PACE market shifts and evolves to grapple with policy headwinds

A Sunday panel on the Property Assessed Clean Energy (PACE) market agreed that 2018 was an “eventful year” for both residential and commercial PACE, and though speakers said they had observed an increased appetite for private placements as well as larger deals across the sector, some policy headwinds persist.

Request a PDF

“For residential PACE, it was a bad year,” said Brock Wolf, executive director at Natixis. “Volumes were down substantially, [especially in] California when regulations went into effect.”

Commercial PACE fared somewhat better, with issuance volumes up modestly by around $270m in 2018, Wolf said.

A reason for the commercial PACE market’s stunted growth is the shift in the types of projects being built. There has been a movement from large, new construction projects to retrofits, which takes much longer to complete, said Winston & Strawn partner, Francisco Flores.

On the residential side, regulations have hampered the growth of PACE. Most of the rules are around consumer protection, licensing and origination and have been implemented mostly in California. Consumers in the state have been seen steering clear of Pace financing because they don’t want to deal with the burdensome administrative costs, such as the long income verification process, said Flores. Moreover, residential PACE loans have seen an increase in pre-payment rates, said Stephanie Mah, vice president of ABS research at Morningstar Credit Ratings.

Meanwhile, there is increasing appetite for private deals, said Greg Saunders, CEO of CleanFund, due to the speed in which the deals can get done and the advantages that come with prefunding structures. For example, CleanFund’s $115m triple-A rated private deal, was well received and priced aggressively, said Wolf. Panelists said investors could expect to see more private transactions this year.

In terms of the outlook for 2019, it is likely that larger projects will dominate the commercial PACE sector, said Saunders. There will be a “gravitation to larger deals at the expense of smaller deals. The $500,000 deals will fade away because of costs involved in getting the mortgage lenders to consent,” he added.

Flores noted that PACE will be used more for resiliency purposes to mitigate damage in the case of natural disasters. The conversation is shifting from energy efficiency towards seismic, fire and flood resiliencies. Although PACE can be seen as a politically charged asset class, the need for more resilient homes will be appealing to policymakers across the political spectrum, Wolf said.

Another trend to watch for this year is direct marketing to consumers by PACE issuers. For example, Ygrene has recently begun advertising on the radio and on buses in Florida, Wolf said, which has resulted in more inquiries from customers. Consumers speaking to the issuer directly rather than to contractors will be a change in the PACE origination structure going forward.  

Panelists expected the noise around new regulations to subside and hoped that the industry will start to overcome statutory differences between various states over the course of 2019.