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It has been a busy year in Washington. In the last 12 months, the Biden Administration has pushed through ground-breaking legislation and funded critical investments across the country. For its part, the commercial real estate sector has kept a close eye on this activity over concerns about increased regulatory oversight or other changes to the status quo. When the $1.2 trillion Infrastructure Investment and Jobs Act passed in November 2021, there was (and continues to be) widespread fear that the legislation would put pressure on an already stretched construction labor market, and there were countless articles about it.
But the industry was mostly quiet when the Inflation Reduction Act passed in August. The legislation, which makes significant investments in energy and healthcare along with some additional changes to the tax code, seemingly had little connection to commercial real estate—but actually, there are many ways that it will benefit this industry. The energy investments will help to modernize properties, make it easier for developers to upgrade buildings and help commercial real estate companies meet ESG goals.
Inside The Inflation Reduction Act
The IRA (an acronym for the legislation and not for an individual retirement arrangement or the Irish Republican Army), has a wide assortment of provisions. It implements a minimum tax rate of 15% for corporations that gross more than $1 billion in revenue annually, closes the carried interest loophole, expands subsidies for the Affordable Care Act and gives the government more control to set prescription drug pricing. While these are important, primarily, the IRA is a climate bill.
The legislation is a massive investment in renewable energies and other incentives to stave off climate change, and it plays to the tune of $369 billion. At the heart of these benefits are tax credits for renewable and non-carbon energy, expanded tax credits for electric vehicles and incentives for biofuels that power cars and airplanes.
These energy investments—of which there are too many to list—are the primary purpose of the legislation and where commercial real estate players will find considerable benefits.
Meeting ESG targets
In the last three years, the commercial real estate industry has voraciously addressed the built world’s contribution to climate change. It’s well established that commercial real estate is among the most significant global users of energy, accounting for 39% of US carbon emissions.
In response, the industry has adopted widespread ESG goals and targets, with many property owners vowing to decarbonize real estate portfolios and construction sites. The Intergovernmental Panel on Climate Change expects that the largest share of climate mitigation will come from “new buildings in developing countries and the renovation of existing buildings in developed countries.”
The IRA initiatives align with these goals. The legislation is designed to reduce carbon emissions by 40% by 2030. The plan funds tax deductions for commercial buildings and expands the incentive to adopt energy improvements from $1.80 per square foot to a scale of $2.50 to $5.00 per square foot, which will help building owners make improvements that will have a measurable impact on energy consumption. It also allocates $40 billion from the DOE Loan Programs Office to support the commercial implementation of innovative clean energy technologies, and it will provide more than $11 billion to fund projects that will reduce greenhouse gas emissions.
Research from Resources for the Future expects that these improvements, along with other IRA provisions, will help reduce electricity costs by 5.2% to 6.7%. For the average American, this results in savings of $170 to $220 annually, with the added benefit of curtailing future volatility in energy prices. Most of the modeling on cost benefits understandably focuses on household energy savings, but commercial buildings will benefit from the same significant savings in energy costs.
Apartment owners have an extra incentive to create sustainable homes. Multifamily buildings that meet Energy Start requirements will receive up to a $5,000 tax credit per unit. Many owners are already pursuing, or at least pricing out improvements that meet Energy Start requirements as part of ESG efforts, and this incentive will help owners meet these goals.
Driving sustainable development
Developers will also find advantages lurking in the details of the bill. There are incentives to promote sustainable development and build better, healthier communities. The bill allocates $250 million to standardize the Environmental Product Declaration to help developers better analyze and compare building materials that meet sustainability guidelines. As the Commercial Observer notes, this will require a description akin to the Food and Drug Administration’s nutritional label requirements. An additional $100 million will also be provided to identify and label low-carbon materials.
Moreover, the bill provides a $10 billion incentive for developers to utilize clean energy technology in manufacturing facilities, which could include the production of materials that are used in new developments, like solar panels. Investing in technology is crucial to achieving more efficient and viable developments. At Northspyre, technology drives better and more predictable outcomes on construction projects by using machine learning and data analytics to guide decision-making, oversee budgets and schedules and manage contracts and invoicing. Technology produces cost and time savings and is only one example of how technology is reshaping development.
Developers leveraging construction technologies throughout the development cycle will realize substantial benefits across the development pipeline. An article in the Commercial Observer highlights the importance of technology in construction, explaining, “The deployment of existing technologies in energy and construction, and the exploration of new ones, can not only save the planet, but they can make our infrastructure more resilient to damage, reduce costs, and—with the lubrication supplied by federal funds—turn a profit.”
While the IRA wasn’t meant to target the commercial real estate or construction industries, the built world plays an essential role in creating a better and more sustainable future. This legislation has provided the funding and incentives to tackle aggressive climate goals, and commercial real estate stakeholders will help make those goals a reality.
Tag(s): Real Estate Development
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