Insurance, by popular understanding, hedges against the risk of contingent loss. By varying pricing based on operations, materials, and design, insurance serves as a nudge to encourage lower risk profiles. In theory at least. We’ll leave unresolved questions about whether this risk reduction is always well reasoned or if you really get better pricing through these changes.

So it was unsurprising to read in Ceres’ new report “Risk to Opportunity” that insurers are moving from superficial PR “towards [thinking] more deeply and strategically institutionalized and embedded in the operations of companies.”

Climate change is becoming recognized as an issue of Enterprise Risk Management, spanning underwriting, asset management, and corporate governance.

One of the most constructive developments is more products and services focused on ensuring the quality of the customer’s energy or carbon savings efforts. These include performance insurance for renewable energy systems, coverage for green buildings that don’t deliver promised performance, and products that apply to carbon offset and trading activities. In all cases, loss-prevention takes the form of due-diligence, scrutiny of engineering assumptions, preventive maintenance, commissioning, measurement and verification, and other constructive interventions to help ensure project integrity and success.

Although released in April 2009, the report covers products existing or introduced in 2008. In many ways, the finding that some insurers were moving much faster than others led to the March 2009 action by state insurance commissioners to require that insurers reveal exposures and responses to climate change. How this will be enforced and what the ‘right’ answers are will be revealed when the responses are provided in March 2010.

[Note: The quote above was taken from an interview with study author Evan Mills with Climate and Insurance.org, an arm of industry advocate NAMIC, which does not like (really doesn't like) the new climate exposure mandate. Ceres retorts that "Insurance trade organizations remain relatively disengaged on climate change." Plus ça change, I suppose.]

Why does this matter? Because outside of government and its multiple layers, insurers and financial firms are best positioned to promote the systemic change in the built environment needed to achieve goals like Net Zero Energy, Architecture 2030, or multi-family specific programs like Greener Communities.

Insurers are perfectly placed to make the case for unifying “green” and “disaster-resilient”
practices across many domains (construction, energy, agriculture, land use), yet scant effort has
been exerted in this regard. It will become increasingly incumbent on insurers to demonstrate
the loss-reducing benefits of the green technologies and services that they reward. Loss-prone
infrastructure cannot be truly “sustainable”.

It’s worth recalling this recommendation from “Resilient Coasts”:

“Wise investing will involve asset managers understanding the impacts of climate change on their investments and managing that risk, especially in real estate, infrastructure and other financial instruments. Responsible banks will need to understand the levels of exposure within their investment and lending portfolios by incorporating climate risks into their due diligence.”

Change is coming in a thousand different ways from code changes, insurance, finance, builders, housing agencies, governments, and most importantly, residents. We’ll start addressing the financial world in short order.

Operating like a wayback machine, the AP collates statistics from October 2007 and March 2009 measuring unemployment (via BLS), residential and commercial foreclosures (via RealtyTrac), and bankruptcies (via court filings) and presents them unweighted. Foreclosures are likely undercounted, because RealtyTrac does not compile information from counties with under 25,000 residents; without publicly available foreclosure information for these counties, the AP gives these counties zero-weight. These areas are typically central Texas, and non-urban areas of Kansas, Nebraska, North and South Dakota, Wyoming, New Mexico, and Kentucky.

The usual suspects (Las Vegas, Florida, Phoenix, Inland Empire, Rust Belt) are all here, but remember that the graphics show rate of change, not absolute numbers. Thus it was surprising to be reminded that Las Vegas/Clark County had a March 2009 foreclosure rate of 7.81% and an October 2007 foreclosure rate of 3.53%.

Highlights from the AP:

The current recession spread like an epidemic from isolation to ubiquity, marching from sequestered pockets of foreclosure to a nationwide explosion of misery as unemployment overtook foreclosures as the dominant misfortune of this recession.

Places with technology-based economies were recession-proof for a while but aren’t now.

Places with large numbers of government jobs — state capitals, university towns, communities with concentrations of hospitals — remain fairly recession-proof. These are places like Columbia, Mo.; Madison, Wis.; the Raleigh, N.C., area; and Athens, Ga.

State government is not hurting that much — at least, not yet.

The regions we look to for our traditional sources of energy, for our coal and oil — Wyoming, West Virginia and the like — have generally not been hit as hard.

While bankruptcy declarations are happening everywhere, they tend to be higher in the South because of such things as low wages, state laws that give power to creditors and a culture that’s more familiar with the bankruptcy option.

Among counties with 25,000-plus residents, no place has been hit harder than Elkhart County, Ind., and that 15 of the 20 American counties hit hardest by the recession in the past year are in six states — Indiana, Ohio, Michigan, North Carolina, South Carolina and Tennessee.

Although the note for editors says “much of the Great Plains region remains relatively unscathed by the nation’s financial meltdown,” I would recommend they overlay this map with one showing population loss to update their definition of ‘unscathed’.

Review and make appropriate plans. I strongly recommend looking closely at the data and using a comparative approach to benchmark your particular area against neighboring jurisdictions.

Keying off the calendar, Multifamily Executive highlighted a recent report from the Resilient Coast Initiative of the H. John Heinz Center. The report, “Resilient Coasts: A Blueprint for Action” makes these recommendations:

Eighteen months makes a big difference as both data and awareness have increased as all participants recognize the necessity of accurate and actionable information. States like California require energy labeling, LEED now requires multi-year access to building performance, and the Federal government is getting into it, either through GSA’s Sustainable Design Program or through better use of existing resources such as HUD financial data.

Just as the brewmaster proclaims that Red Tick Beer “needs more dog“, I say that we need ever more data on building performance. We need building scientists, architects, builders, and engineers to better understand things like whole building design and sustainable construction (and waste) methods. In multifamily, we must understand not only the initial efforts of sustainability, but the ongoing need to consistently review the physical plant, operate sensibly, and dispose correctly.

Most importantly, however, we will need the financial world to come around. That means more information on operating expenses, projections for increased costs and an understanding that building sustainably means building differently. If underwriters and credit officers do not make the effort to understand how the regulation, construction, and operation of buildings have changed, then we cannot move forward with needed haste.

I’ll have more on the best bets to move forward in the next posts.

[Among the many recommendations GAO makes is that HUD collect more and better data about operational costs. The GAO recommendation does not highlight specific data to be collected, but using the LEED v3 "Whole Building Energy and Water Use" requirement: per page 19, it looks like it's just 5 years for LEED-CI. More to come on that.]

GAO wrote the report in part because “[HUD] spends an estimated $5 billion—more than 10 percent of its budget—on energy costs, either directly in the form of public housing operating subsidies or indirectly through utility allowances and contracts for assisted multifamily housing. [HUD] does not have the data necessary to understand the breakdown of these costs or the potential savings opportunities of green building for
many of its programs.”

HUD already provides resources and training and a very, very modest financial incentive to pursue energy efficiency. What I like about the GAO report is its emphasis on using NGO, regional and national sustainability measurements and cribbing the state-level LIHTC incentives for use in HUD projects. This would encompass water use reductions, sustainable material use, and indoor air quality improvement in addition to promoting energy efficiency.

GAO also reminds us that HUD can exercise financial levers: directly through debt financing, Community Development Block Grants, HOPE VI; and indirectly through its support for PHAs and Housing Assistance Vouchers. In addition, HUD’s Office of Policy Development and Research promotes building science and the advancement of durability, energy efficiency, and affordability of housing.

Unfortunately, standard who-pays-for-what conflicts arise in HUD’s relationships with local Public Housing Agencies (PHAs). Writes the GAO:

Some HUD programs offer incentives for energy conservation measures. PHAs receive funds from HUD’s capital fund that may be spent on energy conservation measures, but HUD officials told us that these funds are generally insufficient to cover both the up-front cost of many energy improvements and ongoing repair needs.5 HUD’s operating fund standard rules provide a disincentive to implementing high-cost energy improvements. According to HUD officials, a PHA’s annual operating subsidy is based in part on the prior 3 years of utility consumption, which would be expected to fall in the years following such improvements. This “3-year rolling base” policy allows PHAs to retain 75 percent of savings from reducing utility consumption over a 3-year period, but according to HUD officials, PHAs cannot retain enough savings over this short time to recoup the up-front cost of many large energy efficiency improvements such as high-energy-efficiency boilers.6

It should be noted that these large-scale sustainability initiatives can be met through the use of an energy services company (ESCO) such as Honeywell. Recent regulatory revisions by HUD have improved the processing of these contracts, allowing faster review and longer payback periods. Per the GAO, 195 ESCO contracts were in place in 2007, saving an estimated $50mm annually.

Overall, GAO provides sensible, affordable recommendations for further action. HUD should use third party mechanisms for efficiency benchmarking, collect sufficient information from Section 8 projects and residents, and emphasize (and reward) energy efficiency when awarding grants or in its various lending programs.

These recommendations could have a welcome and systemic impact upon all of multifamily construction, portfolio operation, and lending. We’ll talk more about this in subsequent posts.

The conference season is well underway and I, among many others, am not traveling frequently. Nevertheless, I am very interested in tracking the sessions at the ACI/American Comfort conference, the Apartment Internet Marketing Conference, and the American Planning Association’s National Conference.

Thanks to the hashtag (#) feature of Twitter, I can follow conversations, receive session highlights, and find blog posts that provide even greater detail. You don’t need a Twitter account, just visit search.twitter.com and type in the event name. A search will usually reveal the #hashtag being used for a particular event.

Once you know the #hashtag, you can type it in and pull up all posts (aka Tweets) related to that event. In this case, I’ve searched for #aci09, or the Affordable Comfort conference.

If you have a Twitter client for your desktop (such as Tweetie, Tweetdeck, or others) you can usually search from within the client for events like the Apartment Internet Marketing conference.

Perhaps the greatest benefit is that by identifying attendees at conferences of interest, you can then follow them in Twitter, email them for additional information, or just call them up.

Eligibility for the NSP program is limited to CDBG recipients and 1st round funding must be disbursed within 18 months of April 2009. It’s not clear when 2nd round money must be disbursed by recipients. Given the very tight cycle of rule writing, allocation, and disbursement, this lengthy research document is both well done and a welcome discussion piece.

[Note: HUD has lots of resources including a 1.5hr kickoff video.]

Enterprise’s report reviews the proposed uses of 87 of the 306 NSP funding recipients (58% of total 1st round funding) and identified 7 “promising approaches”:

1. Acquisition and discount strategies
2. Disposition strategies
3. Geographic targeting
4. Green building and rehabilitation strategies
5. Income targeting and long-term affordability
6. Leveraging NSP funds
7. Partnerships and management

Cherry picked areas of interest:

Acquisition strategies reflect the diversity of local experiences and the dispersed nature of the foreclosed properties, and include both individual property purchases and bulk asset purchases. The likelihood of one strategy or another depends not only on the pattern of foreclosure but also on the preference of the funding recipient to focus on specific neighborhoods or to make select investments in relatively stable neighborhoods to prevent further deterioration. Funds from NSP can be used for acquisition and rehab, but not for operating expenses or maintenance. This limitation highlights the need to either dispose of these assets upon rehab completion or to use secondary financing (or rental proceeds) to meet ongoing financial obligations.

Disposition seems to reflect a traditional bias in favor of ownership, and provide for homeownership counseling and DPA. I’ll note my objection to DPA, but the full case is amply made at Calculated Risk. In short, DPA increases costs to borrowers (someone has to recover the DPA), and psychologically reduces the ‘at risk’ component of home equity. What looks more promising is a loan guarantee or reserve use, such as that pursued by Chicago and Atlanta. This allows NSP recipients to maximize the utility of their funding because they can provide a guarantee of a portion of the purchase price rather than devote the full amount to the purchase. There are some lease-purchase and rental programs that do acknowledge the likelihood of depressed pricing or inability of some people to afford the obligations of ownership.

Top 100 Foreclosure Markets by MSA, 2008

Geographic targeting is a mixed bag. Enterprise notes that the funds must be disbursed within 18 months, which is far faster than the HUD’s HOZ program, which has shown the importance of extended funding horizons. Furthermore, geographic targeting could be politically difficult if results are not quickly seen or if funding is concentrated in a limited number of areas. Nevertheless, a variety of data sources, including HUD census tract data, postal service vacant address records, and locally generated data have helped reduce the amount of study required for geographic targeting.

A variety of sustainable building strategies are identified. Reducing ongoing costs are essential for stabilizing these properties in the short and long term. Any efforts to meet third party criteria are welcomed.

I think the income targeting components are the most questionable and will be the hardest to implement. I would recommend additional (or substitute) qualifications that aid qualified government workers (teachers, emergency workers, e.g.), supportive housing/co-housing (which can call upon additional public and private funding), or use of an existing mechanism to identify potential renters or owners. The 18 month deadline just makes it too tight to invent a new process.

Leverage of NSP funds should produce the greatest amount of benefit and allow lenders to recoup some of their tarnished reputations. Again, the short time period in which to identify spending or property purchases will limit the spread of this technique, I believe that multiplying NSP funds through leverage is the best way to provide the greatest good. Through the use of credit enhancements, revolving loans, loss reserves, or additional HOME or CDBG funding, leverage will allow NSP recipients to achieve more for their efforts.

I’ll have to better understand the legislation and the guidance, but proper use of leverage could also support the creation of ongoing community oriented enterprises such as non-profit ESCOs or state-backed enterprises.

Crafted and implemented within a short period, the NSP represents a substantial source of funding and innovation for communities with foreclosure risks. The Enterprise report provides an excellent summation of the legislation and a welcome starting point for implementation.

[Update: Here’s HUD’s FAQ on expenditure timelines:
TIMELINESS OF USE & EXPENDITURE OF NSP FUNDS

How long do States and local communities have to spend this money?

Grantees have 18 months to obligate these funds, and four years to expend funds. Congress was very clear that this money be put to work quickly. In some areas, this level of federal funding will be unprecedented. Thus, HUD expects that grantees will have contracts signed or, at minimum, made written offers for properties within 18 months. Options or other non-binding instruments are not acceptable.

Congress was very clear that there is an urgency to deal with a national housing crisis.

How does HUD determine when NSP funds have been obligated?

As stated in the NSP Federal Register Notice page 58332, “Funds are obligated for an activity when orders are placed, contracts are awarded, services are received, and similar transactions have occurred that require payment by the state, unit of general local government, or subrecipient during the same or a future period.”

What will happen if grantees don’t obligate their funding within 18 months?

HUD will recapture the funds.

Since the layoff from MMA, posting has included LIHTC, green renting, (sub)urban design, and operations. Future topics will include more of the same with additional commentary on public policy and the inclusion of sustainable certifications (LEED, Green Globes, Southface, NAHB, e.g.), as seen by this unintentionally provocative guest post. The ultimate goal is to increase sustainability in multifamily by owners, renters, and lenders through incentives and rewards rather than proscription. There are market-based solutions to these goals and I hope readers will help identify them.

Within the niche of multifamily real estate, this blog aims to reflect the multiple sources of its success or failure. In addition to 11 years in development, finance, and asset/portfolio management, my undergraduate studies in political science and graduate studies in real estate finance lead to an interest in all aspects of real estate. I have always worked as an owner or (distressed) lender, so writings will almost always reflect that bias. As an owner’s asset manager, I was deeply involved in operations, so I will attempt to reflect, where appropriate and able, the challenge of property operations. While I admired the work done by the site teams, I have always had the highest expectations, so occasional jogs into operational theory are an effort to provide additional knowledge to asset managers and others who are not in regular contact with properties.

Much of my recent experience required the 1,000 ft view of troubled assets as well as the 30,000 ft view of portfolio goals within corporate funding limitations. The distressed portfolio was a nationwide mix of 20-50 REO and watchlist properties with varying levels of need and operational competence. Some required gentle guidance and recognition while others required replacement of management and a completely new plan of operation. Still others were immediately marked for sale. Much as I would like to say I could save all of the properties assigned to me, some simply were not worth the expenditure of time and treasure.

As for my time off, I am doing some non-profit consulting work on community development, foreclosure assistance, and sustainable underwriting. Should any readers have thoughts, requests, or leads, please do not hesitate to contact me, info@multifamilyguide.com

Sometimes the posts themselves are provocative, and sometimes they lead to a provocative post. [For those who don't click through, Mark Juleen of JC Hart announces that 1Q traffic was the same or higher year on year despite dropping all print ads; Lisa Trosien asks why we don't use more negative amenity pricing.]

Mark’s experience with non-print advertising echoes the experiences summarized earlier. I won’t rehash the post, merely to recommend that with costs under such scrutiny and a change in outreach methods underway, these types of experiences should be studied and tried.

Lisa’s post about negative amenity pricing prods us to think more thoroughly about product and pricing.

Our starting rent for a floor plan type should be a ‘basic apartment’. [The] base price should be set from our most standard types. Then, when we should look at our inventory and find the ones with detrimental items, such as horrible views, smaller spaces, undesirable locations, etc., we should subtract rent from those unit types.

An added benefit seems to me that it moves you away from a ‘bait and switch’ perception. If you base your pricing off the least attractive unit, you are almost compelling a prospect to spend more to get what they actually want and generating a certain amount of resentment for your trouble. Pricing in the middle (and entering at a higher base rate) allows the prospect to make the choice of purchasing as much apartment as they actually want. This also gives us a chance to listen more closely to the prospect and help match the prospect with the appropriate unit.

Although this is well-trod ground, pricing transparency links cost to benefits by creating a more quantitative ‘value proposition’. Per HBS’s Working Knowledge series:

Some companies view price bundling as a necessary tool to promote initial sales: If they eliminate price bundling, they could eliminate the sale. However, organizations could psychologically unbundle those offerings to promote consumption. One way of doing this would be to highlight the prices of individual items in the bundle after the payment has been made.

Using this unbundling as a guideline, you might want to create your own value propositions. Lower the price for distance from parking, older appliances, or lower ceilings. In this market, everything has a price (to owners and residents) and you might be surprised to learn what you don’t have to spend.

As an example from the archives, on one of my properties, the leasing agents complained about the difficulty of renting ‘basement apartments’ which were typically on the back of the building and darker than others because there were only windows on one facade. The basement apartments could more accurately be called ‘ground floor’ apartments, ideal for pet owners or shift workers who want a quieter unit. In addition to repositioning the units, we also reconfigured the landscaping, providing for more shade and using river rocks to create a constricted area for our four-legged residents. For those renters, no discount on these ‘undesirable units’ was required. Not only did we make more on those units by targeting a certain renter profile, we also improved the psychology of the leasing agents by highlighting the benefits of every floor plan. Please note that pet owners and shift workers are not a protected class for Fair Housing purposes.

[Additional info on pricing psychology from NYT and of course, Wikipedia.]

The first article summarizes the traditional with a twist methods used by FirstCoast Homes to achieve Energy Star-ratings for all of its starter and move-up homes. Their efforts combine design, construction technique, and appropriate appliance upgrades, which limit the total cost to an estimated $1,000 per home.

[Note: As always, I try to bring additional value via hyperlinks. Take a look at all of them for additional information]

The 5 ways revealed to Builder:
1. Improve upon traditional methods through proper installation and 3rd party evaluation of various systems. Be sure to read this ode to traditional techniques from the February 2008 edition of EcoHome.
2. Build a tighter envelope through foam sealing penetrations, caulking baseplates, and use low-expansion foam around portals. These techniques and more reduce potential air intrusion “by about 30%,” according to FirstCoast. Duct blaster and blower tests ensure that the building is tight before the irreversible work begins. (Johns Manville believes 5-25% of ducted air is lost through leakage.)
3. Correctly install the right insulation by using a mix of foam around penetrations and fiberglass elsewhere. Make sure contractors install it right and protect it from crushing, moisture, and other damage during buildout.
4. True value engineering identifies areas to spend smarter, not just less. By reducing the number of windows, FirstCoast reduces the direct cost of windows, but also the size of the HVAC system, saving an additional $400-800 per house.
5. Identify other revenue sources by working with utility companies, and government incentives to reduce the cost of homes, appliances, and testing.

At sister publication EcoHome, green building consultant Mark LaLiberte highlights 5 common errors made in all construction:
1. HVAC ducting through unconditioned space needlessly reduces the effectiveness of your heating and cooling system. Put the ducts in soffits or between floors to maintain their ambient temperature. Research from WSU provides great detail on HVAC in conditioned spaces.
2. Tightened envelopes without intentional ventilation can cause stale air, odors, or moisture to accumulate. Install a whole house ventilation system to bring about 50CFM of fresh air 3-4 times per hour.
3. Improper flashing and drainage leads to moisture buildup and reduces the effectiveness of insulation and moisture barriers. Multifamily folks know all to well the hazards of moisture and mold growth, so this should be well-trod ground. For additional information, Freddie Mac offers a Moisture Management Plan to help identify sources of moisture build up.
4. Poorly installed/selected installation reduces energy efficiency and adds to costs (see above). Exposing it to moisture during the installation process can cause a cascade of additional systemic failures. Watch out for improperly insulated thermal bridges, particularly metal studs that have contact with exterior surfaces. This can be an unfortunate method of reducing the effectiveness of your HVAC system.
5. Excess waste leads to excess costs and can be offset by better reuse of construction materials but more importantly through increased standardization of all materials. All systems have a ‘commodity size’ and making use of these common measurements reduces the potential for waste and on the interior, unsightly seams.

1. Utne Reader’s “Green Renting Revolution” (January 2009) By the way, failing to include links in your article is just not acceptable in 2009.
2. Green Renter, provides a small (but growing!) database of self-selected ‘green apartment communities’ in major metropolitan areas. I think there’s still more work to be done, but additional information can be found courtesy of Sustainable Industries.
3. National Geographic (!) provides a smooth interface to some useful information at The Green Guide. The Home & Garden section shares useful information about household cleaners.
4. Apartment Therapy posts eclectic items on apartment living. One of their recurring features is a focus on small spaces. You can find more of this vein by using a tag search.
5. Planet Green has a multi-page discussion via one of their “How-to” guides. They include a helpful 10 point list of property tips. (additional How-to guides available)
6. Grist’s Umbra Fisk lists some ways to be a Greener Renter.

(Image by Peter O. Zierlein / www.peterozierlein.com)

In our townhouse, coffee grounds are sprinkled around exterior door and window sills to repel ants for an effective and pet friendly insect barrier.

Two weeks ago, Eric Corey Freed, author of Green Building & Remodeling for Dummies offered tips on a greener home to the New York Times. For “space reasons” the NYT only ran 5 of the tips, causing Joe Romm at Climate Progress no end of distress for highlighting impractical, overly simple, or questionable recommendations. Additional correspondence revealed that the NYT cut Eric’s list of 21 to a random 5. Leaving aside the somewhat heated and holier-than-thou storms that occasionally blow across the green world, Joe also embraced the “Can’t Someone Else Do It?”. He linked to, and critiqued, “100 Ways to Conserve“.

Taking just Freed’s 21, many can be used in a rental situation, including:
1. Insulate and turn down the water heater to 125F. (And use the vacation setting)
2. Reduce the amount of water flushed.
3. Replace incandescent bulbs with CFL.
4. Turn off unused lights and electronics.
5. Replace thermostat with a programmable model. Even on a 60 year old house with 80 year old wiring, it only took me about 15 minutes.
6. Request low or no VOC paints.
7. Caulk or seal around tubs and windows. Weather seal doors.
8. Install a low flow showerhead. I replaced one a few weeks ago.
9. Never buy bottled water again.
10. Install a ceiling fan (sometimes you can get one installed at lease renewal).

(Via Greenversations and Green Building Law Update.)

[Source: Millicent Bystander, flickr.com]

What’s particularly interesting about the connection requirements is that it should increase the accessibility of retail centers to surrounding neighborhoods by multiple means of transit (primarily auto and pedestrian). It will be interesting to see if some of the land use changes highlighted by Galley Eco come to pass more quickly in Virginia.

As a resident of an urbanized area of Northern Virginia, this is welcome news. I also suspect that when combined with a greater focus on reducing car use, Walkscore (see comments for how the NYT fumbled its citations), new funding priorities for HUD and DOT, and most importantly, new lending practices, we will start to see a long-term shift in development patterns over the next 5-20 years.

This is a fascinating real estate topic, so expect more posts.

[Note: For more info on street grid designs, see New Urban News.]
Update: VDOT began public hearings on the connectivity standards in early 2009. Charlottesville Tomorrow recorded this hearing in April.