Beginning this month, apartment developers interested in applying for a Leadership in Energy Efficiency & Design (LEED) green building certification will be operating under a whole new set of rules. That’s when LEED v4 became the de facto LEED standard mandated by the Washington, D.C.–based United States Green Building Council (USGBC), an organization that largely pioneered the green building movement, even if it has had its fair share of multifamily design/build detractors along the way.
As LEED has grown in prominence, those detractors have remained critical of the cost and administrative complexity involved in qualifying for LEED. They also question the applicability to apartment buildings of certifications designed for single-family housing and commercial real estate. Whether green building certifications—LEED or otherwise—have weight as a real estate marketing tool also remains nebulous, further adding to the question of certification-program return on investment.
Thankfully for apartment development teams, LEED v4 does promise more accessibility to multifamily, but the certification will nevertheless still incur a cost premium. It’s also going to be as tough and rigorous to get certified as ever, and the USGBC is completely unapologetic about that.
“We owe it to our mission to create better buildings in the market, and we owe it to people who have achieved LEED to make sure those certifications are not watered down and just become another sticker on the door,” says Marc Heisterkamp, USGBC vice president of strategic relationships. “But perhaps we don’t often do a good enough job of showing the great success we’ve had in the multifamily market. It’s certainly not waning in terms of market adoption. It’s grown consistently since 2007, and [the] 2016 numbers are looking bigger than [the] 2015 numbers.”
In fact, the USGBC currently claims more than 4,000 LEED-certified multifamily buildings. In addition to LEED v4, the organization is exploring a new certification for multifamily that will recognize energy performance in operations from existing buildings, and overall the USGBC sees the apartment sector as a growth market for sustainable design and construction.
The organization isn’t alone. In the fall of 2015, the Chicago-based Institute for Real Estate Management (IREM) launched its IREM Certified Sustainable Property program, largely to address the need for a certification for existing buildings. In addition to LEED and IREM, multifamily executives can pursue certification under national and regional programs, including Green Globes, the WELL Building Standard, Passive House, Energy Star, the NAHB Green Building Standard, the Austin (Texas) Energy Green Building program, and California’s Build It Green, among dozens of others.
As a result, choosing a green building certification program in and of itself has become a frustration for apartment builders and operators, involving ROI analyses and even feasibility studies with external sustainability consultants to determine which certification path to take. Some developers even opt out of the certification process entirely, instead building “to LEED standards” without bothering to pursue the official documentation.
To the industry, the bottom-line benefits of energy-efficient operations seem obvious, and third-party endorsement of sustainability still carries weight, but when it comes to who offers that endorsement, and under what conditions, ambivalence often reigns supreme.
Brand-Blind Green Premiums
Even the government-sponsored enterprises (GSEs) show a wide berth when it comes to pegging a preference for one green building standard over another. Both Fannie Mae and Freddie Mac offer special green-building financing programs for multifamily or will reward sponsors with more-favorable lending terms for making assets more efficient from an energy- or water-consumption standpoint. Fannie Mae’s program, for instance, provides a free ASHRAE Level 2 energy audit, better pricing than nongreen loans, underwriting of 75% of the owner’s projected cost savings, underwriting of 25% of the tenant’s projected cost, and up to 5% additional loan proceeds.
Richard Levine is a senior managing director of New York City–based Berkadia’s Atlanta office, which has closed on 10% of the Fannie Mae Green Financing multifamily deals that have been done since the GSE launched the program in May 2016.
“Committed, closed, and under wrap on green product, we’ve financed over $200 million since they started the program in May,” says Levine. “There are eight different green certifications that qualify, and it’s incredibly advantageous for sponsors to pursue this.”
In addition to offering favorable financing terms, the GSE green lending programs are excluded from production caps. So as Fannie and Freddie top out on 2016 business, lending is still available to developers who qualify for the programs. According to Levine, the majority of those sponsors typically qualify with either LEED or the Jones Lang LaSalle–created Green Globes certification.
All the way on the other side of the stakeholder spectrum, apartment residents likewise remain ambivalent about specific green certification brands even as sustainability is becoming more a part of their decision-making process about where to rent or renew, and for how much.
“Branding with LEED is an important part of our marketing campaign now with prospective residents, although they seem more familiar with the word ‘green’ than the word ‘LEED,’ ” says Jim McGinley, senior vice president and chief development officer for Plano, Texas–based Monogram Residential. “But our property managers do feel that the program certifications lend legitimacy to the word ‘green’ and therefore have a positive influence on the conversations they’re having with the resident.”
To that end, Monogram is exploring a green premium amenity package for prospects, offering units upgraded with Nest programmable thermostats, LED lighting, and other green features.
“We haven’t concluded fully how many communities will feature the package or the exact pricing of the package, but it is something we’re rolling out now,” says McGinley, noting Monogram will look to track green premiums via its revenue management software. “It will be interesting if this is one more thing that residents will respond positively to [from a rent premium standpoint], so we’re excited to roll that program out.”
LEED: Elite or Elitist?
One area where LEED might be enjoying preference as a green standard is in the acquisition and disposition of properties. While McGinley says LEED certification in and of itself doesn’t guide dealmaking at Monogram, it’s certainly part of the conversation. At Chicago-based AMLI Residential, LEED is becoming an even larger component of portfolio building and development alike.
“We’re actively purchasing certified communities and have made the decision that, moving forward, all of our developments will be LEED Silver certified or better,” says AMLI sustainability manager and development associate Erin Hatcher. “Right now, approximately 25% of our portfolio is LEED, so we haven’t lost any momentum with green building certification. We’re investing more into it.”
But even with the rapid introduction of ever more green building, certification remains a challenge for Hatcher and her multifamily colleagues. Some of those certifications—particularly Energy Star—have ironically helped to prove the value of LEED to AMLI.
“It can be overwhelming at times to try to track all of the available programs and certifications and understand what might be the best fit,” Hatcher says. “But we do have a growing number of Energy Star–certified buildings, and that’s been an exciting addition, as Energy Star measures building performance and has provided a barometer to see where our LEED buildings stand. We’ve been very satisfied with their results.”
Hatcher is likewise satisfied with the progress the USGBC has made in better incorporating multifamily into the certification process, particularly within LEED v4, which makes upgrades to how the program calculates energy efficiency and ventilation but also makes significant changes on the materials side designed to better address resident health and wellness.
“I agree that in the past it was a little bit challenging to apply either a single-family rating system or an office rating system to a multifamily development, but there are definitely more opportunities within LEED for multifamily-specific credits now, and overall the program has blossomed to accommodate low-rise and mid-rise multifamily, specifically,” Hatcher says.
At Phoenix-based Alliance Residential, vice president of corporate social responsibility Kelly Vickers agrees that LEED, while retaining a more stringent, challenging, and therefore costly certification process, nevertheless remains a gold standard among ratings systems.
“The costs associated with certifying LEED projects can be a barrier and therefore prevent some developers from pursuing it,” Vickers says. “Yes, LEED can be rigorous, and getting certified can be an additional expense, but, in general, green building certifications are going to be a process and take time to work through, and there’s still a lot of value in the LEED certification, as it is highly recognizable and meaningful.”
Others aren’t so sure. “Our clients typically don’t see any real-world difference in marketing value between a true LEED-certified building and one that can reasonably make claims of being sustainable and environmentally friendly,” says Steve Schoch, AIA New Jersey spokesman and managing partner at Collingswood, N.J.–based architecture firm Kitchen + Associates. “If you’re looking for a certification to make you stand out, you want the one that nobody else has. Within LEED, that means stretching to Platinum level, and that’s a nonstarter for many in the marketplace.”
IREM will look to differentiate its Certified Sustainable Property program by designing it to not only be more financially attainable but also address a larger portion of the multifamily built environment by focusing on energy-efficient operations in occupied buildings rather than standards achieved during construction.
“LEED is definitely the upper echelon of green certifications, and it’s absolutely critical to the real estate market,” says IREM sustainability program manager Todd Feist. “But there are thousands and thousands of properties across the country that aren’t going to get to LEED. It might be financially out of reach, or it might be programmatically impossible, but it’s simply just not in the cards.”
Notably, the IREM program offers owners the ability to qualify entire portfolios for a certification at one time, drastically reducing the administrative burden of certifying on a piecemeal basis. Currently, Alliance, Dallas-based Lincoln Property Co., and Belmont, Calif.–based Woodmont Real Estate Services have received certifications under the program, and Feist says the 2017 program pipeline includes more than 100 additional properties nationwide.
As part of the LEED v4 rollout, the USGBC will also begin to recognize existing buildings in terms of energy performance versus only rewarding the efforts made in initial design and construction, although achieving certification still promises to be demanding.
“Part of our goal with LEED v4 is to begin recognizing building performance in terms of operations,” says Heisterkamp. “It’s not cumbersome to achieve, but there is an amount of rigor in the proof that’s necessary to qualify so [that] we’re recognizing the greenest buildings in the market and we continue to be held accountable to our standard.”
Regardless of where LEED v4 shakes out within multifamily, development veterans nonetheless say the significant advancement of sustainability in building and operations practices has much to do with the USGBC, and that even more certification programs are yet to come.
“Building standards have been a great exercise for the development community, and LEED has trained a whole generation of developers to be much more conscious of sustainable development and what it is,” says Fred Harris, managing director of development for New York City–based Jonathan Rose Cos. “It’s going to be an interesting new era in the next several years. I think there will be a lot of new standards going in different directions, and ultra–energy efficient buildings are going to present not just a whole new level of certifications, but a whole new world of what multifamily might achieve in sustainability.”