Premium Pricing for Healthier Amenities

A focus on health and sustainability is a market differentiator, developers and financiers said at a recent ULI webinar during which they discussed their success with such an approach.

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ECO Modern Flats is an LEED Platinum, ENERGY STAR certified apartments in Fayetteville, Arkansas.

A focus on health and sustainability is a market differentiator, developers and financiers said at a recent ULI webinar during which they discussed their success with such an approach.

“The United States spends $2 trillion on health care each year—more than any other country—yet one out of three American children is obese and 50 percent of Americans get no daily exercise,” said Ed McMahon, ULI senior fellow for sustainable development.

However, a shift toward less car-reliant living could begin to have a positive effect on these statistics, McMahon noted. Demand for walkable and connected urban residential spaces is high, and consumers have begun to insist that their homes in smaller communities be surrounded by green spaces, as demonstrated by the premium paid by homebuyers and renters for homes in such areas.

Related: Upcoming ULI Webinars | ULI’s Building Healthy Places Initiative

The problem is that “demand for walkable areas far outstrips the supply of walkable mixed-use real estate supply,” said McMahon. Developers should seek to capitalize on this market for healthy living, which constitutes both a lucrative opportunity and an environmentally responsible way to allocate resources.

An example of environmentally friendly development is ECO Modern Flats, a gut rehabilitation of a 96-unit, market-rate apartment complex in Fayetteville, Arkansas, originally built between 1968 and 1972. “Prior to redevelopment, our building was an energy hog,” said Jeremy Hudson, partner and chief executive officer of Specialized Real Estate Group, project developer. “Twenty-eight percent of all profits was used to pay for utilities.”

The goal of redeveloping the space was to provide a healthy alternative to other housing in the market, he said. Through use of locally sourced nontoxic building materials, paints containing no volatile organic compounds, large windows providing natural light and ventilation, and an allergy-reducing design, ECO Modern Flats became an efficient and healthy alternative to the antiquated and inefficient construction style of many area residential complexes.

The high-style, low-impact development was able to reduce energy consumption by 35 percent, which helps counterbalance the added cost of more expensive building materials. The addition of innovative amenities to the development, such as a community garden, was also a huge plus for residents. The garden adds only $6,000 in upkeep expenses per year—just 1.25 percent of the total operating budget, Hudson said.

He noted that many developers have the impression that renters are unwilling to pay for sustainability. Acknowledging that he saw significant risk in creating such a development, he now believes that this notion is no longer valid, pointing out that rents at ECO Modern Flats are 42 percent higher than those for comparable units in the market. People are “willing to pay the premium,” he said.

Marja Preston, a consultant with Oranje LLC and former president of Asani Development, developer of the net-zero-energy Grow Community on Bainbridge Island, Washington, noted the increased consumer preference for connected and walkable areas. The initial focus of the Grow Community project was to build energy-efficient homes, she said, but “after holding several focus groups, we learned that people had a great desire to live in connected communities.”

Grow Community, a 131-unit development, is a ten-minute walk from the local ferry to downtown Seattle and within a ten-minute walk of all local schools. The community is connected by gardens and interwoven pathways meant to generate social capital and a high level of communal interaction. It was developed in line with the One Planet Living framework, and is one of only nine endorsed One Planet Communities in the world and the second in North America.

Residents wanting to live in sustainably designed and healthy spaces are willing to pay a premium to do so in the Grow Community, Preston said. Rents were 56 percent above market rates in Phase I and double the market rate in Phase II; all Phase II buildings were leased before their completion and the first homes were sold before they were even listed.

Describing her inspiration to develop the Grow Community, Preston explained that even though climate change is a serious issue, most people feel so removed from it that they make no effort to change their habits significantly to address the problem. “The solution is found in self-interest. If the change to a healthier, more sustainable living style can be made easily and comfortably, [a development] will be very successful,” said Preston. “As developers, we have the responsibility to make developments that couple progressive design with easily adoptable shifts in living.”

“The project made no sense on paper,” said Curt Altig, CEO of Builders Capital, a specialty finance company that serves residential homebuilders in the Puget Sound region. “But after we saw how much support the community demonstrated for this healthy and connected development project, Builders Capital got behind it.”

For these kinds of development, “financial flexibility is needed in an industry that holds surprises,” Altig said. As a private financial group, Builders Capital was able to provide support to Grow Community that a more rigid, conventional banking institution could not.

Altig agreed with Preston and Hudson that if a project has a good location, is well planned, incorporates healthy design, and is focused on sustainability, it is sure to be a successful one that developers, financiers, homeowners, and renters can all get behind.

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