Business News

'Green' rentals can save money and preserve affordability

By Aleksandrs Rozens | November 3, 2016


'Green' rentals can save money and preserve affordabilityThe wave of new technology aimed at reducing carbon emissions might conjure up images of Tesla automobiles or solar wind farms. But increasingly, multifamily apartment building renovations and design are keeping energy efficiency in mind – with the goal of offering an affordable housing solution.

Last year, the U.S. spent some $55 billion on the construction and operation of green residential housing, and this spending pace should grow to more than $100 billion by 2018, according to the U.S. Green Building Council (USGBC).

Energy efficiency improvements in multifamily properties can come in the form of updated heating ventilation and air conditioning systems, as well as upgrades to appliances and lighting. Building owners benefit from energy savings and lower maintenance costs.

Green Financing

Reducing energy bills can have a direct impact on the realized net operating income (NOI) for an apartment building, offering a cost-saving opportunity for builders, operators, and tenants – especially in the affordable housing sector.

An Energy Efficiency for All study found that low-income, multifamily, and renting households pay a higher average percent of their income on utilities.

“Green financing allows owners to cut operating expenses and extend the life of the property,” says Bob Simpson, vice president for multifamily affordable, green, and small loan financing at Fannie Mae. “More than 80 percent of the units we finance are affordable for working families, and greening those buildings can mean lower utility bills for tenants,” he adds.

Fannie Mae’s green financing business supports loans for properties that reduce annual energy or water consumption by 20 percent or more through equipment upgrades. The financing also is available for multifamily homes with green building certification such as LEED, Energy Star, or the National Green Building Standard.

This year – through July 31 – Fannie Mae financed $1.2 billion worth of green mortgage loans for multifamily properties, says Simpson.

Fannie Mae Green MBS Issuance 2012 - 2016

Program Expansion

As part of its mission to support affordable housing, Fannie Mae announced in September that it was improving its Green Rewards program by absorbing the cost of a required energy and water audit that owners used to pay. The company also said it would increase loan proceeds to borrowers by allowing lenders to underwrite 75 percent of an owner’s projected cost savings.

“These enhancements remove barriers for owners who want to improve their properties for their own bottom line and so tenants can save money on their utility bills,” says Chrissa Pagitsas, director of green financing business for Fannie Mae.

Encouraging property owners to update their multifamily assets and showing them how they can save money “makes it more likely the owner will do this for the next property,” says Simpson. “It is good for the borrower and tenant community.”

“Some think of apartments as buildings, but they are actually a collection of homes. We all have to think of each unit as a home and the building as a neighborhood,” he adds.

Retrofitting to Compete

Improvements to Fannie Mae’s Green Rewards program come at a time when green properties are attracting institutional investor interest and some developers are finding a profitable niche in retrofitting multifamily properties.

And, the savings could be most meaningful to low-income households. Harvard University’s Joint Center for Housing Studies says utility costs represent some 15 percent of income for renters with incomes below $15,000, but just 1 percent for those with incomes of $75,000 or more.

Investor Interest

In August, Moody’s Analytics said that green building features are becoming an important factor in maintaining property valuations. The credit rating agency also noted that multifamily commercial property loans resold into commercial mortgage-backed securities are better assets when the underlying property is green.

In addition to addressing environmental concerns and improving the net NOI for affordable apartment properties, the refitting and construction of green properties is sure to play an important role in the broader economy.

The U.S. created more than 2.1 million green construction jobs between 2011 and 2014 and the USGBC expects another 3.9 million between 2015 and 2018.

“Our program is one example of how financing from Fannie Mae improves the quality of the nation’s affordable housing,” says Simpson, adding that Fannie Mae “won’t stop innovating in this space.”

Aleksandrs Rozens is a writer in Fannie Mae’s corporate communications department.