Courtesy of Photo by Matthew Henry on Unsplash

The energy consumed by buildings in cities is the major source of greenhouse gas, and major cities worldwide are taking drastic steps to provide building owners with new guidelines to reduce carbon emissions.

Spending to Save

While the new requirements will represent significant upfront costs in some cases, in all cases the energy saved will result in money saved for owners and tenants alike. And many cities are underwriting the costs to help owners comply.

Most cities start with benchmarking regulations to get a picture of which sectors and which buildings need to improve the most. And most cities are planning for incremental improvements, with requirements becoming stricter over time as initial steps are accomplished.

One example is New York City’s Climate Mobilization Act. Among other things, it will require large and medium sized buildings to reduce greenhouse gas emissions 40 percent by 2030 and 80 percent by 2050. The graphic below illustrates other measures New York is taking to reduce its carbon footprint.

This graph shows NYC plans to reduce greenhouse gas emissions
One City Built to Last

Climate Change and Real Estate

This kind of legislation will have both immediate and long-term effects on the real estate market.  As energy use becomes better documented, potential buyers will know whether they are looking at a building that needs a lot of upgrades. Landlords may think twice before renting to a tenant with high energy demands, even if they aren’t the ones directly paying the utility bills.  Tenants will favor properties with lower operating costs. And developers considering new construction will have to account for the new, more stringent standards (although it may not cost as much as they think it will).

There will be growing pains, but over time, green will become normal and compliant building owners will see a meaningful return on their investment. The environmental benefits, however, will be much more far-reaching, benefitting everyone from the tycoon in a penthouse suite to the pigeon on the windowsill.

“The silver lining of these initiatives is that, long term, green building values should increase versus their competitors as tenants/users continue to differentiate in favor of sustainable buildings. Lower costs and increased relative rents by definition will generate higher net operating income and, long term for owners, a lower cap rate which reflects the increased value of necessary building enhancements. In the future, the marketplace will place a real premium on assets with meaningful sustainability improvements. A reasonable metaphor would be centralized HVAC [heating, ventilation, air conditioning] during the ’50s. Many thought the increased capital costs wouldn’t generate incremental returns, and obviously today such systems are base-level requirements.”

-Bob Lieber, executive managing director of New York City–based Island Capital Group

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