Evidence Matters: Measuring Sustainability

Quantifying Energy Efficiency in Multifamily Rental Housing

Highlights

• Multifamily housing has high potential for energy savings through retrofits, but the lack of data on best practices and historical cost savings has weakened investment.
• Current efforts by the federal government and its partners are attempting to increase data collection and standardization, but communicating information about efficiency-boosting activities to lenders continues to be a barrier.
• HUD has increased multifamily green retrofits through direct investment by stimulating private investment using the Energy Innovation Fund and Green Refinance Plus program.
• Utilities are an important resource because they have both money for energy-efficiency improvements and comprehensive usage data.

Young adults from the YouthBuild program equip multifamily housing buildings with solar panels while learning to install the new technology.
Everyday Energy

The sluggish pace of energy-efficiency improvements in the multifamily rental housing sector continues to vex advocates of sustainability. Multifamily housing has a number of characteristics that should make green retrofits an appealing investment, but only a fraction of the potential energy savings in the multifamily sector has been realized. Yet, despite recent advances in building technology and in the financial sector’s ability to model energy savings, energy-efficiency retrofits are still far less common in multifamily housing than in single-family housing. Why are multifamily property owners and investors passing up this opportunity to achieve cost savings through greater efficiency?

Unpicked Low-Hanging Fruit?

According to a widely cited 2009 report by the Benningfield Group, an energy consulting and software development firm, multifamily housing stock could feasibly become 28.6 percent more energy efficient by 2020.1 This increased efficiency would translate into a savings of at least 51,000 gigawatt hours of electricity and more than 2,800 million therms of natural gas, which amounts to $9.2 billion at today’s residential energy prices.2,3 Multifamily housing has characteristics that make it especially amenable to energy retrofits. One is that it is inherently more energy efficient than single-family housing due to size per unit, exterior exposure, and other structural differences (see table 1). At the same time, multifamily housing is older on average than single-family housing and has less efficient heating, cooling, plumbing, and lighting systems.4 An Energy Programs Consortium analysis found that 85 percent of multifamily units were built before 1990, leaving room for substantial savings — anywhere from 30 to 75 percent — from energy-efficiency improvements.5

In addition to the potential energy savings, improving the energy efficiency of multifamily housing also improves the stability of vulnerable households. Most multifamily households (88%) are renters, whose average annual income ($31,000) is just over half that of homeowners ($61,000).6 This means that nationally, the burden of the untapped savings in the older and less energy-efficient multifamily housing stock is being borne by the families with the fewest resources. As a result, renters typically pay a higher percentage of their income for energy. This lowers their discretionary income and makes them much more vulnerable to fluctuations in energy prices, which are increasing at a faster rate than housing costs; between 2001 and 2009, renters in multifamily units faced an average rent increase of 7.6 percent, while energy costs for these renters rose by 22.7 percent.7 Thus, efficiency gains from multifamily retrofits have the concurrent benefit of relieving low- and middle-income families of some of their financial strain and uncertainty.

Nevertheless, despite the inducements of cost savings, increased cash flow, and greater tenant stability, multifamily owners have been slow to make energy-efficiency improvements. Many experts believe that their hesitation is due to market failures, flaws in the functioning of the multifamily housing and finance markets that prevent owners, lenders, and tenants from realizing the benefits of retrofits. One of the most significant flaws affecting the market is the lack of sufficient data about multifamily retrofits and their advantages. This article examines these challenges and the current efforts to provide the information necessary to allow multifamily retrofits to reach their potential.

Quantifying Returns From Investments

Lenders are reluctant to dive into the multifamily green retrofit market for several reasons. Ted Toon, deputy assistant secretary of HUD’s Office of Affordable Housing Preservation, says that lenders are hesitant to enter a new market with unfamiliar loan structures.8 Ben Metcalf, senior advisor in HUD’s Office of Multifamily Housing, says that compared with single-family retrofits, the multifamily market is more complicated and less liquid, which makes it seem riskier.9 The biggest issue, however, is the lack of data on the payback period for retrofits, which is the amount of time it will take for savings gained from increased energy efficiency to cover the up-front investment. The data that do exist, says Paula Cino, director of energy and environment policy at the National Multi Housing Council, do not reflect the diversity of the multifamily market and therefore are not broadly applicable.10 This is partly because there has not been a sufficiently strong market to attract large-scale empirical research; according to Mijo Vodopic of the MacArthur Foundation, “No one has enough data, dollars, or access to good energy-related information to move…on their own.”11

Hector del Real, a former YouthBuild job trainee shown here installing solar panels on a multifamily retrofit, is now a full-time employee with Everyday Energy in one of the new kinds of jobs generated by clean energy initiatives. Everyday Energy

Recently, however, researchers have begun showing interest in this area, recognizing the potential of relatively inexpensive improvements to capture hitherto untapped energy savings. Living Cities, the MacArthur Foundation, the White House Council on Environmental Quality, and the Urban Land Institute recently agreed to standardize their energy consumption data and plan to develop a common “data taxonomy” by the end of 2011. Meanwhile, a number of organizations have recently developed energy-efficiency metrics, including LEED, Enterprise Green Communities, Stewards of Affordable Housing for the Future, and EarthCraft. The Environmental Protection Agency (EPA) is hoping to develop an ENERGY STAR 1-to-100 energy performance scale for existing multifamily buildings that would allow owners to assess their buildings’ performance relative to their peers, with high-performing buildings eligible for ENERGY STAR certification. Fannie Mae is contributing to this effort by collecting energy-usage data on thousands of buildings, which EPA will then analyze to determine if there is strong enough evidence to develop a rating scale. Michael Zatz, chief of the Market Sectors Group in EPA’s ENERGY STAR Commercial & Industrial Branch, says that collecting whole-building data is the biggest obstacle to developing performance metrics for the multifamily sector.12

Lenders, however, need more than just performance data to accurately assess the risk of energy-efficiency investments; they need information about whether specific owners, property managers, and property engineers are able to monitor their buildings and maintain energy performance. Accurate projections for the increased revenue from retrofits are crucial. To make a loan, the increase in revenue from energy savings must be high enough to justify the cost of capital — but if the revenue estimate is higher than the property owner is capable of delivering, the owner may not have enough cash to cover his mortgage and default. Because of this uncertainty, lenders have not yet determined how to appropriately value and incorporate energy savings into the standard underwriting processes, pro forma analyses, or property appraisals for multifamily properties.

These obstacles are especially vexing because the per-unit annual payback on investment (APOI) for multifamily energy-efficiency retrofits is actually better than that for single-family homes, says Louis Schotsky, vice president for investments and sustainability at Equity Residential.13,14 Multifamily retrofits can take advantage of economies of scale not available in single-family homes; it is easier to coordinate retrofits for multiple units that are contiguous and a single intervention (for example, HVAC replacement) can improve efficiency in every unit in the building. Schotsky says that Equity Residential and other multifamily owners have experienced yields from retrofits that exceed those for single-family homes. For these returns to translate into greater investment, however, building owners would need to communicate firsthand operational knowledge to lenders and show the energy savings that are being achieved across many individual units, in order to allow them to predict energy savings with as much certainty as possible. Moreover, the volatility of the energy market makes predicting energy savings even harder, because returns on energy-efficiency investments depend on both the amount of energy saved and the price of energy. These information asymmetries make multifamily retrofits seem far riskier than they actually are, and solutions are still forthcoming.

Utilities: A Crucial Part of the Efficiency Equation

Utilities have the potential to help lenders and owners better understand performance data. “No single subset of entities has more data than utilities, and without their cooperation it is virtually impossible for owners to actually get real-time, accurate usage data,” says Debra Schwartz, director of program related investments at the MacArthur Foundation. “Without this data, modeling and tracking impact information is limited, which in turn constrains the ability to use data as a feedback loop in managing the energy usage in a building.” Schwartz emphasizes the importance of standardizing utilities’ data and data collection methods to track energy usage efficiently, noting that they constitute “an incredibly fragmented universe with lots of different regulators all over the country.”15

The robust, measurable results of investments by utilities and utility commissions illustrate their potential to contribute key data on the APOI from energy-efficiency programs. The California Statewide Multifamily Energy Efficiency Rebate Program, for instance, is a collaboration among California’s four major investor-owned utilities to encourage energy-efficiency upgrades by providing equipment rebates to owners and tenants of multifamily housing. In the first 3 years of the program (2004 through 2006), the utilities saved $25.4 million in both electricity and gas, resulting in a combined average annual APOI of 16.7 percent (see table 2).

Because utilities have funds set aside for energy efficiency, they have also been able to show how much investment can be leveraged with small amounts of interest-free capital in the multifamily market. In the case of the existing building component of the New York State Energy Research and Development Authority’s Multifamily Performance Program, $75 million in grants have seeded an additional $445 million of energy-efficiency investments by property owners; the average annual energy savings for projects that have completed the program and generated a year’s worth of energy usage data is 25 percent.16

Green retrofitting of multifamily housing built prior to 1990 — such as this building that is having insulation added to exterior walls and its windows replaced — can mean substantial savings in energy consumption/costs. National Church Residences

Making Retrofits Make Sense for Property Owners

Utilities’ investments can provide multifamily owners with much-needed capital for energy-efficiency retrofits, but an even more basic need is for more data to help owners better understand the opportunities for energy savings. Many owners who rely solely on their energy bills struggle to make informed decisions about greening their properties. Anne Evens, executive director of CNT Energy, has seen significant owner interest in measuring energy efficiency.

Owners want to get snapshots of their current usage and learn how much they can save from improvements; at the portfolio level, they want to know what accounts for the bulk of their energy consumption to better target their energy-efficiency investments. Part of the solution to this data problem is more and better energy monitoring, but according to Michael Bodaken, executive director of the National Housing Trust, there are far fewer knowledgeable multifamily energy auditors than their single-family counterparts; as with financing, auditing is much more complicated in the multifamily sector.17 Technical data is also needed; Paula Cino says that even sophisticated owners who are already able to benchmark and track their energy usage lack information on equipment, maintenance, and other capital costs.

Despite these difficulties, owners are reporting positive results from incorporating energy-efficiency features in multifamily housing and many are responding to these energy savings by adopting efficiency features throughout their portfolio. Dan Levine, senior vice president for construction at the John Stewart Company, a multifamily housing management, development, and consulting organization, says that “over the long term (10 to 15 years), such improvements free up capital for property owners for other maintenance and improvement needs by reducing operating costs. Efficiency improvements have become more commonplace in maintaining multifamily housing, including using fluorescent bulbs, ENERGY STAR appliances, [and] environmentally friendly products and incorporating recycling as part of our normal maintenance procedures.”18 Nathan Taft, director of acquisitions at Jonathan Rose Companies, an affordable housing developer and investor, says that these “relatively modest investments can produce energy-efficiency gains of 25 to 30 percent, making units more energy efficient, reducing operating expenses for tenants and owners, and providing owners with better access to low-interest, long-term financing.”19

Creating a Space for Market Financing Solutions

Owners report positive results from incorporating energy-efficiency features in multifamily buildings.
photo courtesy of constructionphotographs.com

Efforts are underway across the multifamily housing sector to collect the data necessary to spur private investment in retrofits. Recent multifamily green building and retrofitting programs demonstrate the federal government’s commitment to providing concrete examples of multifamily housing’s potential for cost and energy savings. In 2009 the Department of Energy’s (DOE’s) Weatherization Assistance Program (WAP) received $5 billion as part of the American Reinvestment and Recovery Act (ARRA). WAP has been making grants to low-income households for home weatherization measures such as sealing ducts, caulking, and insulating since 1976. DOE used the opportunity afforded by the new infusion of funding to collaborate with HUD to provide weatherization assistance to owners of federally subsidized public and multifamily housing.20 WAP has already helped weatherize more than 82,000 multifamily units since its inception; Stockton Williams, senior advisor for urban policy at DOE, says that this infusion of funding has doubled the percentage of weatherization funds allocated to multifamily housing, from 8 to 10 percent of WAP funds to up to 20 percent of ARRA weatherization funds.21,22 DOE expects a 10- to 20-percent improvement in energy efficiency, with an average first-year heating and cooling bill reduction of $437.23,24

HUD’s Green Retrofit Program is another ARRA-funded program aimed at creating scalable solutions to the multifamily retrofit problem, injecting capital into the areas of the market most in need while preserving affordable housing for the most vulnerable populations. The program has awarded nearly $250 million in retrofit grants for Section 8 and HUD-subsidized elderly and disabled housing to fund energy upgrades for 20,000 affordable units at an average cost of about $12,000 per unit. To accept the funds, building owners must allow thorough audits of energy consumption both before and after the retrofits to create benchmarks for expected energy savings.25 The Office of Multifamily Housing is currently projecting that this investment will produce an average annual energy savings of 27 percent per unit.26

In addition to efforts to directly subsidize multifamily retrofits and data collection, two new HUD programs aim to make energy efficiency attractive to investors. The Energy Innovation Fund was created to overcome barriers to residential energy efficiency by catalyzing private investment, with the eventual goal of creating a flourishing home energy retrofit market in the United States. The fund will award $25 million in highly leveraged funding by the end of 2011 through a competitive grant process that will seed up to $200 million in investment in revolving loan funds, loan guarantees, and energy-efficiency mortgages. The second program, Green Refinance Plus, is an enhancement of the existing Risk-Share program in which the Federal Housing Administration (FHA) assumes half of the risk of loans for refinancing or property acquisition underwritten and issued by Fannie Mae’s lending network. In Green Refinance Plus, at least five percent of these loans is dedicated to renovations or green retrofits, and FHA insures this portion of the loan under relaxed but still responsible underwriting standards. This way, FHA can demonstrate the cash-flow benefits of green retrofits, but borrowers will not default even if the improvements do not yield the expected savings, says Chris Tawa, senior advisor in the HUD Office of Multifamily Housing Programs, who helped design the program.27 Ted Toon hopes that this program will show that “green retrofits can be financed. When FHA insures it and Fannie Mae underwrites it, private borrowers can go to private lenders and let the market work.”28

The private sector is starting to recognize this potential market. Bank of America recently announced the availability of $55 million in low-interest loans to community development financial institutions (CDFIs) for energy-efficiency programs. The financing is intended for CDFIs that have started pilot programs to finance energy savings in multifamily retrofits. Most of these funds will provide long-term financing to 12 CDFIs judged to have the most effective, nationally applicable solutions for funding energy-efficiency improvements.29 Amy Brusiloff, senior vice president of CDFI lending and investing at Bank of America, explains that CDFIs have “lending expertise and can aggregate resources to mitigate risk and credit enhance loans. They can also use government and philanthropic resources to help defray the costs of marketing to building owners, data collection, and energy-efficiency underwriting training.”30 Bank of America will work with Bright Power to track the energy and water savings post-retrofit in buildings funded through the program.

Before and After: The infrared image on the right highlights the effectiveness of weatherization. The area of blue shows where metal panels have been installed; the “blue” is cold air kept outside the building. The area of reds and yellow, where the plates have not yet been installed, show heat and energy escaping from the building. Energy Initiatives | Preservation of Affordable Housing

One area of focus for the Bank of America’s program will be finding a scalable model for stand-alone retrofits (that is, retrofits not connected to mortgage initiation or refinancing). These investments are particularly difficult to finance because the risk for the lender is not bundled with other, less risky investments. In addition, because loans for retrofits are relatively small compared with the mortgage for an entire building, underwriting costs will be much larger relative to the expected return, making the loan comparatively more expensive. Moreover, owners of properties with individually metered utilities do not capture the energy savings from retrofits, which limits the revenue that can be applied to debt payments. However, stand-alone retrofits have the benefits of stabilizing tenants through decreased utility costs and increasing owners’ solvency because of the net increase in cash flow.

The Cook County Energy Savers program is providing a model of how the difficulties of stand-alone retrofits can be overcome. Designed and managed by the Center for Neighborhood Technology (CNT), a Chicago-based think tank that works on sustainable development issues, the program targets affordable housing in Chicago not already going through major recapitalization. Using funds from various public and private sources, CNT is a one-stop shop for all of the technical information, capital, and skilled workers necessary for stand-alone retrofits. This centralization substantially lowers the high transaction costs of retrofits for individual owners. In addition, CNT ensures the quality of the retrofit and monitors the results. Community Investment Corporation, a local CDFI, provides the financing (used by about 50 percent of participants) as well as financial advice to participants. Since 2007 Energy Savers has retrofitted 5,000 units in Chicago at an average cost of $2,500 per unit; the program has 2,500 more units in the pipeline and estimates that an additional 4,000 to 5,000 units will be finished by the end of 2011. The retrofits have resulted in a 30-percent reduction in energy consumption; other benefits include a 5,000 metric ton reduction in greenhouse gas emissions and 75 new jobs.31

The innovation and collaboration currently underway in the multifamily green retrofit market are encouraging. These developments may soon make capturing the untapped energy savings in the multifamily sector a reality.

Related Information:

Split Incentives

1. The Benningfield Group. 2009. “U.S. Multifamily Energy Efficiency Potential by 2020,” 3–9.
2. Ibid.
3. Energy Information Administration, Office of Electricity, Renewables & Uranium Statistics. Electric Power Monthly, July 2011, table 5.3; Energy Information Administration, Office of Electricity, Renewables & Uranium Statistics. Natural Gas Monthly, July 2011, table 19. 1 therm = 100 cubic feet of gas.
4. Joint Center for Housing Studies of Harvard University. 2008. “The State of the Nation’s Housing 2008,” 33; The Benningfield Group, 7, 15–6.
5. Matthew Brown and Mark Wolfe. 2007. “Energy Efficiency in Multi-Family Housing: A Profile and Analysis,” 3, iv.
6. The Benningfield Group, 4, 16.
7. Joint Center for Housing Studies of Harvard University. 2011. “America’s Rental Housing: Meeting Challenges, Building on Opportunities,” 43.
8. Interview with Ted Toon, August 2011.
9. Interview with Ben Metcalf, July 2011.
10. Interview with Paula Cino, July 2011.
11. Interview with Mijo Vodopic, June 2011.
12. Interview with Michael Zatz, August 2011.
13. Annual Payback on Investment = Total Investment/Payback Period.
14. Interview with Louis Schotsky, August 2011.
15. Interview with Debra Schwartz, June 2011.
16. Correspondence with Lindsay Robbins, project manager, New York State Energy Research and Development Authority, July 28, 2011.
17. Interview with Michael Bodaken, July 2011.
18. Interview with Dan Levine, June 2011.
19. Interview with Nathan Taft, June 2011.
20. U.S. Department of Housing and Urban Development and U.S. Department of Energy. 2010. “Fact Sheet: HUD-DOE Weatherization Partnership — Streamlining Weatherization Assistance in Affordable Housing.”
21. Ibid.
22. Interview with Stockton Williams, June 2011.
23. “Weatherization Assistance Program — The American Recovery and Reinvestment Act of 2009.” U.S. Department of Energy, Office of Energy Efficiency and Renewal website. Accessed 1 June 2011.
24. Joel F. Eisenberg. 2010. “Weatherization Assistance Program Technical Memorandum: Background Data and Statistics,” 7.
25. “Green Retrofit Program for Multifamily Housing.” U.S. Department of Housing and Urban Development website. Accessed 10 June 2011.
26. Savings estimate courtesy of Ted Toon.
27. Interview with Chris Tawa, August 2011.
28. Interview with Ted Toon, June 2011.
29. “Bank of America Announces New Energy Efficiency Finance Program,” Bank of America press release, 25 May 2011.
30. Interview with Amy Brusiloff, May 2011.
31. American Council for an Energy-Efficient Economy. 2011. “Case Study — Chicago Area Energy Savers Program,” 3.