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With a recession looming and a labor shortage disrupting the industry, sustainable development policies aren’t top of mind for real estate developers. But recent events, including the passage of the Inflation Reduction Act, have made it clear that needs to change.
Environmental, social, and governance (ESG) standards are becoming more widely adopted in commercial real estate because the public is becoming more ecologically conscious. The U.S. government is responding to that desire by working to make its operations carbon neutral by 2050 and putting pressure on different sectors of industry to go green. For the real estate segment – responsible for almost 40% of the world’s carbon dioxide emissions – that means making systemic operational changes.
Consequently, your company’s sustainable development policy needs to align with the requirements of the new landscape.
U.S. Commercial Real Estate Sector Sustainability Policies Found Lacking
Green Street, a commercial real estate intelligence provider, published a report outlining why U.S.-based developers need to draft more environmentally conscious building policies.
The firm created a six-category scoring system to assess the green building regulations in Europe and the United States. On a scale of 1 to 100, most European countries scored at least 48 because of the region’s strict greenhouse gas emission rules. The continent’s high standards have pushed developers to find new ways to make projects more environmentally friendly, like embracing non-traditional building materials. By contrast, the U.S. scored an 11 because of America’s comparatively lax green real estate development regulatory environment.
Green Street determined that only 18% of the U.S.’s top 50 real estate markets have building-related emission laws on the books. The organization believes that developers haven’t crafted sustainability policies for their projects because there was no incentive to create them. However, the report asserts conditions within the country are changing quickly, noting, "Green regulatory costs are not a far-off, low probability, ‘stroke of the pen’-esque risk. The costs and impacts of regulations are taking place in real-time and are getting more onerous, not less.”
Recent federal and municipal efforts to curb the U.S. real estate sector’s greenhouse gas output support the firm's determinations.
In March, the Securities and Exchange Commission proposed requiring corporations to disclose the environmental risks of their operations. The International Energy Agency determined the real estate sector is responsible for 39% of the world’s carbon emissions. That means the SEC’s new rule could significantly impact developers’ access to capital and project road mapping.
In addition, several major American cities have enacted policies to curb the carbon emissions of large commercial buildings.
New York City’s Local Law 97 will fine owners for not complying with new emission reduction standards in 2024. Similarly, Boston’s Building Energy Reporting and Disclosure Ordinance requires large and mid-size properties to slash their greenhouse gas output by 2030 and eliminate it by 2050. And Washington D.C.’s Building Energy Performance Standards mandate that large commercial property owners significantly cut their energy consumption in half by 2023.
How Real Estate Firms Can Create Strong Sustainable Development Policies
Taking steps to massively reduce greenhouse gas emissions and electricity consumption in commercial properties is a complex undertaking. However, you can meet the challenges of the new normal head-on by crafting sustainable development policies that align with federal and municipal regulations and satisfy investor priorities.
To start, you need to focus on finding localized green building project solutions. Solar panels can be very effective at lowering the carbon footprint of individual properties by cutting their energy consumption. And thanks to the Inflation Reduction Act, owners are now eligible for a tax credit of up to 30% of their photovoltaic cell installation costs. But while using renewable energy technology to decrease electricity usage is a good strategy in some markets, it’s less than ideal in cold weather cities. When launching new projects in those areas, implementing designs with energy-efficient lighting systems and eco-friendly flooring makes more sense.
Another sustainable development consideration is incorporating emerging technologies into future projects. For instance, warehouses have high electricity costs because of the enormous amount of energy required to heat, cool, and ventilate large indoor spaces. IoT networks enable tenants to reduce energy consumption with smart thermometers and Wi-Fi-enabled LED systems. Climate change is complex, but engineers are coming up with innovative solutions every day.
Lastly, your real estate sustainable development policy needs to be transparent about the higher costs of green building materials.
While there is an increasing sense of urgency about making commercial construction projects more environmentally friendly, the global supply chain hasn’t caught up to the paradigm shift. Until the sector adjusts, you’ll need to clarify to investors that solar panels and IoT platforms are more expensive than traditional building infrastructure. And you’ll need to educate them about the government financial incentives and greater appeal to potential tenants that will offset those costs. By putting that information upfront, your backers will see that you’re ready to take on the challenges of a marketplace in transition.
Moreover, your firm’s sustainable development policy needs to be implemented sooner rather than later. The National Association of Real Estate Investment Trusts (Nareit) released a report in July that revealed the sector knows which way the wind is blowing. REITs that established reduction goals for greenhouse gas emissions went from 43% in 2020 to 59% in 2021.
Nareit’s findings indicate a new reality is rapidly emerging for real estate development firms operating in the United States. Incorporating ESG targets into project planning will be a requirement for securing funding across all asset classes and geographies. And your firm needs to be prepared to meet that condition.
Download our 4 Recession-Proof Asset Classes You Can Count On As a Real Estate Developer to learn which commercial real estate project types will bolster your portfolio’s sustainability amid an economic downturn.
Tag(s): Real Estate Development
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