How Multifamily Investors Can Hedge Rising Energy Costs

March 16, 2022

The Russian invasion of Ukraine has invited harsh economic sanctions from world leaders like President Joe Biden, who recently escalated the United States’ commitment with a ban on Russian oil, gas, and coal. This announcement to cut off 8% of the U.S. supply of liquid fuel came with swift increases in energy prices around the country at a time when 39-year high inflation of 7.9%, supply chain disruptions, and record-breaking gas prices averaging $4.17 for a gallon of gasoline were already wreaking havoc on the economy.

This combination has negatively impacted the cost of utilities across the board—especially for multifamily homeowners responsible for paying utilities even if they get housing assistance. However, there are ways to reduce the impact of rising utilities on multifamily-assisted properties.

Adjust Utility Allowance for Inflation

Owners of HUD-financed multifamily-assisted properties are required to perform a Multifamily Housing Utility Analysis and update their utility allowances annually. It is also a requirement that owners submit documentation to request an increase in utility allowances in the event that rate increases exceed 10% of the previously approved utility allowance. Years like this where rent and utilities have rapidly increased make these adjustments imperative to more accurately reflect the cost burden to residents who qualify for assistance from HUD because without it, they face hardships paying for other necessities. To make sure that the utility analysis does not fall short of the needs of residents, owners should use sample sizes larger than the minimum requirements in Notice H-2015-04. To stay informed about any utility rate increases approved by the Public Utilities Commission (PUC), owners should also sign up for email or text alerts.

Invite Resident Reporting of Energy Inefficiencies

It is in the best interest of the resident and the landlord for tenants to receive accurate rental assistance—which means accounting for rising utilities. Owners need to work on opening a line of communication with residents so they can report increases in utility bills as soon as they observe them in case it reaches that 10% increase threshold that would prompt an updated utility analysis. This reporting platform can also be used for residents to request or suggest energy-efficient repairs that would reduce utility costs.

Perform Routine Maintenance that Prioritizes Energy Initiatives

While a good resident reporting system will help prevent energy inefficiencies from becoming a drain on utilities, it is also good practice to perform routine maintenance to try to prevent these costly issues from occurring in the first place. Taking proactive measures to improve energy efficiency and conservation will not only save money in the long run, but it may also pay off with certain energy rebates.

Expect the Cost of Heating to Rise

The U.S. Department of Energy is forecasting the cost of heating oil will hit a three-year high in 2022 at $3.45 for a gallon of oil—up more than a dollar from 2020 alone. Water heating accounts for approximately 20% of a home’s energy usage so reducing hot water use and minimizing waste could significantly impact the total utility bill.

Emphasize Energy Saving Measures

Reviewing Chapter 12 of the HUD Handbook 4350.1 and the U.S. Department of Energy’s Energy Saver webpage will provide useful tips on how to improve overall energy efficiency. Owners will ultimately need to proactively install energy-saving updates and share tips with their residents so they are more energy conscious to help minimize the impact of inflated utilities.

Here are just a few cost-saving initiatives owners can implement themselves or encourage their residents to consider:

  • Residents could save up to 10% every year on heating and cooling by dialing back the thermostat by 7°-10° for 8 hours a day when they are not home.
  • Lighting comprises 15% of an average home’s electricity use, but households can save $225 each year just by installing LED lighting.
  • Guaranteeing adequate insulation with recommended R-values throughout the home is essential to energy efficiency—including the attic, exterior walls, foundation, duct system, pipes, water tank, and floors above unheated spaces like garages.
  • Updating doors and windows with new weather stripping or caulking to better seal in the desired environment will save money on both cooling and heating.
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