the real estate industry is lagging behind.

The Certified Residential Green Appraiser™ certification path is designed to cultivate your knowledge of green building, give you all of the most recent cost and value data, and enable you to competently complete an appraisal assignment on a green home. Upon becoming certified, you will be an expert in your area, far ahead of the competition, and ready to meet the new challenges in the field.

Passivhaus (Passive House)

An interesting development in residential green construction in the Pacific Northwest is the advent of Passivhaus design. Originally developed in Darmstadt, Germany beginning in 1991, Passivhaus (pronounced "passive house") design does not include a central heating system. How does a home stay warm in a colder climate than we have in the Pacific Northwest? With lots of insulation and no air infiltration. That means a passive house can be warmed not only by the sun, but also by the heat from appliances and even from occupants’ bodies.
Passivhaus design has recently come to the Pacific Northwest in earnest through a series of trainings this past summer. There are currently several designs on the drawing board in local architects' studios, and one has broken ground in Hood River. Stay tuned to Greensight Value for updates.

What's the price of green construction?

Because I am an appraiser focused on green construction, this question, or a version of it, is asked of me almost every day. Though the question appears simple, to an appraiser is it fraught with implications. First, what does the questioner mean by "price?" Price is the amount asked for something, and also the final amount paid for that thing once it has sold. What someone asks for something, its price, can be very different from its "value," which is what something is worth. What something is worth in a simple sense is what can be agreed upon as a suitable replacement, such as in terms of money, for that thing. Cost is related to both these ideas, and may also be what the questioner meant: what does it cost to build a green home? To an appraiser, this question asks how much will have to be spent to have the home built.

It may seem that this is parsing words, but from an appraiser's perspective, these differences are enormous. They illustrate why appraisers will attempt to clearly define the problem at hand before proceeding to find an answer. After all, one person's price is another person's value. Our continuing education courses for appraisers are designed to answer particular questions that appraisers have about valuation issues. Our first three-part series of courses, "Appraising Green Homes," gives answers to one of the day's most vexing questions: what's the price of green?