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Store and sell energy
Use solar arrays and batteries to generate, store, and sell energy, turning the building from a pure consumer into a participant in the grid.
Multifamily energy standards are worth meeting, and most operators know it. Commercial real estate accounts for 35% of energy consumption in the United States, according to the Environmental Protection Agency, and 30% of that energy usage is attributed to waste. Multifamily makes up over 41% of the commercial real estate sector. Nearly everyone agrees the industry must reduce its environmental impact. The real question is how, and that is where the difficulty starts.
Implementing environmental policies is becoming increasingly important for owners and managers of multifamily buildings, for several reasons. The first is the intended one. Prudent policies reduce greenhouse gas emissions. That limits the adverse effects rental properties have on climate change. Real estate is increasingly a contributor to global warming, so the benefit to society is the starting point rather than the whole argument.
Beyond the societal benefit, meeting energy efficiency standards has effects that show up inside the business.
Each of those is a lever operators already care about for other reasons. Retention, staffing, and access to capital drive most decisions in the business anyway. Multifamily energy standards simply attach a measurable environmental requirement to them. Staff retention in particular is a cost most operators underestimate. The numbers on multifamily employee turnover make that plain.
With the benefits firmly established, the primary challenge facing many in the industry is what guidelines to follow and how to follow them. The obstacle is not conviction. It is knowledge, data, and financing, in that order.
In a survey of property owners and managers conducted by the University of Nebraska, respondents were asked about barriers to improving energy efficiency at their properties. A significant barrier they cited was a lack of knowledge about which energy efficiency measures would be most effective. Without a way to rank measures by impact, every project looks like a guess.
As a result, many owners and managers struggle to collect and track the data needed to meet the standards set by regulatory bodies. Collecting required data is seen by many as a complicated and time-consuming process. It requires specialized skills, resources, and tools that the operator simply doesn’t have.
The mechanics explain why. Energy data lives in utility bills, building systems, and vendor portals. None of them share a format with the property management system. Benchmarking a building means reconciling those sources against unit counts, square footage, and occupancy for the same period. Doing that once for one property is tedious. Doing it every month across a portfolio is a data pipeline problem. That is why standardizing multifamily property data across systems is a precondition for any credible energy program.
Some measures carry upfront costs with no clear return on investment (ROI) timeline. When that is the case, operators may lack access to the necessary financing. Lenders and investors fund what they can underwrite. A measure whose payback cannot be modeled from the property’s own data is hard to finance no matter how sound it is in principle.
Despite the challenges, the business case for implementing sustainable practices in multifamily buildings is compelling. It rests on three kinds of evidence: the risk of doing nothing, the operating savings of doing something, and the capital that follows.
A report by the Joint Center for Housing Studies at Harvard University (JCHS) puts 40% of the nation’s rental housing stock, representing 17.6 million dwellings, at risk. Those homes are in danger of experiencing “substantial annual losses from increasingly common environmental hazards.” That reframes efficiency as asset protection rather than optional virtue.
The World Green Building Trends 2021 report showed that new green buildings brought an average 10.5% reduction in operating costs in the first year. Savings reached 16.9% over five years. Construction of new green buildings and green renovation or retrofit projects increase the asset value of buildings by upwards of 9%. Lower operating cost and higher value are the two inputs every valuation model already uses.
The January 2022 Bloomberg Intelligence (BI) report also shows the impact of green initiatives on raising capital. Total assets managed under the umbrella of values-based, socially responsible, and impact investing grew from $22.8 trillion in 2016 to $30.6 trillion in 2018, then surpassed $35 trillion in 2020. BI predicts that global ESG (Environmental, Social, and Governance) focused assets under management may exceed $41 trillion in 2022 and climb to $50 trillion by 2025.
For an owner raising a fund, that pool of capital is only reachable with measurable results. Investors focused on ESG need evidence that a portfolio meets multifamily energy standards, not a statement of intent. That means comparing energy performance property to property and against peers. It is what portfolio benchmarking is built to do once the underlying data is consistent.
The commercial real estate industry is making efforts to address these challenges. Many operators participate in voluntary initiatives, and an industry consortium is working on the data side of the problem. At the same time, industry groups have pushed back on mandates.
Many operators participate in voluntary initiatives such as ENERGY STAR® and LEED® certification programs. These initiatives provide a roadmap for building owners and managers to reduce energy consumption and greenhouse gas emissions. They also provide recognition for the effort. They answer the “which measures” question the Nebraska survey surfaced by giving operators a defined set of criteria to work toward.
The Open Standards Consortium for Real Estate (OSCRE) is a global, non-profit, member-based organization. It is working with leading companies and industry associations to develop standards for improved environmental data management and reporting. The effort is called the Environmental Data Project. It is designed to provide participants with a framework for identifying environmental standards to track within a company’s existing data strategy. That last phrase is the important one. Energy reporting works best as an extension of a rental property data strategy that already exists, not as a separate spreadsheet.
The National Multifamily Housing Council (NMHC) and other industry groups have raised concerns about mandates. Their worry is the additional cost and burden that mandating energy efficiency could impose on multifamily operators. According to the NMHC, the upfront costs of implementing energy efficiency measures can be significant. Development costs are already high. Putting the additional burden on developers could worsen the already significant under-supply of affordable housing. Some energy efficiency upgrades can take five to ten years to recover the investment before savings are realized.
To meet energy efficiency standards, the multifamily industry must continue to collaborate with regulators and policymakers. The goal is clear guidelines for data collection, tracking, and compliance. Financial incentives, such as tax credits and grants, can help offset the upfront costs of implementing energy efficiency measures. Policymakers should also explore the potential of public-private partnerships to provide financing options for multifamily operators.
Until clear requirements are in place, multifamily operators should be creative and hold themselves accountable for making small, incremental steps toward meaningful change. In a recent McKinsey report, “Climate Risk and the Opportunity for Real Estate,” the authors encourage the industry to look for opportunities in five areas.
Use solar arrays and batteries to generate, store, and sell energy, turning the building from a pure consumer into a participant in the grid.
Use a building’s green attributes to attract residents, which ties the energy program back to leasing and retention.
Apply new technologies, like modular construction, to support development at lower environmental cost.
Use measurable energy-saving accomplishments to reach impact-motivated investors, connecting the operating work to the capital-raising benefit.
Track emissions and energy consumption through heating, cooling, lighting, and space management. This is the step that makes the other four provable.
Notice that the fifth item is the foundation for the fourth, and arguably for all of them. Multifamily energy standards, whether voluntary today or mandated later, will be met with data. Operators who already track consumption consistently across the portfolio will find compliance an extension of reporting they do anyway.
While the multifamily industry faces significant challenges to meet energy efficiency standards, there are compelling reasons for owners and managers to adopt sustainable practices. By reducing environmental impact, improving tenant satisfaction, and boosting financial performance and value, operators contribute to the fight against climate change. They also ensure the long-term viability of their properties.
At the time of writing, most multifamily energy standards were voluntary. Operators participate in programs such as ENERGY STAR® and LEED® certification, which provide a roadmap for reducing energy consumption and greenhouse gas emissions. OSCRE’s Environmental Data Project is developing standards for environmental data management and reporting. Regulators and industry groups continue to work toward clear guidelines for data collection, tracking, and compliance.
Collecting the required data is seen by many operators as complicated and time-consuming. It demands specialized skills, resources, and tools they do not have. Energy data sits in utility bills and building systems that do not share a format with property management or accounting systems. Benchmarking therefore means reconciling several sources for every property every period. Owners also cite a lack of knowledge about which efficiency measures are most effective, which makes it hard to know what to benchmark against.
According to the Environmental Protection Agency, commercial real estate accounts for 35% of energy consumption in the United States, and 30% of that energy usage is attributed to waste. Multifamily properties make up over 41% of the commercial real estate sector, so a large share of that waste sits in apartment buildings. Reducing it is where multifamily energy standards deliver both environmental and financial returns.
The evidence says yes over time. The World Green Building Trends 2021 report found new green buildings averaged a 10.5% reduction in operating costs in the first year and 16.9% savings over five years. Green construction and retrofits raise asset value by upwards of 9%. The caveat, raised by the NMHC, is that upfront costs can be significant and some upgrades take five to ten years to recover the investment.
Consistent operating and utility data across every property turns energy reporting from a special project into an extension of the reporting you already run.
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