CREJ - Multifamily Properties Quarterly - February 2017
Colorado’s multifamily housing climate is changing. Rental rates have experienced a 44 percent growth over the last five years, with the current average rental price at $1,340 per month compared to $928 per month at the end of 2011. In addition to growth, the demands are changing. In a cultural climate where “going green” is as much a savvy marketing strategy as an altruistic business decision, multifamily projects are popping up all over the state touting their sustainable design features. But the question remains, is “green” still a fad or is some form of sustainable design the new standard for building going forward? From what we’re seeing from property developers and owners, as well as the trends we are seeing in leasing, we’d err on the side of the latter. • Increased buy-in. What was once a city known for the brown cloud of pollution that hung over it, Denver has worked hard to clean up its act. Sustainability isn’t just a buzzword for the city; it’s part of a multiyear mission to transform how the area is taking care of its people and environment. The city ranked No. 9 on the Environmental Protection Agency’s 2016 Energy Star Top Cities list. Denver is on the map for cutting emissions through energy efficiency. The city also established 12 major sustainability goals it aims to achieve by 2020, several of which are important for developers and owners. By 2020, the city plans to reduce the total amount of energy consumed by buildings, mobility and industrial processes to below 2012 levels; increase citywide recycling rates to 34 percent or greater; and reduce, per capita, the use of potable water by 22 percent. And with the city’s goal of reducing trips in single-occupant vehicles to no more than 60 percent of commutes, there’s a renewed focus on improving public transportation, making transit-oriented developments that much more of a focus moving forward. Combine that with the fact that the city is a magnet for millennials, and it becomes clear that there will be an increased demand for more sustainable multifamily housing in the future. • The millennial factor. With home prices soaring to record levels, many of the millennials attracted to Colorado’s lifestyle will need to rent vs. purchase a home – at least, for the time being. As a result, multifamily developers and owners are paying attention to what they value. According to Pew Research, millennials are the most sustainable generation to date. These 20- to 35-year-olds are more likely to support strict environmental policies and regulations, prefer to work for sustainable employers, choose sustainable transportation options when possible, and will pay more for eco-friendly products. Multifamily developers and owners are taking notice. Going green is becoming the standard, not the exception. Leasing agents are quick to highlight the green features of their buildings and community, including composting programs, bike-sharing options and the use of eco-friendly materials in construction. It’s become a competitive differentiator. But just what does being sustainable or green mean in multifamily housing? That’s where certification programs come into play. Benefits of the Certifiably Sustainable These days, it’s almost unheard of to open a new apartment complex or redevelop an existing one without being certifiably green by someone’s standard. LEED and Energy Star remain two of the most popular certification bodies. While LEED certification has been the premium standard for quite some time, it also can be time consuming and costly to go through the process. Many builders are inclined to pursue Energy Star, which is easier to attain in both new builds and retrofit projects. For those companies for which sustainability is just one part of a total wellness package, there are new certification programs such as the one offered by The International WELL Building Institute, which outlines a performance-based system for measuring, certifying and monitoring features of the built environment that impact human health and well-being. Incidentally, Denver is home to the first community in the state on track to achieve WELL multifamily building certification. While getting certified can be a headache, it also can come with benefits for the developer/owner. Some lenders will give a discount on loan interest rates for using sustainable practices. For example, for properties that qualify as “green” under Fannie Mae and Freddie Mac guidelines, loan spreads can be 13 to 41 basis points lower. In today’s yield-driven environment, the reduced debt payments equate to increased value in the capital markets. Green properties also can be more marketable to potential residents who are willing to pay a premium for things like composting, recycling and low-flush toilets. There’s anecdotal evidence that environmentally conscious residents are inclined to take more ownership in a sustainable property, creating a stronger sense of community where people take better care of common spaces. One such apartment complex that has experienced these benefits is Denizen, a 275-unit community located 20 feet from the Alameda light-rail station. Denizen was the first market-rate LEED Platinum rental building in Denver. It was over 90 percent occupied three months after its completion and has seen rental rates increase more than 10 percent in just over a year. Given the complexity of these large developments, it is nearly impossible for a developer to pinpoint exactly what the added cost is for going green. While there is some speculation on how going green impacts return on investment as more multifamily communities employ sustainable design features, more hard data will begin rolling in. It’s safe to say in the meantime that as long as the city of Denver and residents continue to demand sustainable practices, they are here to stay.