The Cost of Green: Is the Price Right?

By some measures, sustainable practices are rapidly becoming the norm in the multifamily sector. Although sizing up the true costs of sustainability can be challenging, investors and managers have a variety of best practices and analytical tools to work with.
Source: Yardi Matrix data

Source: Yardi Matrix data

By some measures, sustainable practices are rapidly becoming the norm in the multifamily  sector. The number of new green-certified apartments rose 32 percent in 2016, to some 59,000 units, according to an analysis of Yardi Systems Inc. data by its marketing and leasing platform RentCafe.

Yet as sustainability becomes the new norm, the question of how to assess the true cost of green remains open. Given its brief track record, sizing up cost patterns is still largely anecdotal, multifamily executives say, with comprehensive studies hard to come by.

“Payback periods are tough to zero in on, as they have historically been so dependent on the rebates and other incentives offered by utilities,” observed Peter Zadoretzky, director of sustainability for Bozzuto Management Co. Moreover, “there isn’t a one-size-fits-all set of sustainable features for apartment properties.”

That said, the lead times required for sustainable measures to return the initial investment have been shrinking, sometimes drastically, he noted.

One contributor is the falling cost for some sustainable tools. The installation price for one popular new feature, rooftop photovoltaic panels, dropped 5 percent in 2015 alone, according to Lawrence Berkeley National Laboratory. Sustainable features are easiest to install in new product. And while expenses are falling, developers are finding that sustainable alternatives are generating higher rents than their conventional counterparts. According to rent data from Yardi Matrix, green-certified apartments command an average 33 percent rental premium, which translates to $560 per month.

Can that help offset the cost by itself? The answer appears to be a qualified yes. A recent RENTCafé survey of more than 2,600 renters found that 69 percent would like to live in a sustainable community.

A whopping 52 percent indicated that they would pay no more than $100 per month extra to live in a sustainable property. But add in government and utility source incentives, and the savings side of the formula improves further.

Old vs. new

And indeed, incentives can make all the difference. In a joint project with Stewards of Affordable Housing for the Future, for instance, energy consulting and management firm Bright Power assessed a 33-state sampling of 227 properties that were retrofitted between 2006 and 2012 under the auspices of the U.S. Department of Housing and Urban Development. The communities varied in size from fewer than 20 units to 250-plus, with the largest contingent between 25 and 100 units.

Energy upgrades included heating, cooling, lighting, hot water and building envelope issues. The investment emphasized replacement of key components—such as windows, appliances and boilers—rather than retrofitting existing equipment.

The average premium for sustainable energy and water upgrades compared to conventional upgrades was about $2,300 per unit. For the bulk of communities studied, costs varied from $1,600 to $3,500 per unit. That translates into a 15-year simple payback for energy improvements and one year for water-related investment.

The study notes that “the 15-year payback period for energy measures might be too long for many owners to pursue without incentives such as those provided by the GRP, even though lifecycle savings outweigh first cost by 20 percent.”

In the largest slice of the properties studied, energy savings ranged from 6 to 24 percent and averaged 18 percent. Water savings varied even more widely, from 4 to 38 percent.

The right ratio

Source: RENTCafé survey of 2,600+ renters

Another way of assessing improvements is to examine the savings-to-investment ratio. Properties that were retrofitted under the HUD program showed that investment in energy reduction would yield about 20 percent savings during the useful life of the sustainable improvements.

In a bid to develop standard practices for evaluating the costs and benefits of green upgrades, the Natural Resources Defense Council recently assessed the costs of improvements at three aging communities in New York City. The environmental organization’s Center for Market Innovation evaluated the properties using ASHRAE II standards.

At Regina Pacis, a 161-unit affordable senior community in Brooklyn, energy costs accounted for 40 percent of its annual $1 million operating budget. The audit proposed eight energy-saving measures ranging from orifice plates and thermostatic radiator valves ($219,000) and advanced submetering ($80,800) to solar panels ($800,000) and a thermostat for the community room ($1,500).

The estimated upfront cost for upgrading Regina Pacis totaled $724,000; with the help of rebates, the cost dropped to $588,000. The projected impact to the bottom line: annual energy savings of 22 percent, which adds up to $1.3 million during the 16-year average useful life of the improvements. Return on investment came to 56 percent, with a seven-year payback period and 12 percent internal rate of return.

As part of the same exercise, the Center for Market Innovation also performed an energy audit of River View Tower, a 386-unit moderate-income Manhattan community dating from 1961. To help trim the property’s annual $1.8 million utility bill, which comprises about 43 percent of the community’s operating budget, the auditors rolled out 10 measures with an estimated price tag of $1.6 million.

Annual savings would add up to $514,000, representing a 29 percent cut in River View’s utility outlays. But the marquee number may be the 255 percent return on initial investment that resulted from the $5.8 million in total savings.

Originally appearing in the April 2017 issue of MHN.