Home Innovation Insights

How can federal incentives and policy can help us get to a greener future faster?

How HUD Transformed the Multifamily Market Via Green Incentives & Policy

September 24, 2021

A little more than a decade ago, homes and apartments lagged in earning green certification. USGBC’s LEED rating system had launched 10 years prior with help from the Federal Energy Management Program, and increasingly offices, educational buildings, medical facilities, and other commercial buildings were earning green certification for their green, high-performance features.

But, unfortunately, that didn’t account for the buildings where we live – single-family homes, townhouses, duplexes, garden style apartments, assisted living, student housing, mid-rise and high-rise apartments. The exception was multifamily or mixed-use buildings where the local jurisdiction mandated LEED certification. In those cities, there wasn’t a choice.

Understanding the barriers that existed for residential buildings seeking green certification helped Home Innovation craft the NGBS Green program to eliminate many of those barriers. As a result, NGBS Green certifications soared over the past 10+ years.

For example, unlike commercial buildings, green certified apartments do not command higher rent than non-certified buildings. Also, tenants typically pay their own energy costs, so investing in energy efficiency measures for multifamily buildings does not yield an ROI for the developer.

Developers who were early adopters of NGBS Green cited two specific reasons for seeking certification: 1) corporate sustainability goals, and/or 2) institutional investor preferences. Multifamily developers such as Crescent Communities and Alliance Residential set environmental stewardship as a key corporate goal, backing their sustainability commitments by seeking and earning NGBS Green certifications. Other developers agreed to earn NGBS Green certification when institutional investors prioritized green certified buildings for their real estate portfolios.

The market demand for green residential buildings increased considerably with Fannie Mae’s Preferred Green Financing program, which offers a variable rate reduction for buildings that earn a green certification from the list of programs they recognized.

But without question, the single most impactful catalyst for green, high-performance multifamily buildings has been the HUD Green Mortgage Insurance Premium (MIP) Reduction. The Green MIP reduction was the game changer the residential construction industry needed. Implemented at the very end of the Obama Administration, the HUD MIP was a big enough financial incentive that even the most stalwart anti-green developer or owner couldn’t resist. As news of the HUD MIP reduction spread through the industry, developers and owners that previously never considered a green certification, or even openly scoffed at the suggestion, changed their minds. The MIP reduction was enough of a payback to more than overcome the three biggest green certification barriers:

Not only did the HUD MIP reduction increase the number of new buildings seeking certification, but it single-handedly created a green certification imperative to take on green renovations for existing multifamily buildings or other building types, such as commercial or industrial, being converted to multifamily. The resulting environmental and social benefits from existing buildings being renovated to be more energy efficient and green cannot be understated. Newly constructed buildings earning NGBS Green certification are more sustainable and healthier for their residents. But renovations of older, inefficient buildings yield far greater benefits for the environment and residents because older buildings are typically inefficient and poorly performing.

At the same time, HUD also instituted another policy mandate that had far-reaching benefits for housing in disaster-prone areas. As part of their requirements for communities to access federal redevelopment funding after natural disasters such as hurricanes, HUD required eligible buildings to earn a green certification. Currently, over 2,000 homes being rebuilt from Hurricane Maria’s devastation in Puerto Rico are seeking NGBS Green certification. This is a win-win for everyone. The federal government funds housing that will be more sustainable, and hopefully more resistant to future disasters. Puerto Rico gets housing that is more environmentally friendly to help conserve resources and protect their beautiful natural amenities. And the individuals and families living in the homes will save money on utility bills, and have a more durable, healthier home that requires less maintenance.

What is the lesson learned? Simply, incentives work. Federal policy to incentivize green construction has helped transform the laggard housing industry.

According to the National Multifamily Housing Council, the U.S. could save $9 billion in energy costs by improving the energy efficiency of apartments.

So where do we go from here? NGBS Green continues to work to help the entire housing industry build better homes. We offer the following ideas for how federal policy can continue the path to sustainable housing.

Home Innovation, through our NGBS Green program, is helping builders design and construct greener, more sustainable, heathier homes. As demonstrated by their past success, federal incentives and policy can help us get to a greener future faster.