The California multifamily market is evolving rapidly and becoming more complex. The mandate is likely a foreshadowing of what will eventually be required throughout the country. Investors would do well to remain abreast of developments in the state.


What California's Zero Net Energy Mandate Means for the Luxury Multifamily Market

Jan 10, 2019

California’s zero net energy (ZNE) building requirements are leading the way nationally in environmental protection. The state’s Public Utilities Commission’s Residential New Construction Zero Net Energy Action Plan requires all new residential construction, which includes multifamily buildings up to three stories high, to be ZNE by 2020. All commercial construction, including new high-rise multifamily buildings and existing buildings that will undergo major renovations, will have to meet the same ZNE requirement plus support power grid optimization by 2030.[1]

These moves are part of a larger legislative mandate to make 50 percent of the energy consumed in California renewable by 2030. The mandate is frequently described as “bold,” but despite that, it was passed by the California Energy Commission in May 2018, with practically no opposition. It even had the support of the construction industry, which views solar power as a selling point in homes.[2]

Zero Net Energy Efforts in California

ZNE buildings produce as much energy as they consume. Buildings in California will achieve ZNE through energy efficient design and on-site or community renewable power generation, typically photovoltaic solar power. ZNE buildings will offer energy cost savings but will not always rely on their own generated energy. Rather, they will be connected to the grid, drawing energy from it at certain times and contributing at other times.

Since the date to meet ZNE requirements for low-rise housing construction is quickly approaching, those requirements have been developed in much more detail. The California Energy Commission staff told Green Tech Media that they expect 47,000 new low-rise multifamily units and 5,000 high-rise units to be built in the state in 2020.[3] Solar panels will be mandatory in some regions of the state, as they already are in several California cities. The commission also strongly encourages other measures, such as storage batteries, heat-pump water heaters, and more efficient building envelopes. These measures fit well with the many emerging and green technologies that are becoming increasingly common and appeal to segments of the renting population nationwide.

The ZNE requirement will raise construction costs, but those costs are expected to be recouped relatively quickly. For single-family homes, it is estimated that the costs will be recouped twice over the course of 30 years. For multifamily properties, the situation is more complex, since the costs will be borne by the developer and the savings will go predominantly to the residents.

Utility companies will be strongly impacted as well. They’ll be forced to make significant structural changes, the costs of which will likely be passed on to consumers. As an alternative to solar panels on individual buildings, property owners will have the option to join with community facilities, which are centralized third parties that supply to a number of consumers for a fee. Since these facilities will require space, they could encroach on archeological sites and protected wildlife habitats in California’s deserts as they expand. 

The ZNE Requirement for California’s Commercial Buildings and Tall Multifamily Housing

Multifamily housing represents about 11 percent of the energy consumed by all buildings in California.[4] Although developers have another decade in which to prepare, research and implementation of the requirements are already underway.[5] Because of the much larger scale of these buildings, there are larger-scale technical issues to be solved.[6]

Another aspect of the state’s mandate is its goal to retrofit existing buildings during major renovations. To accomplish this, the state can use the issuance of building permits as leverage.[7] This can have an impact on the multifamily value-add market, which is already shrinking in many places and facing construction labor shortages, by adding cost to repositioning projects. The effect that may have on the overall housing market is difficult to predict.

The California multifamily market is evolving rapidly and becoming more complex. The mandate is likely a foreshadowing of what will eventually be required throughout the country. Investors would do well to remain abreast of developments in the California market and seek qualified guidance for their activities in that state.

At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and multifamily real estate valuation to transaction support and property management. We specialize in assisting our clients with 1031 exchangesacquisitionsrepositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.

For more articles like this one, check out our investment strategy blog posts.

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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.

Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.

Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRASIPC.

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