‘How Much Does Sustainability Impact Multifamily Performance?’: Cushman & Wakefield Report Investigates

Cushman & Wakefield
Courtesy of Cushman & Wakefield

By Jack Stubbs

Over the last couple of decades, developers, investors and members of the architecture, engineering and construction (AEC) community have been focusing on making their real estate assets more sustainable. Efforts to achieve LEED certification (Leadership in Energy and Environmental Design) have increased, with the U.S. multifamily sector, in particular, seeing gains made.

Chicago-based commercial real estate services firm Cushman & Wakefield recently released “Sustainability’s Impact on Multifamily Performance,” a report that analyzed the impact that sustainability initiatives and incentives – in particular LEED – are having on the multifamily market in terms of overall demand for multifamily properties and the trajectory of rental and sales rates. Utilizing CoStar data, the firm analyzed 50-plus unit Class A properties in “Gateway-Plus markets” (New York City, Los Angeles, Chicago, San Francisco / San Jose, Seattle and Washington, DC) from 2000 to 2021.

Across several metrics, the incorporation of sustainable design practices saw demand increase for multifamily properties. LEED-certified multifamily assets achieved 3.1 percent higher rents on average compared to the non-certified assets during the same period, while sales pricing showed particularly robust premiums, averaging 9.4 percent above non-certified sales on a per-unit basis, the report states.

Since the turn of the century through 2021, the multifamily sector has seen considerably increased activity when it comes to sustainable design practices, making substantial inroads on the commercial sector, which has typically been prioritized more from a sustainability standpoint, according to Jacob Albers, research manager at Cushman & Wakefield and co-author of the recently-released report.

“I think a lot of the sustainability practices and interest and commitment to [the space] has largely been focused on the office sector for the past twenty years. We’ve seen tremendous growth in the past decade, and particularly in recent years…[and] multifamily is the furthest along of the major asset types when it comes to this,” Albers said.

In the gateway markets that Cushman & Wakefield analyzed for the study, inventory stood out as an indicator of the positive effect that LEED-certification efforts are having on demand for multifamily assets, thinks Albers. “Over the past 20 years, there’s been 140 percent growth in how much of the percentage of inventory that is LEED-certified, which is the primary indicator that we used for this study. One of the main takeaways was that the interest in this from the owner and developer side of things has dramatically grown,” he said.

Impacts on rent premiums for LEED-certified multifamily assets are also worth noting, with the 3.1 percent average from 2000 to 2021 peaking at 4.5 percent in fourth quarter 2011, and temporarily dropping to negative 2.1 percent at the beginning of the pandemic. However, the LEED premium, quickly rebounded to more typical levels (around 3 percent) by fourth quarter 2021, states the report, which suggests relative resilience in rent premium pricing as the post-pandemic recovery period continues.

And although rental premiums have served as a healthy indicator of the performance of – and demand for – multifamily properties, occupancy rates do not paint the same picture, primarily as a result of the pandemic.  

LEED-certified property occupancy has averaged 75 basis points below that of non-certified properties over the last twenty years, and during the pandemic fell by 197 basis points below occupancy rates of non-LEED-certified assets by fourth quarter 2020. As of fourth quarter 2021, however, this discrepancy moderated, reaching negative 83 basis points.“While there has been slightly less [growth] when it comes to occupancy, that hasn’t outweighed the other gains. Occupancies are still at strong stabilized levels above 90 percent throughout most of the time period that we examined,” Albers added.

Looking forward, the hope is that the positive momentum garnered through LEED certification efforts will precipitate a broader interest in making multifamily asset types more sustainable – something that holds especially true for the central, urban core markets that the firm analyzed in its research.

“I’m very optimistic about how much [this] will grow in the future, not just for LEED but a variety of sustainable practices and certification types…on the business side, we’ve seen a tremendous amount of growth consulting on projects when it comes to getting buildings to be certified for a sustainable purpose…which is definitely the norm in these major gateway markets,” Albers said.

As to the “chicken-or-the-egg” question – whether the increased multifamily rental and sales premiums are necessarily due to their LEED certification or just a result of them being substantially newer, updated product types than older, vintage products – the answer is multifaceted, detailed Albers. “For products delivered in [the last 10 years], the premium has been higher for rents…[so] the idea that it’s the newer product is LEED-certified is a factor…but a bigger driving factor is that LEED and other certifications drive build qualities, and also drive higher-quality amenities both in-unit and in communal areas…those are things that residents notice.”

Since the onset of the pandemic in particular in early 2020, generational trends also factor into residents’ preference for more sustainable brands, amenities, and living spaces, a factor that might yet play a greater role in the quarters ahead, thinks Albers. “We’ve seen a flight back to quality over this past year. For over 60 percent of Gen Z and Millennials, sustainability is a differentiator…[and] I foresee that number increasing,” he said.

“The follow-up question that we’ve heard from people in the multifamily space…is what this looks like in terms of expenses, paying for higher build-quality and higher maintenance costs,” Albers added. “But on the other hand, you’re also investing in a better experience in terms of utilities. One interesting question that this brings up for a lot of building owners out there is that there might be opportunities in the multifamily space… So that’s an area to keep watching.”