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New York City’s real estate investors may not have needed to worry about their report cards since leaving school — but this year, their letter grades will once again come under the spotlight. As of this January, all midsize and large buildings are required to post their energy efficiency grades near all entryways. Analysts project that over 40,000 of the city’s buildings will need to mind their scores in the coming year. To add to the pressure, buildings will also be required to achieve specific grades or pay steep fines starting in 2024.
For many, the change feels like a necessary measure for New York and its residents alike. City council data indicates that buildings are responsible for a whopping 71% of New York’s greenhouse gas emissions. These new grading requirements are part of New York’s Climate Mobilization Act, which, among other goals, intends to scale back building-generated emissions by 40% before 2030.
As ambitious and important as these changes seem, they also pose uncertainty to those in the real estate investment sector. The regulations push us to ask: Is true sustainability only a few red-pen lines and score shaming away? And, not unimportantly, what will the city’s real estate investors need to do to stay at the top of the class (or, at the very least, above that costly failure line?)
There will undoubtedly be some growing pains as the commercial real estate sector adjusts to the new regulations. However, I believe that the changes will ultimately pose a boon not only to the city’s sustainability goals, but also to the investors tasked with meeting them.
The Appeal Of Sustainability
First, we need to face the fact that sustainability measures would have come into play eventually.
As Melanie E. La Rocca, commissioner of the buildings department, recently told the New York Times on the matter, “People want to know what they are walking into, what they are living in, and what their contribution to meeting their values are.”
Consumers want energy-efficient spaces — not only for the health and sustainability reasons that La Rocca indicates, but also for the cost-saving benefits they provide. In New York, Con Edison’s electricity rates are 130% costlier than the national average. As a result, energy bills often constitute a substantial portion of the utility costs that commercial and residential tenants pay each month.
However, if property owners can upgrade their building performance by investing in clean generation products such as solar panels, or ensuring that their spaces are operating as efficiently as possible, they may be able to lower utility costs overall. These changes may make their building more attractive on the market.
Of course, this is easier said than done.
“Buildings will have to do deep energy retrofits, buy green power or eventually look at carbon trading.” Urban Green Council CEO John Mandyck reportedly told Crain’s New York Business shortly before the new regulations were signed into law. “We get that it’s tough and that billions of dollars will need to be spent to reduce carbon emissions. But new technology and new business models will be invented to help buildings get there.”
Meeting sustainability goals will require investment. However, the price tag of adherence may not be as high as investors worry.
The Upfront Cost Is Feasible
The unaffordability of sustainable construction is an outdated myth. According to a major study conducted by Davis Langdon, the cost of building a LEED-certified building did not significantly differ from that of a traditionally constructed building within the same category. In other words, a green luxury building would cost about as much to build as a conventional luxury structure.
However, many people have a mistaken belief that sustainable buildings are more expensive to build. In 2007, one survey found that respondents believed that including green features would increase the cost of construction by 17%. Statistics shared by the U.S. Green Building Council indicate that the real price difference was closer to 2%.
Moreover, there are measures that real estate investors can take to defray the costs of making green upgrades to existing buildings. These strategies include green leasing, which allows landlords to document sustainability priorities in legal and/or building documents. Depending on the language of the lease, this approach may enable landlords and tenants to split incentives and share the cost of efficiency investments and sustainability certifications.
Investors may also be able to pursue on-bill financing to minimize their expenses. This strategy allows businesses to take on low-interest loans with minimal upfront costs, and then repay them via utility bills. New York also offers financing through the New York City Energy Efficiency Corporation (NYCEEC) and provides tax abatements for property owners who invest in green roofs and/or solar panels.
Taken together, these strategies could empower all real estate investors to add green features and improve their sustainability grade without overspending their budget.
Opportunities For Further Investing
New York’s regulatory push toward sustainability is a challenge for real estate investors, yes — but it also opens the way for new growth in the sustainable building market.
Data from a recent Urban Green forecast indicates that if all buildings optimized their efficiency and adhered to carbon caps, New York City could host up to a $24.3 billion energy retrofit market by 2030. Moreover, the report states that “the new law could trigger a 13-fold increase over today’s annual market depending on how soon owners begin investing in their properties.”
Where does this all leave us? While the new regulations and grading system may be off-putting for some real estate investors, it is clear that achieving greater sustainability is both more necessary and more affordable than it ever has been before. These new energy-efficiency grades will help lead the city toward cleaner business practices and more lucrative and consumer-tailored investments. If all goes well, New York’s improved sustainability measures may even inspire other cities across the country to follow its example.