Momentum Growing for Use of Building Performance Standards To Support Commercial Real Estate Decarbonization
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Insights
An evaluation of the financial implications of building performance standards (BPS) reveals a nuanced landscape for real estate investors. The prospect of reduced net operating income (NOI) by up to 5.8% for non-compliance underscores the economic gravity of these regulations. The introduction of BPS policies across various U.S. jurisdictions indicates a shift towards more stringent environmental governance in the real estate sector. This shift is not merely about adherence but also about the potential for value preservation and enhancement through improved sustainability credentials.
Investments in energy efficiency and sustainable building practices can mitigate the risk of financial penalties. Moreover, they can enhance a building's marketability to tenants who increasingly prioritize environmental considerations. The long-term benefits may include not only regulatory compliance but also increased asset value and competitive advantage in a market that is progressively valuing green features.
The implementation of BPS policies has significant implications for the real estate market, particularly in the commercial sector. The report's focus on the potential NOI reduction for non-compliant buildings highlights a critical pressure point for owners. The strategic incorporation of green lease clauses and submetering represents a proactive approach to sustainability, aligning the interests of owners and tenants towards energy efficiency.
As BPS policies become more prevalent, we can anticipate a bifurcation in the market, with sustainable properties gaining a premium and non-compliant ones facing devaluation. This trend could catalyze a wave of retrofitting activities and increase demand for buildings with high performance in energy efficiency. Real estate investors and developers will need to factor in the costs of such upgrades and the potential impact on rental income and property values.
The report's emphasis on the upside of regulatory compliance through sustainability investments is a vital consideration for building owners and tenants alike. The implementation of green lease clauses and submetering can serve as effective tools for managing a building's carbon footprint. These measures not only facilitate regulatory compliance but also promote transparency and accountability in energy consumption.
Submetering, in particular, is a critical component, as it aligns cost responsibility with consumption, thereby incentivizing tenants to reduce their energy usage. The potential energy savings of up to 15% through submetering, as noted by the U.S. General Services Administration, demonstrates the tangible benefits of such systems. Building owners who adopt these practices not only stand to comply with BPS regulations but also position their properties as leaders in sustainability, which can be a significant differentiator in the real estate market.
NORTHAMPTON, MA / ACCESSWIRE / January 16, 2024 / CBRE Group, Inc.:
CBRE analyzes financial impact and upsides of regulations aimed at reducing buildings' carbon emissions, identifies actions to aid compliance
By Sara Johnston Director, Mktg & Comm
A growing number of local U.S. jurisdictions are implementing building performance standards (BPS) to combat carbon emissions in the real estate sector, creating new financial and reputational considerations for building owners, according to a new report by CBRE.
Ten local jurisdictions across the U.S. launched BPS policies in 2023, including cities, counties and states. New Jersey joined California and Colorado in enacting a statewide policy in 2023 with Maryland, Massachusetts, Minnesota and Washington scheduled to do the same over the next three years.
The regulations are aimed at reducing buildings' greenhouse gas (GHG) emissions. The stipulations vary by jurisdiction with many imposing financial penalties for policy violations. CBRE's Econometric Advisors analyzed the potential financial impact for a 500,000 sq. ft. office building that failed to meet energy- or emissions-reduction mandates in cities with active BPS policies. The analysis found non-compliance could reduce a building's net operating income (NOI) by 5.1 to
"The financial penalties associated with BPS regulations could be significant for building owners, but collecting fines is not the goal. The policies are designed to incentivize investing in the improvements needed to reduce a property's carbon impact. Those investments also have an upside in protecting a building's reputation and helping to attract tenants. As regulations become more widespread, a strategic approach to sustainability will become a prerequisite for any major capital investment," said Dennis Schoenmaker, executive director and principal economist, CBRE Econometric Advisors.
Actions to aid compliance
Improving a building's energy efficiency and overall performance requires the cooperation of building owners and tenants. While the building owner is liable for financial penalties, how tenants operate their individual spaces significantly impacts a building's ability to meet performance targets. Two actions to aid cooperation and compliance are green lease clauses and submetering.
Green lease clauses outline specific obligations and commitments related to sustainability measures like energy efficiency, renewable power procurement, water consumption, waste management and more. Such clauses can feature cost-sharing measures to help distribute building improvement costs among tenants and the owner, as well as stipulations to track and reward tenants who reduce their energy usage.
Submetering is the process of measuring and monitoring individual tenants' energy consumption and billing them accordingly. It can also be applied to large electrical equipment, such as HVAC, lighting and building automation systems. The use of submetering provides more accurate data, allowing a building owner and its property management team to focus on areas with the highest impact. Research has shown the use of submetering in multi-tenant buildings can lead to an energy savings of up to
"Momentum is growing for more BPS implementation. Building owners operating across multiple markets are facing tremendous amounts of complexity in navigating the various regulations. The good news is the solutions to help simplify the complexity and accelerate decarbonization are advancing every day, as does the industry's understanding of the urgent need to act. Owners and tenants are becoming more aligned on the importance of sustainability, and this shared responsibility will be key to driving progress," said Rob Bernard, chief sustainability officer, CBRE.
View the full report here.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world's largest commercial real estate services and investment firm (based on 2022 revenue). The company has approximately 115,000 employees (excluding Turner & Townsend employees) serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
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SOURCE: CBRE Group, Inc.
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FAQ
What are building performance standards (BPS) and what financial and reputational considerations do they create for building owners?
How many local U.S. jurisdictions have implemented BPS policies and what are the potential financial impacts for non-compliance?
What actions can aid compliance with BPS regulations for building owners and tenants?
What is the potential energy savings from using submetering in multi-tenant buildings?
Who is the executive director and principal economist of CBRE Econometric Advisors and what is their perspective on BPS regulations?
