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How the Multifamily Sector is Approaching ESG

Multifamily developments that boast sustainable features or provide affordable housing are finding they have more options from capital sources looking to meet ESG targets.

With more attention being placed on investments that meet environmental social governance (ESG) standards, it's becoming easier to secure financing to buy or build apartment buildings if the apartments have rents that are relatively affordable or if the buildings are designed to be good for the environment.

“You get more capital sources interested in developments that meet ESG,” says Rob Hinckley, senior managing director in the New York office of JLL Capital Markets, Americas.

That’s because many capital sources have made bold promises to their stakeholders to make investments that not only return a dependable yield on investment but also meet high ESG standards . That includes large, institutional investors like state pension funds, which are often responsible to their pension holders. Publicly-held companies like commercial banks are often eager to show stock investors they have that they have made investments that meet their own ESG standards.

“We all believe that there will be more focus by the entire industry and more benefits and incentives going forward to achieve and comply with ESG standards,” says Kelli Carhart, head of multifamily debt production for CBRE.

Equity partners come forward for ESG developments

These ESG standards can now help developers attract equity partners to their projects to build new apartments.

For example, JLL is now helping a developer gather the financing to build a new apartment tower in Downtown Brooklyn. The new apartments will have to be sustainably designed and benchmark their utility use to comply with all of New York City’s rules. Those green features help the project attract a joint venture partner that now plans to contribute enough equity to the project to cover 20 percent of its development cost. The partner is an insurance fund that favors investments that meet its new standards.

The particular terms that capital providers offer to properties that meet their ESG requirements can vary widely.

“ESG has yet to be standardized, specifically in the “social” and “governance” categories,” says Carhart. “The evolving nature also has the measurement of ESG a bit more subjective within the industry.”

Workforce housing gets better deals for permanent loans

Apartment buildings can also continue to get lower interest rates on permanent loans from some lenders if they meet ESG standards. That’s especially true for properties that qualify as “workforce housing.”

Freddie Mac and Fannie Mae lenders offer permanent loans with lower interest rates–often dozens of basis points less than their usual fixed interest rates–to these workforce housing properties. Other lenders are also eager to make permanent loans that will help them satisfy promises to be more socially responsible. But these lenders often do not offer better interest rates for these loans… yet.

“While life companies are tracking ESG and trying to find ways to measure it in their portfolio, there is no pricing difference for loans with ESG criteria, at the moment,” says CBRE’s Carhart.

The officials at the Federal Housing Finance Agency (FHFA) who oversee Freddie Mac and Fannie Mae now demand that at least half of the loans to apartment properties that Freddie Mac and Fannie Mae buy in 2022 will be to properties with rents affordable to moderate- and low-income households.

Apartment communities can get even lower interest rates from agency lenders if their rents are affordable enough to earn government subsidies like federal low-income housing tax credits. 

"The current focus on ESG and social impact investing has also generated significant interest from the private sector in looking at creative ways to help create and preserve affordable and workforce housing,” says Maria Barry, national executive of community development banking for Bank of America.

Freddie Mac and Fannie Mae must make sure that at least a quarter of the apartment loans they buy in 2022 will be to properties with rents affordable to households earning up to 60% of the area median income.

Freddie Mac and Fannie Mae also continue to offer premium interest rates to apartment properties that use fewer utilities like electricity and water.

“The ‘environmental’ of the ESG requirements have been incentivized by the agencies for several years via their green programs," says CBRE’s Carhart.

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