Energy Code Requirement Could Impact Multifamily Development, Rents

Rules that require buildings to meet the latest energy codes to qualify for certain federal home loan programs have raised some concerns among multifamily housing developers.

A directive earlier this year from the Department of Housing and Urban Development (HUD) and the Department of Agriculture (USDA) would require all single-family construction financed by the agencies to be built to the 2021 International Energy Conservation (IECC). HUD-financed multifamily housing needs to be built to 2021 IECC or ASHRAE 90.1-2019 standard, which is the energy code used by larger multifamily buildings. HUD and USDA said the directive would save homeowners and renters money by lowering utility bills, and it determined that 2021 IECC and ASHRAE 90.1-2019 will not negatively affect the affordability and availability of housing covered by the Energy Independence and Security Act of 2007 (EISA).

However, more than half of respondents to a National Association of Home Builders (NAHB) survey of multifamily housing builders and developers said they believe the rules will dissuade them from pursuing some projects due to higher costs, and 44% of respondents said the requirement will cause them to charge higher rents.

NAHB noted energy codes, like other model building codes, are typically released every three years, and states and municipalities are able to adopt the codes on their own timelines and take into account local climate, geography and construction practices. Only 11% of survey respondents said they already built in an area that has adopted the 2021 IECC. Much of the country has yet to implement the 2021 energy code, and the NAHB said the directive effectively becomes a national mandate requiring the majority of developers to build new codes.

The new rule is scheduled to go into effect in May 2025.

The Federal Housing Finance Agency (FHFA), the regulator and conservator of Fannie Mae and Freddie Mac, is also reviewing the policy for possible adoption in its single-family and multifamily mortgage programs, according to NAHB. More than 60% of respondents said if Fannie and Freddie adopt the new energy code requirement, additional affordable housing projects and market-rate projects will be discouraged. Many indicated the rule would spur them to seek other sources of financing and reduce the size of apartments or amenities.