Does Green Make Sense? Exploring the Unanswered Questions of Green Finance and Development

April 2011

Karen Leone de Nie: Welcome to the Federal Reserve Bank of Atlanta's Perspectives on Real Estate podcast series. I'm Karen Leone de Nie with the Atlanta Fed, and today we're talking with Dr. Raphael Bostic, assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development.

Assistant Secretary Bostic was appointed in July 2009 and is the principal adviser to Secretary Shaun Donovan on HUD policy, program evaluations, demonstrations, and research. He oversees work that provides HUD and the nation with current information on housing needs, market conditions, and research on other important housing and community development issues.

Assistant Secretary Bostic was the opening keynote speaker at a conference hosted by Tulane University and the Atlanta Fed in March 2011 called Strengthening the Green Foundation: Research and Policy Directions for Development and Finance. This podcast will further explore HUD's involvement with energy-efficient housing and the role of the public, private, and nonprofit sector finance on such housing projects.

Assistant Secretary Bostic, thank you for joining me today.

Raphael BosticRaphael Bostic: Thank you, Karen, for having me. It's good to be here.

Leone de Nie: This conference addressed very specifically questions of green development and green finance. What are some of the challenges that HUD faces regarding green finance, and what opportunities do you see on the horizon?

Bostic: So, there are some real challenges around green finance. First of all, the structure of green finance and what it does to your standard lean priorities, so as who gets paid back first, those relationships, which have been long established, get called into question, and a lot of lenders have some concerns. But aside from that, there are some real behavioral questions, which really lead you to question the basic premise of some of these financing mechanisms. For example, there's an energy-efficient mortgage product where you're given a larger loan to put in some green features with the idea that when you have the green features, you will save money and those savings will allow you to pay off the extra amount of your mortgage. But we don't know if people actually do save more after those green features are put in. We don't know if they're really able to carry those things. So, those are real challenges that we need some research and some more information on.

In terms of the horizon, I think that the industry is starting to face and realize what these challenges are, and they're putting out pilots. They're trying some experiments to try to answer these questions. I'm hopeful that in the next couple of years we will start to get a much better sense of which features and which characteristics of green finance work and which ones don't work as well.

Leone de Nie: Has the recession had an impact on green initiatives, and if so, how?

Bostic: The recession question is actually a really interesting one, because it may have actually helped to accelerate the adoption of some of these green features in the sense that people are stressed. They're looking for ways to save, they're looking for long-term, more stable environments and living situations. And to the extent that green investments can then translate into a lower-cost basis, you could imagine that the recession has been beneficial in that regard. The other thing, in terms of the recession, is that there was the Recovery Act that was instituted to try to offset some of the negative impacts of the recession, and a bunch of money through that (the Recovery Act) has been used for weatherization upgrades and retrofits, both in HUD and the Department of Energy. And so, we're going to take advantage of—you know, it's almost like a silver-lining type of experience, to say that even though a bad thing has happened, we can use this as an opportunity to invest in ways that get us to better and more sustainable outcomes.

Leone de Nie: Continuing on this discussion of advancing the green building agenda, what do you see as the role of the investor market in driving green building, and how do you see this trend affecting HUD strategies and programs?

Bostic: So, the investor is critical in all of this because, to the extent that there is going to be a market in green building, it's going to be investors that drive that. There's going to be a bunch of private capital that will come to bear and will really help determine what the value of these properties will be and how they will sell and re-sell in the marketplace. This is all critical to getting a green building foundation to scale and to really change how the industry operates.

In terms of HUD, I think that we have been looking for quite some time for ways to partner with private interests, with nonprofits, with foundations to explore how we can be more effective and more efficient with our green building. We would love to learn the lessons that the private sector has, that the investors have, and then use that for our own portfolio. So HUD has a large portfolio of their own through public housing, and being able to convert that into a green portfolio would be quite useful for us because our building performance isn't the best in the world, and there is definitely room for improvement there.

Leone de Nie: So that leads me to my next question. You've been alluding to some unanswered research questions about green development and green finance, and I wondered if you wanted to go into a little more depth about what the research community might be able to contribute to making better policy decisions in regard to green development and finance.

Bostic: The backdrop for this is that a lot of the conversation around green building is really at a religion level. There is a lot of belief, there's a lot of passion there, but it often is not backed up with a strong and solid evidence base, and there are a lot of questions out there. I talked a little bit about some of these behavioral questions—about when you have green features in a building, do people actually save more, do they use less energy? Or is it the case that because the cost of use-per-unit is lower, you use more of it? A second question is, to what extent are green features actually incorporated into sales prices for homes or for commercial buildings? Are they incorporated into rents in meaningful ways? And that knowledge then can be used to translate into people being willing to invest in certain features, maybe not others. Do these conversions into value differ across the different parts of the country in different markets? To what extent does government regulation influence the value of properties that have green? There are a whole host of questions, both in terms of the behavioral side and in terms of the investment side, and in terms of what consumers are willing to spend for green features.

Leone de Nie: In many markets, there's tension in the housing sector between new construction and the rehabilitation of existing housing stock, especially given the high levels of abandoned and blighted properties resulting from the foreclosure issues we've been facing. How do you see this tension playing out in HUD's future strategies, and also in regards to how some of the retrofits might look to more energy-efficient strategies?

Bostic: So it's interesting that you call it tension. I actually think that it's a little different in that what the housing crisis has done for us has made very clear how different parts of the market are all related to each other, they do influence each other, and they should inform each other. And the new construction stock is one where we can learn a lot about what the real standards are about green investment—where we can learn, sort of, what parts of the green foundation and infrastructure the consumer really likes—and then try to incorporate those more broadly into the existing stock.

And then the other thing, I would say, is that these impacts are really going to change and differ, depending on whether the market is tight, or whether the market is slack. So, in slack markets, I think there is far less tension. There are far more degrees of freedom out there so that what happens in the new construction market is not going to be that difficult. Well, it actually depends—it can go either way. But in tight markets, in particular, difficulty in new construction, if you think about these foreclosures, these blighted properties—that's really going to influence what happens in the existing stock and may actually spur more investment there.

Leone de Nie: Based on that response, I'm wondering, what advice do you have for affordable-housing developers on incorporating sustainable features in their development in light of the current budget environment? But also, what do these developers need to do to make the case for green projects?

Bostic: I think that it's really important that we think about these green investments as business investments. We've got to have an investment strategy that is sustainable, that pays for itself, so that this isn't just about charity. And, I think, in the affordable housing context, in particular, we need to think hard about, what are the features that actually pay for themselves in real ways, and which ones might seem sexy, but don't give us the same sort of business payback? And really distinguish between those in a direct way. And I think that's the important piece to that.

The other thing I would say is that I do think that there is a lot that is still out there, even in these difficult environments, even in the difficult time where capital is scarcer than it would be otherwise, and that we always need to find ways to explore and investigate and experiment, to try new features. Because the affordable housing stock is stock where perhaps these features are going to be their most meaningful. We've got people who already have small margins in terms of income relative to their cost basis, their household balance sheet. And so, any way that we can provide savings is going to be helpful.

Leone de Nie: Assistant Secretary Bostic, thank you for joining us today.

Bostic: Thank you very much. It's been a pleasure to talk with you.

Leone de Nie: This concludes our podcast with Raphael Bostic, assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development.

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