Billions of dollars of energy saving potential are sitting in our nation’s multifamily buildings. A study by McKinsey and Company estimated that the capital required to unlock energy efficiency opportunities in our nation’s low-income residential buildings between 2009 and 2020 is approximately $46 billion, and would provide a present value of $80 billion in savings.

Almost a quarter of this energy efficiency potential is in multifamily buildings, accounting for approximately $16 billion in savings.

The capital to unlock these improvements, however, is not always readily available. In response to this challenge, Deutsche Bank Americas Foundation and Living Cities engaged Steven Winter Associates and HR&A Advisors to aggregate and analyze a dataset of multifamily housing projects—totaling over 21,000 units—that had undergone energy efficiency retrofits in New York City. The study looked for three key metrics: pre- and post-retrofit building performance, the reliability of savings projections and, finally, to establish a framework for incorporating energy savings projections into underwriting.

Energy retrofits ensure the long-term viability of existing affordable housing. Retrofits help improve the physical conditions of existing housing stock which helps to address the issue of the widening gap between supply of and demand for multifamily affordable housing across the U.S.

Also, retrofits generate significant operating savings that can be reinvested into the building, supporting future operations and/or capital work.

Retrofits bring direct energy savings to those most in need, help avert future rent increases, and improve conditions in affordable properties.

Residents of multifamily housing, particularly affordable housing, are extremely vulnerable to energy cost increases, and stand to benefit the most from energy retrofits.

According to the U.S. Department of Housing and Urban Development (HUD), 88 percent of households in multifamily buildings are renters and have a nationwide median household income that is approximately half that of homeowners. Energy costs in low-efficiency multifamily housing puts a large financial strain on these households.

HUD found that while average rents in multifamily housing increased by 7.5 percent from 2001 to 2009, energy costs for these renters increased by nearly 23 percent.

Residents in direct-metered buildings can benefit from substantially lower utility bills. In direct-metered buildings (where residents pay for the in-unit share of utilities and building owners pay for base-building energy consumption) residents can benefit directly from retrofits to apartments, such as appliance replacement, lighting upgrades and, in some cases, improvements that impact heating and cooling.

Not only do retrofits improve the quality of the housing stock, but they generate significant operating savings that can be reinvested into the building. Energy efficiency savings can play a critical role in improving a building’s financial stability, freeing up capital to offset potential rent increases and/or cover additional capital work. Energy savings essentially creates an ongoing annuity that provides a return on investment to the owner.

Affordable housing owners often face considerable financial hurdles to repairs and retrofits, as they are limited in raising rents or passing along costs to residents to recapture the cost of improvements. Furthermore, most do not have the upfront capital available to invest in these projects. Operating savings resulting from retrofits can be used to build up capital reserves, service additional debt to carry new capital work, make repairs, or improve building operations.

The 2011 Deutsche Bank Americas Foundation/Living Cities study reports that NYC affordable multifamily buildings undertaking comprehensive retrofits recorded $240 per unit in annual fuel savings, and $50 per unit in annual common area electric savings across the study portfolio.

Assuming total building expenses of $5,000 to $6,000 per unit per year, and annual energy savings of $290 per unit from a comprehensive retrofit project, savings would equate to a five to six percent reduction in expenses. More importantly, this extra income could be used to support almost $3,000 in debt per unit.

Examining fuel savings across the Deutsche Bank/Living Cities portfolio, $240 in annual savings could support approximately $2,480 in new debt per unit, which covers the median per unit cost of fuel retrofits of $2,200 across the portfolio.

While the study marks considerable progress on this front, additional efforts are critical to supporting transformation of underwriting practices. The industry needs to continue to document the reliability of energy savings through the development and/or expansion of building energy databases. Furthermore, increasing accountability in audit projections can serve as a means to improve the accuracy of projections and support lenders’ use of audit projections.

More effort is needed to build upon the study’s methodology for underwriting against energy savings and prove out the concept.

Finally, support from government and philanthropic sources are required to support these activities and serve as a source of credit enhancement in the early stages. And while some housing agencies and industry stakeholders have begun to make important shifts, energy efficiency retrofits need to become part of typical business practice on a broader scale. 

 

Sources: “The benefits of energy efficiency in multifamily affordable housing,” report by Deutsche Bank. McKinsey & Company, Unlocking Energy Efficiency in the U.S. Economy, 2009

http://www.huduser.org/portal/periodicals/em/EM_Newsletter_Summer_2011_FNL.pdf

 

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