The Pricing Risk of Energy Use Intensity for Office and Multifamily Mortgages

Prior studies have shown that energy use is related to commercial mortgage defaults. This report presents the results of a new and tractable methodology to estimate the association between energy use and mortgage pricing sensitivity - specically the orig-
ination contract rate and points - of oce and multifamily mortgages. Source Energy Use Intensity (Source EUI) is our key energy eciency measure of interest due to its increasing availability through local energy eciency benchmarking programs and the
potential ease of its construction from the utility bills of commercial buildings. Based upon an empirical model of mortgage default transitions for a sample of 610 securitized office and multifamily mortgages from Trepp, we simulate the loan-by-loan mortgage prices using a four factor dynamic model with: i) a measure of Source EUI that is scaled to the the net operating income of the property, called Scaled Source EUI, ii) the Electricity Price Gap, the cumulative dierence between expected and actual re-
alized electricity prices, iii) loan-to-value ratio, and iv) the 10-year LIBOR rate. We find a statistically signicant positive association between mortgage default and Scaled Source EUI and a statistically signicant and negative association between the Scaled
Source EUI of buildings and the simulated market prices of the mortgages written on those buildings. We then derive two sensitivity measures with respect to changes in Scaled Source EUI: i) the sensitivity of mortgage points to a 1% change in Scaled
Source EUI; ii) the sensitivity of the mortgage coupon to a 1% change in Scaled Source EUI. We nd that sensitivity of mortgage points to 1% shocks to Scaled Source EUI is 7.71 and 4.0 basis points respectively for oce and multifamily loans. We nd that the sensitivities of mortgage coupons to 1% shocks to Scaled Source EUI is 2.10 and 0.84 basis points respectively for oce and multifamily loans.