Impact of Energy Factors on Default Risk in Commercial Mortgages

This is a first study of the effects of building-level energy consumption and the time-series risk of the energy pricing on the default risk of commercial mortgages. We apply measures of energy consumption using information on building-level source energy use intensity (EUI) and site EUI obtained from a unique data set that merges the building-level data collected through the benchmarking ordinances of Boston, Chicago, Minneapolis, New York, Philadelphia, and Washington, DC with origination and performance data for commercial mortgages that have been securitized into commercial mortgage backed securities. We develop a unique measure of energy price risk called the electricity price gap, computed as the difference between realized and expected electricity prices since the date of loan origination. We find that building-level source EUI and the electricity price gap are statistically and economically associated with commercial mortgage defaults. Using building energy simulations, we find that building asset characteristics and operational practices that affect source EUI have very important effects on the likelihood of default. Overall these results suggest that building-level energy efficiency and energy price risk do move the needle on default risk. Since commercial real estate investors are the residual claimants on this risk exposure, these results show the potential importance of accounting for energy efficiency and price risk as part of the loan risk assessment process in new mortgage originations.