New Climate Rules Are an Opportunity, Not a Threat, to Commercial Real Estate
Shortly after mobilizing $400 million of long-awaited Inflation Reduction Act funds to facilitate the adoption of energy-efficient codes for new buildings, the Biden-Harris administration turned its attention to the real culprit of building emissions: our existing buildings. As exciting as a new building can be, with all of the advanced technology that they are being equipped with today, it is existing buildings that account for 29 percent of U.S. annual energy-related emissions. Plus, the demolition and construction associated with new buildings create a lot more carbon that will need to be offset by a building’s more efficient operations.
In September, the White House issued a national framework for climate resilience in buildings, which included objectives to transition to “zero emissions” buildings. Though not legally binding, this framework is the culmination of a broader effort undertaken at both the federal level and below. A growing number of U.S. states and municipalities are setting up policies for climate change mitigation across the existing building stock (collectively known as building energy performance standards). New policies are being adopted meant to strengthen the resilience of building assets against physical climate risks.
For evidence, take Colorado, whose Air Quality Control Commission established new energy performance standards for large buildings in August, joining California, Maryland, Oregon, and Washington in adopting climate-focused rules and regulations for new and existing buildings alike. And the momentum is staggering. Most notably, in September, the U.S. Climate Alliance, a bipartisan coalition of 25 state governors, committed to adopting building energy efficiency standards.
Commercial property developers, owners, and managers in these forward-looking jurisdictions have an understandable inclination toward anxiety, even frustration, over compliance achievement, let alone going beyond compliance to achieve the more ambitious climate-positive outcomes that we so desperately need. And for their part, there’s no questioning that nationwide, commercial facilities are under acute financial stress, marked by stubbornly high vacancy rates, increasing loan delinquencies, tightening credit, and other adverse conditions.
Though it may seem counterintuitive, the industry must recognize these new “baselines” for building performance, or rather, maximum levels of acceptable climate delinquency, for what they are: a financial opportunity. Buildings that are technologically equipped to minimize operational emissions, maximize occupant health and well-being, and withstand physical climate risks have proven capable of paying for themselves. Advanced building assets are cheaper to operate and maintain; they fetch higher rents, they strengthen the ESG performance records of their corporate owners, managers, and investors, and they support a number of positive, community-scale economic, sustainability, and public health outcomes.
But for building owners to capture this potential without compromising the financial performance of their assets, they will need to take a strategically incremental approach. Start with compliance. In many cases, building energy performance standards simply mandate either a maximum level of operational energy consumption or, more ambitiously, operational energy-related emissions per square foot of floor space by a given deadline. In other words, these policies are not prescriptive. Owners and managers of existing buildings are afforded the discretion to choose the optimal path for compliance achievement.
The path is not easy, even for building owners who want to upgrade buildings to stay ahead of decarbonization standards. Each building is different, and, like everything in commercial real estate, building decarbonization does not have a one-size-fits-all solution. It’s important to consider how building performance may be optimized in a manner that is conducive to carbon-neutral and, better yet, carbon-negative operations. There are three rules of thumb that, when adhered to, stand capable of yielding sustainable progress toward deeper emissions reductions and climate resilience improvements.
First, no decarbonization initiative in the built environment will succeed without a robust data foundation. To that end, the first investment shall be an advanced energy metering system, which enables asset owners and managers to map the zone-by-zone and floor-by-floor, or ideally, tenant-by-tenant and device-by-device energy consumption of their building assets. With this information, regulated businesses will be able to determine where their inordinate consumption patterns lie and, by the same token, inform corrective actions.
Second, with the results of a preliminary operational energy audit as their guide, landlords would be best served to prioritize addressing their largest sources of emissions and physical climate risk. Finally, building owners and managers should prioritize dual climate change mitigation and adaptation interventions that promise the fastest financial ROI. The idea, really, is to maximize operational energy and building maintenance cost savings so that project implementers can not only accelerate debt service but strengthen their capacity to finance future building performance improvements.
Many buildings find that the low-hanging fruit is often electrification of building systems by replacing things like gas-fired boilers. Beyond their being powered by a cleaner source of energy (i.e., electricity), the functional advantages of today’s commercial-grade distributed energy resources (DERs) cannot be ignored. By equipping these systems with sensors and automated control systems, they can be optimized in a way that is not possible with the previous technologies. Installing more efficient, monitorable, and controllable electrified equipment, which is conveniently subsidized by the U.S. Inflation Reduction Act, is a reliable enabler of compliance achievement and more.
As the number of smart (i.e., IoT-enabled) DERs implemented in a commercial facility grows, so too does the building manager’s ability to drive progressively more efficient operational outcomes through adaptive device programming and continuous activity monitoring. Using these adaptable devices to changing conditions, building managers can minimize the costs associated with disruptive, multi-stage building retrofits and other “hard” infrastructure upgrades.
Public policy is leveling the playing field for the commercial real estate industry. By forcibly raising the baseline for building energy performance and climate resilience, policymakers are effectively “de-risking” the time-intensive and costly processes of so-called climate alignment. It stands to reason, then, that staying ahead of regulatory requirements is a way to de-risk a property and help it stand out in a difficult market. But it’s only those property owners that practice strategic incrementalism, or rather, pursue self-sustaining decarbonization strategies that will come out on top.