Sustainability: good for the planet and the broker?

What is the relationship between the green features of multifamily housing properties and their risk of mortgage default? The Effect of Transportation, Location, and Affordability Related Sustainability Features on Mortgage Default Prediction and Risk in Multifamily Rental Housing, a paper from Dr. Gary Pivo, a professor of Urban Planning and Natural Resources at the University of Arizona, looked at walkability, auto dependence, exposure to pollution, and proximity to protected open space to try to determine a relationship. Pivo points out that real estate is one of the fastest growing sectors for triple bottom line investing, often referred to as “Responsible Property Investing” (which can include many different property development and management practices, but focus on “ecological integrity, community development, and human well‐being.”) He suggests that default risk models should take into account sustainability features to improve their accuracy. The paper tests two hypotheses:

If certain transportation‐, location‐, and housing‐related sustainability features are added to a model of default risk,the accuracy of the model will be improved.
Sustainability features will be associated with a lower risk of default, all things being equal

Another report hypothesized that the long-term energy savings green-homeowners retain would translate into lower default risk, and asserted that banks and loan providers should give better terms to those homeowners. Pivo also found that “sustainability features” reduce default risk for multifamily rental properties, and similarly advocates for sustainability’s ability to reduce default risk being accounted for in loan underwriting.

This paper shows that properties with certain sustainability features – specifically those related to property location – are a better risk than previously thought and those features have not been given sufficient credit in the loan origination process. Dr. Pivo explains that improving default risk models for sustainable properties could encourage investors to move capital towards those sustainable properties, and “foster transformation toward more sustainable cities.” He adds that, because all data used in the study is publicly available from the U.S. Census Bureau and other agencies, it would be easy to build a tool that would help lenders improve their models.