Multifamily construction is booming. The most recent Multifamily Production Index (MPI) rose for the eighth consecutive quarter to its highest level since the second quarter of 2005. Even with strong production, vacancy levels remain low. And the forecast is bright for this sector – multifamily construction is projected to remain strong through 2015 due to demographic trends and a decreasing homeownership rate.
Getting builders to “go green” during the last housing boom was challenging. A VP of Construction for a national builder once listened politely to my pitch and said simply, “Honey, I can’t build them fast as I can sell them. Why would I do anything differently?”
But with this recent growth trend, things seem to be different. Multifamily green certifications to the National Green Building Standard (NGBS) are also booming. So what’s changed? Why are multifamily developers bothering to seek NGBS certification when demand is so strong? Fortunately with age comes insight (usually), so here are the top five reasons I believe green is growing in the face of strong market conditions.
Large institutional investors want to invest in projects seeking green certification, and NGBS certification meets their requirements. These investors have determined there is a competitive advantage to green certified buildings. A recent CoStar Group study confirmed that green buildings outperform their non-green peer assets in key areas such as occupancy, sale price, and rental rates, sometimes by wide margins. Although the conclusion regarding higher rental rates for apartments remains unsubstantiated for many markets, the fact remains that non-residential commercial buildings, at the forefront of green certification for a decade, are showing significantly higher resale values. Combine higher-value properties with lower operating costs (see #3 below) and you get a lower cap rate. This is a big plus from an investor’s perspective and guaranteed to command greater attention from institutional investors as they seek out high-yield, low-risk investment opportunities.
Green certification might not (yet) command higher rental rates, but in many cities it is an appreciable market differentiator. Anecdotally, the evidence is strong. Our program partners reliably report that they attract more renters to visit their communities and lease up faster than their non-green competitors. Market research consistently confirms that Millennials and Gen Xers want greener lifestyles but believe that it is the responsibility of businesses to create green products. For multifamily developers here is the unique value proposition. You can make prospective renters feel as though they are making as little negative impact on the world as possible, while enhancing their lifestyles with well-designed apartment communities.
Some developers select green certification to mitigate the future risk of higher rent rates and building values for green buildings as compared to non-green certified buildings. Others are looking to hedge energy price volatility. Energy is a significant operational cost for all apartment managers; utility costs represent the single largest controllable cost in an apartment community. Improving building performance and lowering overall utility costs for developer/owners can increase net operating income and make a significant difference to the bottom line. Long-term forecasts continue to predict that residential utility costs will rise appreciably. If you are not building energy and water efficiency into your buildings today, you are building in obsolescence.
The investment community believes that between 30 and 50% of a company’s value is intangible, based mostly on corporate reputation. (Others place the value of such intangibles at 70%.) Being an environmental leader and setting corporate sustainability goals are among the more important strategies to building a favorable corporate reputation. Further, the mounting convergence of brand and corporate reputation means that the corporate brand is as important, if not more important, than product brand(s). Land development and construction activities in particular have a very visible impact on the environment. Setting clear, transparent, and measurable sustainability goals is an efficient way to position multifamily developers in a favorable light. Seeking affordable, attainable NGBS certification for all new construction can solidify the corporate sustainability commitment.
In a few jurisdictions NGBS certification brings tangible rewards: expedited permitting, density bonuses, tax credits, permit fee reductions, rebates, and LIHTC preference. In those situations the reason to commit to green is obvious. But even in areas where green isn’t mandated or incentivized, savvy developers understand that seeking NGBS certification can grease the wheels of many sluggish development review processes. Local officials and local community residents appreciate when developers propose projects with reduced environmental impacts and above-code construction practices. And by demonstrating your environmental bona fides by attaining NGBS certification you get to select which green practices to employ in your project, as opposed a government mandate how you attain green. You might as well perfect those green practices – most development will face more stringent building codes and environmental regulations in the future. Use the NGBS as a voluntary, above-code program to get public recognition now, and bank the hands-on expertise for when building requirements ratchet up in the future.
Remember how I mentioned market research consistently confirms that Millennials and Gen Xers want greener lifestyles but believe that it is the responsibility of businesses to create green products? Corporate social responsibility (CSR) is also a way to attract and retain talent. In a global workforce study by Towers Perrin, the professional services firm, CSR is the third most important driver of employee engagement overall. In the United States, an organization’s stature in the community is the second most important driver of employee engagement, and a company’s reputation for social responsibility is also among the top 10. Deloitte reports that 70% of young Millennials, those ages 18 to 26, say a company’s commitment to the community has an influence on their decision to work there. A corporate-wide commitment to green certification can help you attract and retain your most valuable employees.
Intrigued? Curious? Skeptical? I'd love to hear from you! Find out more about the benefits of NGBS certification of multifamily buildings.***