Climate change will almost certainly devalue specific low-lying pieces of real estate in Massachusetts over the life of the next 30–year mortgage. At the same time, Massachusetts investors that retrofit zero-carbon technologies will both help fight climate change and realize short-term returns.
The Real Costs of Carbon
Carbon emissions cost the real estate industry in three ways: flood risk, wasted energy and exposure to forced upgrades.
Short-term flood risk arises not so much from base sea level rise as from storm surge on top of tides. A MassLandlords analysis of NOAA storm surges, tides and NAVD elevations lends credence to this view, suggesting that major portions of Boston and Cambridge should either be behind flood mitigation or paying flood insurance at this point. Perceived flood risk has sharply devalued certain individual lots up and down the East Coast. As published by researchers at the University of Colorado and Penn State, the nationwide average devaluation of exposed real estate is now 7 percent (10 percent among investors) and climbing.
The direct expense that comes with burning fossil fuels is equally real. It is easy to forget that natural gas is neither free nor renewable. Historically low prices will continue for a while yet, but not forever. Natural gas is already possibly at peak supply simply due to pipeline constraints; parts of Greater Springfield and the Cape have a moratorium on new accounts. Renters readily move out of uninsulated natural gas apartments after their first winter of $300-per-month heating bills (to say nothing of renters with baseboard electric heat), increasing turnover and vacancy.
Future climate policy may require landlords make large capital expenditures. A carbon tax or cap-and-trade will come to Massachusetts eventually. (We follow California in such matters, and their cap-and-trade program is up and running.) If one thing is certain, it is that additional regulations or forced obsolescence will be levied on landlords. We will have to absorb these costs, replace our equipment or pass costs on to unwilling renters.
With flood insurance premiums, fuel costs and policy all contributing to financial uncertainty, is there anything an investor should do?
Solving the Split Incentive with the Sun
The oil embargo of the 1970’s created a “split incentive” problem. We aggressively submetered to push fuel costs onto renters, but we remained (as required by law) in charge of the capital equipment that burned the fuel. Any efficiency improvements would have to be paid out of our pocket but would only save renters. As a result, old, inefficient equipment remains in widespread use.
Now we are in a dramatic transition equal to the fuel embargo years but in the other direction: The savviest landlords are taking back the cost of fuel using sunlight. The technology exists and has been on the market for a long enough time where buildings can now be reliably heated and cooled (an added bonus) using solar-powered mini-split heat pumps. The basic path to monetization has several steps.
First, landlords must insulate and air-seal. A brand-new building can now be designed so efficiently it is heated with only waste heat from appliances, the so-called “passive house.” For existing investment properties, retrofits are called for. The latest incarnation of MassSave (combined with support from local community action councils for subsidized units) now provide discounts of up to 90 percent of list price on retrofits. This will reduce fuel consumption 30 percent to 60 percent.
Now we are in a dramatic transition equal to the fuel embargo years but in the other direction: The savviest landlords are taking back the cost of fuel using sunlight.
Second, landlords must switch from oil, gas or electric baseboard to mini-split heat pumps for each unit. These systems do not create heat, they move it from outside to inside. As a result, they can provide far more heat than combustion per unit of energy. Under real-world conditions, they carry about three times more heat than a 99 percent efficient boiler for the same energy input.
Third, landlords must install solar either on that building or in the same load zone, and distribute as many credits as they can to the unit meters. This Schedule Z reallocation works best when owners keep each unit’s meter in their own name.
Finally, landlords should charge renters a higher base rent for “heat and electrical included up to a cap.” The cap will be the solar generation of the systems and/or the Schedule Z credit balance remaining. Renters will reimburse the landlord for any excess consumption, and will still therefore have an incentive to conserve, just as they do today when paying utilities directly.
This monetization benefits early adopters most. The market rate for “heat included” is currently several hundred dollars a month per unit, more than adequate to justify the capital expenditure when MassSave incentives and SMART credits are counted. Not only will this make landlords money, it will sharply reduce carbon emissions, or eliminate them entirely depending on the grid supply selected for overages. In this way, the market can make a large difference in climate change. Who will be next to go zero-carbon? My advice: don’t be last.
MassLandlords has published an article, “Can Massachusetts Landlords Charge for Solar,” with implementation details.
Doug Quattrochi is executive director of MassLandlords Inc.