Saving Green: Environmental Sustainability and Affordability in Rental Developments

By Emmanuel Assa, B.S. CEE, Class of 2017

Two of the hottest topics in building design these days are environmental sustainability and affordability. This is especially true in places like the Bay Area in California, where affordable housing is a growing problem and environmental sustainability is a constant focus. However, the two are often placed in conflict - if it costs more to design and build a green building, how could it possibly be affordable? Green technology and materials can be expensive up front, but due to the lowering costs of technology, the consideration of life-cycle costs, and increased incentives for developers and homeowners, affordable environmental stewardship is more possible than ever.

A lot of the opposition to combining green development with low rental prices comes from the idea that creating green buildings is prohibitively expensive. While it’s true that green buildings can cost more up front, people often think that the additional costs are greater than in actuality. The World Business Council for Sustainable Development found that people believed that on average, green features added 17% to the cost of a building (Knox, 2015). In fact, the actual amount is more around a 2% increase in marginal cost (Knox, 2015). Another common complaint is the cost of hiring “green” designers or construction companies. As of right now, LEED-certified contractors or architects command a premium, and the difference in cost can be off-putting (Vamosi, 2011). Getting a building LEED-certified can also be costly, as LEED charges a varying amount for permitting that depends on the size of the building. For larger buildings, the cost of certification can even exceed $1 million (Vamosi, 2011). Though the amount is usually small in comparison to the entire project (a $400 million budget office building had a LEED certification fee of $1.08 million, or 0.27% of the total cost), it can still cause budget-sensitive developers to balk. And if they decide to go ahead with the project and certification, it often means an increase in the asking price of development units.

What makes this argument against green building flawed is the fact that it only considers up-front costs. The picture changes dramatically when you take into consideration life-cycle costs, which are made up of both upfront and continuous operating costs. Over the lifetime of a building, the operating costs actually outweigh its upfront costs. Green buildings perform far above average in terms of operating costs, because green buildings are designed to use less energy and water than normal, resulting in lower water and energy bills (Penny, 2012). This means that the owners of the building save more over time than they spend up front. For example, a major hotel project spent about $184,000 on energy efficiency improvements but saved about $58,000 a year - the improvements paid for themselves in a little over three years (USGBC, 2015). Consider this generalization: if energy costs in a building are $2 per square foot, making the building more energy efficient will add savings of about 30%, or $0.60 (Valhouli, 2008). Each year, a 100,000sq ft building would save $60,000, or a discounted net present value of $750,000 over its 20-year lifespan (Valhouli, 2008). All with a small upfront investment in the right technology. With life-cycle costs taken into account, the argument for green building becomes all the more convincing.

These “long-term” incentives are extremely important for low-income renters and homeowners. In affordable housing, whether public or private, renters are often asked to pay for utilities. If a building is made to be energy efficient, this means that the cost to those renters is greatly reduced, increasing the affordability of the housing (Schweitzer, 2016). Many cities with public housing projects are realizing this. In Ann Arbor, Michigan, “the local housing commission is completing floor-by-floor renovations in the five-story Baker Commons public housing facility with the goal of reducing energy use at least 20 percent” (Schweitzer, 2016). In Pittsburg, “affordable housing opened in February 2015 by the nonprofit ACTION-Housing Inc... provides homes for young adults phasing out of foster care and low-income designed to be capable of generating enough renewable energy to meet or exceed its annual energy demand” (Schweitzer, 2016). In both these cases, the aim is to make the developments more affordable for residents. With improved, cost-effective technology and retrofits, it’s possible to create housing developments that are even better suited to low-income inhabitants.

However, this altruistic streak very rarely applies to private housing developers. Though public entities and nonprofits are motivated by social good, it’s rare for private developers to feel the same. Not only that, but there’s often a sense of “split incentive” - why should developers pay for up-front improvements to the building if renters are the ones paying for utilities and reaping the savings (Valhouli, 2008)? In a nutshell, “investing in high-performance features can become a driver for returns for building owners by increasing tenant retention and reducing costs associated with lease churn” (Valhouli, 2008). Tenants understand the value of energy and water-efficient buildings, and will prefer them to rentals without. Tenants saving money on utilities will also be less likely to leave the rental in the long run, providing more reliable sources of income. Still, this doesn’t give an exact incentive for developers to specifically create low-income housing. That’s where policy comes in. One of the most prominent incentives for affordable housing is the Low-Income Housing Tax Credit (LIHTC), which reduce the amount of tax the developer has to pay in exchange for the creation and upkeep of low-income rental units (ACTION, 2016). The LIHTC makes developing affordable housing attractive to for-profit developers, which would be hard-pressed to make housing affordable in regular market conditions. What makes the LIHTC more sustainable is the fact that it gives additional consideration to developments that also adhere to green development standards. For example, an Uptown Lofts development in Pennsylvania recived LIHTCs for meeting Passive House Institute U.S. energy efficiency criteria (Schweitzer, 2016). If that isn’t “tasty” enough for profit-seeking developers, it’s been shown that green apartment buildings often command higher rents than their counterparts, lease-up rates for green buildings typically range from average to 20% above average (USGBC, 2015). So even if some housing units are reserved as “affordable,” the developer can still charge above-market rates for the rest.

So, whether it’s through the lower cost of going green or through the increasing incentives to provide low-income housing, it’s getting easier and easier to develop housing that’s both environmentally friendly and affordable. Admittedly, policy has a large part in the creation of low-income housing, but the long-term cost advantages of going green helps to convince developers that the project is worth the compromises. In the end, the combination of efficient technology and policy allows for a win-win situation for both developers and low-income residents. Though in the past affordability and environmentalism may have seemed mutually exclusive, now the two go hand in hand. As we move forward into the future, we will hopefully continue to see this trend in our urban areas - equity for humanity, and environmental sustainability for the planet.