Preserving Affordable Housing via Energy Efficiency

February 15, 2017

by Margaret Garascia

Despite the potential for sizable savings, the affordable multifamily market is underserved by current energy efficiency programs. The primary reason is a lack of data and understanding about the multifamily housing stock in most cities from both the public and private sectors. Market segmentation analyses in Chicago, New York, Los Angeles, and other US cities are helping clarify opportunities for improving the efficiency of their multifamily stock, while offering tools for other cities to do the same.

As cities lead the way on water and energy efficiency, the multifamily housing stock must be part of the solution. Buildings with five or more units account for approximately 25 percent of all housing units in the United States and house 20 million families. In many cities, multifamily represents an even larger portion of the housing stock. Some evidence suggests that multifamily tenants face higher energy costs than people living in other types of housing. One study found that energy costs are 37 percent higher per square foot for low-income tenants of multifamily units than in owner-occupied units (e.g., condos or co-ops), perhaps because of building structure and condition, lack of tenant control over utilities in master-metered buildings, or resident density.

The multifamily market is an untapped reservoir of energy savings. Off-the-shelf energy efficiency improvements can yield significant savings in electricity and gas costs in the unsubsidized multifamily market that is affordable to lower-income households. Energy efficiency upgrades can deliver both energy savings and nonenergy benefits, including improved tenant comfort, reduced financial stress, and decreased incidents of hypertension and asthma.

Yet the diversity of the housing stock and challenges associated with ownership and operations make a one-size-fits-all approach to improving its energy efficiency ineffective.

To overcome these challenges, the first step is to complete a market segmentation and characterization. This approach divides the multifamily market according to its building characteristics, ownership structures, tenant affordability, and financing.

Understanding Energy Efficiency Opportunities in Multifamily: An Example from Chicago

When Elevate Energy and the national Energy Efficiency for All initiative (EEFA) partnered to assess Chicago’s multifamily market, the results showed that the city’s affordable housing is ripe for energy efficiency improvements, which can save residents and owners money, reduce carbon emissions, and contribute to affordable housing preservation.

Chicago is home to an estimated 1.3 million housing units, of which 77 percent, or around 1 million units, are in multifamily buildings. While the multifamily housing stock nationally is diverse in age, size, and construction material, 92 percent of Chicago’s multifamily stock falls into just three categories: (1) brick two- to four-unit buildings constructed before 1942, (2) low-rise buildings with five or more units built before 1942, and (3) wood frame, two- to four-unit buildings constructed before 1942. The three segments represent nearly 500,000 units and the potential to avoid 6.5 million metric tons of carbon dioxide emissions through energy efficiency improvements.

Most multifamily buildings in Chicago are more than 70 years old. More than 90 percent of the city’s two- to four-unit buildings and more than 75 percent of its larger buildings were built before 1942. Unless the properties have been substantially rehabilitated, they lack basic energy efficiency improvements, such as proper insulation and air sealing.

The analysis of Chicago’s multifamily stock also shows the dominant role of smaller properties. Two- to four-unit buildings, which make up more than 80 percent of the multifamily market, are the largest source of Chicago’s unsubsidized lower-cost rental housing. Owners of two- to four-unit buildings may have more difficulty accessing energy efficiency upgrades than owners of other multifamily buildings, in part because of cost. Owners of these smaller buildings have few options to finance improvements, and they typically manage their properties on a tighter budget than owners of larger buildings. These owners may have difficulty paying the up-front costs of energy efficiency improvements even though the improvements save money in the long run. Deferred building maintenance, also because of cost and lack of financing, may create substantial health and safety issues that must be addressed before program implementers can safely make efficiency upgrades.

Using Energy Retrofits to Preserve Affordable Housing

In 2007, with funding from the John D. and Catherine T. MacArthur Foundation, Chicago’s public, nonprofit, and for-profit sectors launched the Preservation Compact to address the loss of affordable rental housing in the Chicago area. Market characterization and segmentation research conducted by the Institute for Housing Studies at DePaul University revealed that multifamily buildings were the backbone of Chicago’s lower-cost rental housing. As part of the compact, project partners crafted an energy efficiency program to focus on preserving affordability by reducing energy costs in prewar low-rise buildings with five or more units—one of the city’s most prevalent multifamily types. As of December 2016, the program, which has been operated for nearly 10 years by Elevate Energy, has served more than 26,000 units in 633 buildings, reducing the typical multifamily building’s energy use by up to 30 percent.

The buildings retrofitted by Elevate Energy and its lending partner, Community Investment Corporation, often align with the density of subsidized and unsubsidized affordable multifamily buildings, as shown in the map below. Understanding the geographic distribution of a city’s multifamily stock can clarify where a program is likely to have maximum benefit—complementing knowledge from community practitioners and providing a visual story to attract potential partners.

A Framework to Apply in Other Communities

Through a new publicly accessible framework and examining the Chicago methodology, other cities and municipalities can use market segmentation to understand multifamily energy efficiency challenges as they play out locally.

Cities interested in conducting market segmentation can apply the lessons from similar studies in Chicago, New York, and Los Angeles. To design a valuable multifamily market segmentation, cities should do the following:

Settle on a primary data source that appears to be the most complete and comprehensive. Once its strengths and weaknesses are understood, researchers can identify secondary data sources to fill in gaps.
Take stock of privacy requirements associated with each dataset to know if the market characterization data file can be shared with a broad audience.
Consult local experts in housing, real estate, and energy policy. They often have deep knowledge of the datasets available and the associated challenges.
Use an affordability lens in the market segmentation to understand the scope of the subsidized, lower-cost-unsubsidized, and market-rate housing stock. The appropriate methodology may vary with local context.

Margaret Garascia is a senior research analyst at Elevate Energy and coauthor of “Segmenting Chicago Multifamily Housing to Improve Energy Efficiency Programs.”