This article was originally published on RMI's website on June 18, 2024. You can read it here.

In May 2024, the US Departments of Agriculture (USDA) and Housing and Urban Development (HUD) updated their minimum home energy standards for new construction. This is great news because residents in new homes that these agencies support will soon benefit from lower bills, greater resilience to extremely hot and cold weather, and all-around more comfortable and healthier living spaces.

Multifamily homes like HUD-funded apartments and condos purchased with Federal Housing Administration (FHA) mortgages will be among those affected: new covered buildings under four stories will need to comply with the 2021 International Energy Conservation Code (2021 IECC), while taller buildings must meet ASHRAE/ANSI Standard 90.1-2019 (90.1-2019). HUD and USDA estimate that over 40,000 new apartments will be affected every year.

This month, the Federal Housing Finance Agency (FHFA) is considering a similar move as regulator and conservator of the Government Sponsored Enterprises (GSEs), including Fannie Mae and Freddie Mac. While best known for their support of single-family home mortgages, the GSEs collectively back about 40% of outstanding debt on US multifamily properties. A change of policy from FHFA would likely affect hundreds of thousands of new apartments annually.

Between the HUD-USDA standard and a potential FHFA decision soon, updated energy standards are poised to make a big impact on higher density housing. The combination of updated efficiency standards and incentives for new apartment buildings will create win-wins for residents, developers, and the climate that affects all of us.

Benefits for Builders and Developers

The updated standards are cost-effective on their own. According to HUD and USDA’s final determination and Pacific Northwest National Laboratory’s energy modeling, 90.1-2019 for new high-rise multifamily buildings is so economical that it costs less than $20 per unit to implement and pays back in less than two months on average. The updated low-rise standard, the 2021 IECC, is more expensive up-front but is cashflow-positive for residents within 18 months of purchase on average, thanks to utility bill savings. Both standards also provide improved comfort and resilience — benefits for residents that developers may use as selling points.

With strong incentives from the Inflation Reduction Act (IRA), developers and residents could both reap even richer rewards when apartments qualify for ENERGY STAR New Construction (ESNC) or Zero-Energy Ready Home (ZERH) certifications. When paying the prevailing wage, multifamily developers can earn $2,500 per ESNC unit or $5,000 per ZERH unit from 45L tax credits. We dove into the costs, benefits, and bottom line for low-rise developers complying with the 2021 IECC while aiming for the highest 45L payout. Here’s what we found.

While costs are higher in more northern climate zones and the West Coast, these areas’ energy utility companies are often required or encouraged by their regulators to offer incentive programs for energy-efficient new construction. Builders in incentive-rich states like Illinois, Maryland, Massachusetts, and New York will likely find that by stacking utility rebates and federal tax incentives, they can more than offset the costs of building to ESNC certification standards.

Builders can also take home more of the tax credit by choosing to build all-electric. All-electric new construction is often financially attractive when building to minimum energy standards since only one utility connection and energy system needs to be installed, rather than two. Across all climate zones, the median cost reduction when attaining ESNC certification for an electric unit compared to a dual-fuel unit is around $375. There are also local incentives to consider: in many jurisdictions, energy utility companies have begun to shift their new construction programs to encourage ENERGY STAR NextGen certification, which requires ENERGY STAR heat pump appliances for space and water heating.

Zero Energy in the Sunbelt

Our analysis suggests that the $5,000 45L incentive more than covers the cost to reach ZERH certification in three climate zones: 2A (most of the Gulf Coast and adjacent areas), 2B (the hottest parts of the desert Southwest), and 3A (the inland Southeast and coastal Carolinas). In muggy 2A, developers could net more than $600 per ZERH unit.

As with ENERGY STAR, builders can take home more of the credit if they choose all-electric construction: the upside is almost four times as high for ZERH, at around $1,400 per unit. ZERH units must include electrical wiring and capacity for electric heat pumps regardless of the heating, cooling, and water-heating appliances installed, so choosing to build all-electric from the start avoids these added costs.

Now's the Time

There has never been a more opportune time to build high-performance new apartments in the United States. For many developers, 45L tax credits are the cherry on top of a capital stack that has encouraged energy efficiency for years, thanks to mechanisms such as efficiency-focused Low-Income Housing Tax Credit Qualified Allocation Plans, local zoning bonuses, and more. Developers spurred on by these friendly environments are increasingly proving that high-efficiency multifamily construction is not just feasible, but profitable, especially with growing experience. For example, passive house–certified developments in Pennsylvania have flipped the script on affordability with final construction costs in some cases lower than those of at-code buildings. Similarly, market data from Massachusetts has shown minimal incremental cost for passive house multifamily construction. This indicates an opportunity for forward-looking developers to distinguish themselves while remaining profitable and competitive on first costs.

All-electric units with ZERH certification also closely align with the highly anticipated national definition of zero-emission buildings, suggesting that the historic Greenhouse Gas Reduction Fund’s $27 billion investment could contribute to low-cost, disadvantaged-community-centered financing for these climate-aligned new homes.

Developers nationwide will soon be required to meet the new HUD-USDA energy standard for about one out of every four homes they build. Should FHFA follow suit with a similar rule, updated energy standards will affect no less than two-thirds of all residential new construction. With favorable incentives, rich new sources of financing, and a livable planet on the line, it’s time for market actors to seize the moment and start building 2050’s climate-friendly homes today.

Note
This analysis assessed incremental costs of attaining ENERGY STAR Multifamily New Homes National Version 1.1 and Zero-Energy Ready Homes National Version 2 certification. At this time, federal guidance indicates that ENERGY STAR national version 1.2 will become a reference certification for the 45L tax credit for most states in 2027. Until then, the less stringent national version 1.1 will continue to apply.

Methods

RMI analysis followed the below steps:

1. Begin with ENERGY STAR’s Cost & Savings Estimates for Multifamily New Construction, National Version 1.1, which estimates measures selected and incremental costs of ENERGY STAR certification above the 2012 IECC for one city in each of eight climate zones.

2. Note differences in code requirements between the 2012 IECC and the 2021 IECC and their impact on incremental costs of ESNC Multifamily Version 1.1 above the 2021 IECC.

3. Using DOE ZERH’s Multifamily National Program Requirements Version 2, identify what measures would be needed to attain ZERH certification.

4. Where ZERH measures differ from ENERGY STAR measures, estimate incremental costs for ZERH measures using NREMD and other methods, such as review of prior Department of Energy and National Laboratory publications, as needed.

5. Apply an inflation adjustment factor to each measure’s incremental cost based on the date of the publication used to estimate the cost. Note that estimates are provided in 2024 dollars.

6. Apply a location adjustment to each measure’s incremental cost using city-level construction cost category data from For climate zone-level location adjustments, city-level indices were combined in an unweighted average.

7. Apply a 30% prevailing (Davis-Bacon) wage adjustment to all incremental costs, based on recent experience from our projects and partners.

8. Sum adjusted incremental measure costs to estimate total incremental costs of each certification for a home of each fuel type (electric-only or dual fuel).