The long view on green certifications

Green has finally arrived in multifamily. Or so it seems.

While it’s taken a few years to mature and take hold inside the apartment space, on-going evidence of its value has made going green more desirable to lenders, developers, and now apartment operators.

Just what is the real value of green certifications to apartment owners, particularly retrofits on existing apartment buildings?

The reason for the slow embrace of sustainability by apartment owners may be that we are realists. And we suffer from simple-step syndrome. Project pay-offs must be obvious, and methods, simple.

Simple-step milestones are both easy to understand and to present to our stakeholders. For example, with new construction you scope it, bid it, and build it. Once the job is done and the CO (certificate of occupancy) is signed, you’ve either made your numbers or you haven’t. Your commitment to your lender concludes with the project hand-off.

But green has a “longer tail” as it’s called in statistics. The cost analysis and value is derived from the performance of the structure, including its upkeep and maintenance, and there’s still so much more. The long tail of green apartment operation includes, but is not limited to, a complex interaction of physical plant, regional utilities, local laws, effective rents, and resident demographics and behavior. This is even further complicated by the dreaded split incentive nature of apartments whereby the owner pays for some or all of the water and energy conservation measures of which the resident is the unvested beneficiary.

Nevertheless, drought, aging infrastructures and the ensuing rising utilities have dropped this green movement, specifically conservation, on to our properties and into our spreadsheets. It’s not always an easy or step-by-step path to prove value, but with thought and advanced planning, it can pencil and be a viable method to controlling the uncertainty of rising utility costs.

As green initiatives have evolved, so too has the race to identify and value their effects according to meaningful and consistent standards. Nationally, there are two major players by way of footprint and impact in the field of green certifications for apartment buildings.

A green certification primer: ENERGY STAR®
ENERGY STAR was first launched in 1992 and grew out of the Green Lights Program, which had the goal of working with office and building owners and managers to retrofit their lighting to more energy efficient options. It’s a U.S. Environmental Protection Agency (EPA) program and today provides a widely recognized standard for energy efficiency in buildings, consumer appliances, electronics and homes.

Even as it continued to expand and morph, ENERGY STAR in the buildings sector was most often engaged in the office, school, retail and other buildings sectors for much of its history and there was little engagement with the multifamily sector. Recently however, ENERGY STAR launched a new offering for existing multifamily properties that has garnered the interest of many in the industry.

For existing buildings, the program works on a 100-point scale. Benchmarking energy use at a property and scoring 75-plus indicates your building is in the top 25 percent of energy efficient performance compared to similar buildings across the country and is eligible for an ENERGY STAR certification.

To earn ENERGY STAR certification in the multifamily category, a property must have whole-property energy data (including inside the individual units as well as common areas), have at least 20 units and at least 50 percent of the buildings’ square footage must be used for multifamily housing.

“ENERGY STAR’s Portfolio Manager® is an excellent tool and metrics calculator to benchmark a company’s energy, water and greenhouse gas emissions,” shared Energy Star Manager Michael Zatz, “The benefit for companies just beginning their conservation efforts can be substantial and over time leads to monumental savings as owners and managers act on the results.”

EPA asserts that ENERGY STAR-certified buildings save over $9 billion annually in energy costs over conventional buildings and use 35 percent fewer greenhouse gas emissions than comparable buildings.

A green certification primer: LEED
LEED or Leadership in Energy and Environ-mental Design, the second of the more widely-recognized green certifications, began in 1994 as a single building standard for new construction. LEED is a product of the U.S. Green Building Council (USBGC), a private non-profit organization headquartered in Washington, D.C., and also works on a 100 point rating scale. Once rated, properties are then awarded 1 of 4 certification tiers: platinum (80 points); gold (60-79 points); silver (50-59 points) and certified (40-49 points).

Whereas, the only direct cost of ENERGY STAR certification is for a licensed professional engineer or architect to review and certify a property’s results, LEED certification also carries an application fee that typically runs in the thousands of dollars. The fee varies depending on the size of a project and whether the owner is a USGBC member.

“LEED certified buildings save money and resources and have a positive impact on the health of occupants, while promoting renewable, clean energy,” states Asa Foss, LEED AP Homes, LEED Residential Technical Director, U.S. Green Building Council. “Our green building certification program recognizes best-in-class sustainable building strategies and practices.”

The USGBC states that LEED-certified buildings run, on average, 13.5 percent less in overall operating costs on new construction, and an average of 8.5 percent less on existing buildings. USGBC research suggests that LEED certification has a positive impact on occupancy with a 6.4 percent gain on new construction and 2.5 percent gain on existing. According to research by the Institute for Building Efficiency, various studies indicate improved resale value ranging from 5.8-35 percent.

LEED for existing buildings
When LEED began awarding credentials in the early 1990s, it was only focused on new construction. Its existing buildings segment was formally launched in 2002. It was a logical move.

The challenge of rising energy costs went far beyond newly constructed homes and apartment buildings. Existing residential buildings accounted for 53.7 percent of the total national energy consumption in 2002, and 51 percent of all U.S. electricity consumption. The average household spent $2,000 a year on energy bills, yet new construction made up less than 1 percent of the national inventory. Green certifications were addressing less than 1 percent of the issue.

LEED-EB: Operations and Maintenance spun off a new set of standards targeting the specific concerns of older buildings, their distinct maintenance needs, and the retrofits necessary to bring operational performance in line with present-day conservation. The overarching objective was to identify and guide high-impact improvements to buildings, increase operational efficiencies and decrease costs. Most importantly the agency is intent on modeling retrofits that deliver quick payback periods to owners.

Advances in the LEED-EB program include charting out predictable development cycles on retrofits, refining more transparent environmental and human impact weighting and layering regionalization into the calculations. The 100 point system is weighted across 5 categories: energy and atmosphere (35 percent); sustainability (25 percent); indoor environmental quality (15 percent); water efficiency (14 percent) and materials and resources (11 percent).

The original LEED-EB standards were mostly based on installed equipment and the availability of public transportation. By 2008, the assessment became more building and occupant-performance based. The following year LEED-EB awarded up to 15 points for reductions in commuting by building occupants. Today, the program assesses a property’s operating plan, conducts a basic energy audit, and issues appropriate credits for a community’s adaption to regional priorities such as mastering water efficiency in areas affected by drought.

Most recent advancements include standardizing the program to create efficiencies for building owners across a portfolio. The USGBC recognizes uniform approaches and streamlines the review process accordingly.

Presently there are over 120,000 apartment units in the U.S. seeking LEED certification. Ninety percent of LEED’s total residential portfolios are multifamily assets. Of new multifamily construction, over 10 percent have chosen LEED certification in 2014.

LEED-EB has already been adopted by hundreds of companies, cities, states and even the Federal government by way of its GSA-owned and leased buildings.

Green certification has proven to coincide with energy efficiency within any market, as well as to lower operating costs. Socially, it is a clear step forward on the part of a company to meet sustainability commitments. It has also become a feature that residents now seek.

Why it matters
Since multifamily is generally an industry of pragmatists, the biggest push for green certifications is usually based on the cost savings associated with sustainability. Green certifications have now proven to be associated with lower operating costs. It’s a simple business model and adds value to an asset in easy-to-understand terms.

However, research continues to suggest that occupants in green certified buildings tend to be more satisfied than those in conventional buildings, as well.

A recent survey compared conventional buildings certified by LEED for Existing Buildings (LEED-EB) and ENERGY STAR, examining a total of 61 buildings.

Buildings with at least one certification averaged a satisfaction score at least seven points higher than uncertified facilities, while those facilities boasting two or more certifications scored even higher.

ENERGY STAR buildings averaged 30-point-higher occupant satisfaction scores, while LEED-EB facilities averaged 10 points higher than those without that certification. The economic and environmental benefit of green buildings seems to have permeated the hearts and minds of our residents.

Several resident surveys have indicated that they would be willing to pay higher rents to live in green buildings. While this may be hard to verify in practice, it is not hard to imagine that a certified property that enthusiastically markets their energy-saving features, improved living comfort, and lower utility bills would be able to ask and receive additional rent from potential prospects. It is also conceivable that these properties would have lower vacancies and faster lease-ups than non-green communities. If that is in fact the case, then it would put green features on par with the typical upgrades and amenities historically pursued by management. This will have a major impact on the funding for energy-related investments.