The Retrofit Economy: A policy roadmap to renew aging high-rise housing

As Canadian governments look for ways to drive our COVID-19 recovery, one significant opportunity will be to reinvest in some of our most important housing stock: our aging apartment buildings. This will generate new economic activity while simultaneously addressing two policy goals: securing long-term affordable housing and significantly reducing greenhouse gas (GHG) emissions. As outlined in last week’s speech from the throne, retrofits can “create thousands of jobs . . . cutting energy costs for Canadian families and businesses.”

More than two-thirds of all buildings that will be standing in Canada in 2050 – the federal government’s target year for reaching net-zero emissions – have already been built today. Our climate and housing plans must focus on the renewal of existing buildings to avoid loss due to deterioration, which is already beginning to take crucial housing units offline.

More than 740,000 Canadian households, or around two million Canadians, live in aging high-rise rental housing. These buildings were built after the Second World War as a result of generous tax incentives by the public sector, and have since become a critical segment of the country’s housing stock, representing more than half of all high-rise housing in Canada. Post-war towers provide the bulk of the nation’s purpose-built rental housing and are generally Canada’s most affordable housing. A minority of these towers are publicly owned social housing; the majority are owned by the private sector and remain affordable by virtue of below-market rents – generally due to aging building conditions, distance from city centres and long-term tenancies.

Renewal of these apartment towers is crucial for three key reasons:

• The buildings are falling apart:  Most of these buildings are beyond the end of their life cycle and in need of critical repairs just to keep them inhabitable. In some cases, acute building failures have led to long-term building evacuations, as in the case of Toronto’s 650 Parliament St., where an electrical fire displaced tenants for more than 18 months, placing strain on the city’s shelter system. Without systemic support for critical repair, this trend will increase.
• Combating climate change: Reinvestment in aging apartment buildings has historically been driven by energy savings, with recent focus on GHG emission reductions. These buildings can emit up to 90 per cent more than new, state-of-the-art residential buildings, and as a stock emit three megatonnes annually. Targeting them for carbon reduction is crucial, resulting in housing that can weather climate shocks and stresses.
• Healthier buildings for residents: As we enter a post-COVID world, healthy housing is fast becoming a critical factor driving housing renewal. Tenants are experiencing health risks due to inadequate fresh air supply, concealed mould growth and vulnerability to severe overheating. Neighbourhoods where aging apartments are prevalent are over-represented for cases of COVID-19, due to a host of reasons still emerging, including overcrowding and poverty. Investments in renewal can provide healthy and resilient housing at a time when many public health experts are suggesting we need to be more prepared for coming viruses.

Where are we now?

The retrofit of rental housing has become a policy priority in many provinces and territories, as well as through the Repair and Renewal stream of the National Housing Strategy’s Co-Investment Fund. Public housing companies, notably B.C. Housing and Toronto Community Housing, have made deep retrofit a priority, as have as a small number of private owners. But uptake is still slow, partly due to market barriers.

The current economics of energy pricing has already incentivized owners to complete retrofits with the shortest payback periods. These can reduce energy consumption by 10-15 per cent, but do not scratch the surface of the critical repairs and upgrades needed to improve occupant comfort and health. Meanwhile, policy targets are not being met: net-zero emissions by 2050 will require more ambitious and systemic change, with most of our buildings requiring retrofits to reduce emissions by 40 per cent or more.

However, demonstration projects are under way to show how this can be done: CityHousing Hamilton’s Ken Soble Tower, is undergoing a retrofit of this affordable seniors’ tower to the Passive House standard, which will reduce GHG emissions by 94 per cent. This ambitious retrofit is funded in part by the Canada Mortgage and Housing Corporation (CMHC). When completed next year, this net-zero-ready project will include modernized ventilation, cooling designed to serve the building in much-hotter 2050 climates, and an ultra-high-performance building envelope. It will also include all capital repairs required over the next 30 years. This approach will give the building a second life.

Deep retrofits can have both social and environmental impacts. To achieve both, investment must be focused on improved building envelopes and modernized HVAC systems. These investments are expensive – often taking more than 30 years to pay back at current energy and product prices. And yet retrofits of this scale have benefits that cannot be measured in simple paybacks: they can give buildings a new service life, improve housing quality and reduce GHG emissions by 90 per cent. Further, these buildings can be secured as long-term affordable housing through conditions placed on public funding (as the National Housing Co-Investment Fund already does): a critical piece of the puzzle, given the housing affordability challenges facing urban areas across Canada.

The fragmented ownership structure of this asset class, with hundreds of separate private and not-for-profit owners, makes policy responses hard to get right. CMHC wisely established a retrofit finance fund in 2016, and since then the National Housing Strategy has provided a pathway to funding for deep retrofit. But program requirements are not yet suited for the private sector, which owns around 80 per cent of these buildings. The fundamental paradox is that the only mechanism available to most private owners to generate necessary capital for retrofit is rent increase, which undermines the affordability goal. Through the CMHC fund, this paradox can be resolved by providing low-cost financing and grants tied to a commitment to affordability.

Building a retrofit economy

Housing retrofits also represent tremendous economic opportunity through the creation of a new retrofit economy: a combination of construction activity, green products and technologies, and skilled workforce.

Whereas a robust retrofit ecosystem exists in other jurisdictions, such as Japan and the European Union, the Canadian market is still missing an efficient and cost-effective supply chain for retrofit. Many crucial products are not available in our marketplace, such as all-in-one HVAC units that provide heating, cooling, ventilation and exhaust, designed for quick installation in each suite. Other products are available but have high price points and limited competition, such as overcladding assemblies or balcony enclosure systems.

Canada also needs a skilled workforce with expertise in retrofits. A labour force with specialized training in retrofits, from engineers to the skilled trades and general contractors, builds investment confidence from housing providers and results in more efficient use of funds. In the EU, retrofit training has been recognized as critical to the economic efficiency of federal programs, leading to successful pan-European training programs such as Fit-to-NZEB. Canadian training programs, offered through colleges, universities and training institutions, can help to drive this growth.

The Tower Renewal Partnership has estimated that $50 billion worth of construction is needed in Canada to rehabilitate aging apartment towers. The construction jobs that tend to be created from these energy retrofits are local and sustainable. The supply chain that a retrofit “pipeline” would create has the potential for export. A coordinated strategy could lead to significant industry expansion and capacity to meet the retrofit challenge.

Other countries have already forged the path forward. In the mid-1990s, the German government focused attention on creating a positive cycle of new technologies, products and trades training that drove down payback periods. This was supported by creative public incentives and finance programs through the KfW, Germany’s federal development bank that plays a role similar to Canada’s CMHC. In Germany, over a period of just three years in the late 2000s, 27 billion euros in federal loans and grants leveraged 54 billion euros in private investment; 1 billion euros in annual heating costs were saved as a result of retrofits; and 894,000 long-term jobs were created. The KfW-backed retrofit economy has resulted in not only a rapid reinvestment in aging German buildings, but also in a German-based industry that supports domestic construction while exporting its products globally.

How do we do it?

If we don’t act now, aging towers in Canada will start to be torn down or redeveloped into high-end housing, leaving a hole in the affordable housing supply in our major cities, while other countries build the companies that will dominate this growing sector of the economy.

There are three key things that Canada should do now to kick-start this renewal:

1. Refine and enhance CMHC’s Repair and Renewal program to drastically expand uptake and incentivize high performance:
   • Calibrate low-interest financing and grant support to meet project needs, and incentivize innovation through expanded grant support where performance targets (affordability, social inclusion and carbon reduction) are exceeded.
   • Performance standards are generally designed for new construction. Calibrate CMHC project targets to the unique needs of retrofits, supporting alternative compliance paths that foster industry innovation.
   • Help public-sector and non-profit owners build their capacity to take on retrofit projects through sector-specific supports such as financial guidance and retrofit standards, including guidance on retrofits with residents in place.
   • Engage private owners by offering retrofit finance and remortgaging tools customized for the private sector. Explore a private-sector retrofit tax credit that preserves rent affordability.
   • Support the acquisition by non-profits of existing apartment tower housing to preserve affordability, while undertaking deep retrofits at transfer. An acquisition and renewal financing program can be combined with tax treatment at point of sale to incentivize the transfer of housing assets to non-profit entities through capital gains reduction.

2. Work with industry councils set up by Innovation, Science and Economic Development Canada (ISED) to bring together a working group focused on building the retrofit supply chain with a focus on industry readiness:
   • Convene all players currently in the supply chain, highlighting the gaps that can be filled by partners from the private, public or not-for-profit sectors.
   • Focus on solving specific, critical gaps: How can we produce all-in-one unitized HVAC systems or high-performance panelized exterior cladding in Canada, to drive down costs and create exportable products?
   • Launch an R&D challenge to test and deliver showcase prototypes tied to CMHC funding, spurring innovation and supply chain development.

3. Introduce targets and standards to realize predictable and incremental nationwide retrofit advancement:
   • Set national targets with a focus on GHG emission reductions, health and comfort, creating a pathway to net-zero emissions by 2050.
   • Provide guidelines for retrofits including guidance on phased retrofit approaches to avoid locking in carbon. Where upfront costs of comprehensive retrofit are too high, owners can opt for phased improvements over the course of several years to meet their goals.
   • Require owners of apartment buildings to develop net-zero emissions plans to meet Canada’s 2050 targets. A mandatory public reporting system for existing buildings’ energy consumption could create positive pressure on owners while generating actionable data.
   • Develop a federal model step code, like those implemented in Germany and British Columbia, providing a trajectory and guidance on future code requirements to spur industry readiness, and work with provinces and territories to plan for their adoption.

Housing retrofits are a tremendous opportunity for systemic reinvestment to meet climate, housing and economic growth goals. It is an opportunity that should not be missed.