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Surging Heating Costs May Spark Higher Rents

By Jennifer Epstein

 From homeowners renting out spare rooms to publicly traded real estate investment trusts, landlords in colder areas of the US are bracing for their heating costs to soar this winter.

Household bills for natural gas and heating oil are expected to be nearly 30% higher nationally than they were last year, according to federal government projections, and electricity prices are also on track to rise. Demand could be higher, too, since temperatures are forecast to be slightly colder through March than they were last winter. 

Photo by Alex Green: https://www.pexels.com/photo/black-couple-spending-time-on-bed-at-home-5699743/

That will add to property owners’ burdens after more than a year of high inflation has squeezed their budgets for supplies, insurance and labor. For renters who’ve experienced dramatic increases in leasing costs since the start of the pandemic, it’s yet another expense they can expect their landlords will try to pass onto them.  

“Many of us include heat in our rents, and rents are going to have to go up to keep up with the escalation of costs,” said Allison Drescher, president of the Small Property Owners Association in the Boston area.

The Northeast will be hit especially hard. With its cold climate and older, less energy-efficient housing stock, the region’s household gas and electric bills through the winter are typically the nation’s highest. The area also has more homes that use oil — the most expensive fuel — than anywhere else in the country. Those households are expected to get stuck with an average bill of $2,354 for October through March, almost 27% higher than last winter, according to the US Energy Information Administration. 

Any rent hikes spurred by ballooning heating costs will stack on top of substantial increases tenants have endured during the pandemic leasing boom. Since March 2020, rents jumped 6.5% in Boston, 13% in New York City and a whopping 32% in Manchester, New Hampshire, according to November data from Apartment List. 

‘Silver Lining’

With energy costs rising year-round — due partly to hotter summers increasing air-conditioner use — many landlords are looking not just to pass on their costs but to reduce them in the long run.“One silver lining to price shocks could be more energy-efficient systems,” said Doug Quattrochi, who rents out two floors of his triple-decker house in Worcester, Massachusetts. He’s seen many mom-and-pop landlords make “low capital” investments to convert their properties from oil to natural gas, and others make the bigger leap to electric heat pumps.Some smaller owners, though, are caught in a bind — squeezed by rising heating bills but unable to shoulder the upfront costs of retrofitting systems to cut their monthly expenses.

“As prices go up, owners will work on conversions as they can afford them,” Drescher said.

Corporate developers and landlords are better positioned to construct or retrofit units with an eye toward energy efficiency and their bottom lines. Owners of affordable housing are typically barred from raising rents by more than a few percentage points annually, giving them incentives to find ways to cut costs as their expenses rise.

“What’s happening in the energy markets now is pushing us in the direction we need to go,” said Laura Humphrey, director of sustainability at L+M Development Partners, which builds and manages properties mostly in New York, New Jersey and Connecticut. “It’s a wake-up call after having a lot of years of sort of abnormally low energy prices.” 

New Technologies

At Beach Green Dunes II, an income-restricted development on the Rockaway Peninsula in Queens, L+M and partner Triangle Equities built with energy-efficiency in mind. The 127-apartment property has a closed-loop geothermal system for heating and cooling, photovoltaic panels to convert thermal energy into electricity, and an airtight and insulated external structure. Part of the wave of post-Hurricane Sandy construction along the oceanfront in the Rockaways, it also includes features to guard against flooding.

Read more about a “net zero” affordable housing development in the Rockaways.

Owners and developers of any size can tap into an array of tax credits, rebates, loans and technical assistance from governments and utility companies for installing electric heat pumps and other energy-saving equipment. The Inflation Reduction Act, signed by President Joe Biden in August, includes billions of dollars for residential clean energy that will be distributed beginning in 2023. Some landlords, though, are likely to be overwhelmed by what’s offered.“If they’re a smaller owner and they have limited resources, even just trying to understand how to access those funds can be a significant challenge,” said Ilana Judah, associate principal and Americas East resilience leader at Arup, an engineering and design consulting firm.In the meantime, buildings are racking up big heating bills, from materials costs that started escalating toward the end of last winter as Russia invaded Ukraine and the US began weaning itself off Russian oil and gas.

Older Buildings

Refilling the oil tank at a 40-unit affordable co-op building in Manhattan’s Morningside Heights neighborhood cost more than $10,600 in late November, nearly twice last December’s bill, said Aaron Weber, the property’s manager. “They haven’t really had the money to upgrade the heating infrastructure, and burn a lot of fuel because they use old tanks,” Weber said. The co-op’s board may need to consider raising its maintenance fees or leveling an assessment on owners, further straining residents who live on fixed incomes, he said.Higher gas and electric bills early in the year had some buildings in Slate Property Group’s portfolio spending their full annual utility budgets by May or June.“We really shot through our whole budget in about five and a half months,” said Donny Hochberg, director of property management at Slate, which owns 4,000 apartments in New York City.In newer or recently retrofitted buildings where each unit pays for its own gas or electric heat, tenants are also sweating their bills. Electric providers are heading into the winter advising customers of higher rates. National Grid, which has customers in Massachusetts, New York and Rhode Island, raised its winter pricing by 64% year over year, pushing a typical customer’s monthly bill from $179 to $293, the company said.

Even as energy prices rise, there are some ways to trim heating bills without needing to wear a snowsuit to bed. Sealing drafts throughout a building — including removing air conditioners from windows in the cooler months — is inexpensive and can cut heating costs by roughly 15%, said Judah, the resilience consultant. In buildings with central boilers, replacing valves on cast-iron radiators with thermostatic knobs that cost less than $100 each would allow residents to control the flow of hot air while reducing heat consumption.

Those steps, Judah said, are “not particularly glamorous, but very effective.”

More stories like this are available on bloomberg.com

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