Sustainability. Affordable housing. These terms often overlap when it comes to development and/or renovation of multifamily product, and for good reason. There is a growing need and demand for affordable housing. There is also increased demand for green residences, those that are created through use of sustainable design practices, and result in operational efficiencies.
The question: How do green design features impact the feasibility of developing new affordable rental housing?
The answer: It depends.
Affordable housing development depends on a limited supply of low income housing tax credits — LIHTCs — to help finance development. Green development, meanwhile, is also important, but for different reasons. Eco-friendly housing creates efficiency and protects the environment. However, it is sometimes difficult to quantify green development benefits. As such, equity providers and lenders might not be willing to underwrite all operating efficiencies from a green development to generate greater loan proceeds.
While all stakeholders would prefer to see sustainable design features in new development, the cost can stress project budgets and could increase the number of LIHTCs necessary to produce affordable housing. At the risk of oversimplifying, this has resulted in a trade-off, of sorts, between the amount of affordable housing produced each year and the level — and cost — of green design features.
Even with case studies noting that green, affordable housing can eventually save money, the upfront costs can place project budgets under stress and create bad optics for those concerned about the cost of affordable housing production.
— Todd Crow, executive vice president and head of the Tax Credit Solutions segment of PNC Real Estate.
Affordable housing is designed to serve a renter pool spending less than 30% of its after-tax income on housing. The townhome development in your neighborhood, in which residents earn up to 60% of the area median income, is affordable housing, as is the urban core residential high-rise offering half of its units below market rate.
In its 2018 “The State of the Nation’s Housing,” the Joint Center for Housing Studies of Harvard University said that demand for affordable housing continues to outstrip the available supply. The report noted, “The nation’s supply of low-cost rental housing shrank significantly after the Great Recession, and has remained essentially unchanged since 2015.”
There is little doubt that demand for affordable housing has reached a crisis point in some parts of the country. Higher upfront expenses involved with green development can mean fewer units.
When it comes to green development, “developers struggle with sustainability issues, as they attempt to apply a ‘one-size-fits-all’ approach to green activities,” Crow said. “‘Sustainability’ can run the gamut, from natural-gas vehicles to transport construction materials, to use of environmentally-friendly paint on houses, to a focus on reducing consumption of water and energy.”
In an attempt to narrow the category, GSA lenders Fannie Mae and Freddie Mac provide loans reliant on green practices. The Freddie Mac Multifamily Green Advantage® program offers loans rewarding investors and developers that take steps to reduce energy and water consumption. Fannie Mae’s Green Financing Business is also geared toward energy and water improvements, as long as they are part of a renovation or development of affordable rental housing.
And, there is proof of eventual cost savings involving green programs. The Environmental Protection Agency said that implementing energy-efficient programs across affordable housing types can result in energy savings of anywhere between 15%-30%. Furthermore, a 2012 study by CNT Energy and the American Council for an Energy-Efficient Economy said that building owners and residents could save $3.4 billion per year by making energy-efficient upgrades in existing multifamily housing.
If this is the case, then why isn’t there more affordable housing, especially housing that is energy-efficient and sustainable?
One reason is that, as noted above, higher upfront costs and the need for higher LIHTCs can be problematic for construction budgets. Eco-friendly roofing and frame materials are frequently more expensive than other materials. Renewable technologies, such as solar panels, programmable HVAC systems and water reclamation systems, are costlier. A higher per-unit cost for sustainable development could result in fewer units delivered.
To summarize, the connection between eco-friendly development and affordability is complex, partly because sustainability is such a broad concept. Additionally, higher up-front development costs can sometimes mean fewer units even if green design features eventually lead to lower expenses and future savings. The challenge of merging the proper balance between meeting the urgent need for affordable housing and desirability of sustainable design must be a priority for owners and operators alike.