What to Know About Local Carbon Policies for Commercial Real Estate

Sound like a lot to keep track of? Commercial real estate would agree. 

These geographically specific policies are not uniform but they all share a similar framework of imposing imminent restrictions on buildings, and penalties for those properties that aren’t in compliance once the law goes into effect. 

“They’re all different, which is not good news for large holders of real estate,” said Deb Cloutier, chief sustainability officer at sustainability advisory firm Legence. “Because now you’ve got to learn what these [policies] are. You’ve got to manage and track [them], and you’ve got to have different timelines.”

As commercial real estate continues the momentum of 2022’s ESG efforts, local legislation is likewise upping the ante. New York’s Local Law 97 is slated to go into effect in 2024. This timeline, not to mention the pressing threats of climate change, has brought local policy to the forefront of CRE strategy, or at least discourse.

“These regulatory frameworks have teeth in them unlike any that have existed before,” said Cloutier. 

City-specific environmental standards aren’t new, she explained. Rather, benchmarking disclosure ordinances precluded today’s building performance policies. The original ordinances collected data; they were a passive means of drawing attention to buildings’ energy consumption patterns.

Boston demonstrates this transition from passive disclosure to active policy. The city first instituted an early version of BERDO in 2013. Under that original framework, buildings in Boston had to report their energy and water consumption patterns on a yearly basis. 

In September 2021, Boston amended BERDO with new guidelines, overlaying the disclosure policy with a tangible, actionable and consequential framework. BERDO now requires buildings to reduce their greenhouse gas emissions, with the goal of reaching  net-zero by 2050. 

This shift from disclosure to performance has provided municipal governments with a prescriptive pathway to achieving their respective carbon reduction goals, said Cloutier. Local policies may differ in the details but they overlap widely in ideology; each sets a performance threshold for a building or asset that will ultimately result in a fine should the property fail to meet its city’s expectations. 

“The evolution of these performance standards to include fines and penalties for not meeting compliance pathways, like an Energy Star score or a certain carbon emissions intensity, has really ramped up,” said Ben Myers, vice president of sustainability at developer Boston Properties (BXP). “It has ramped up the focus of building owners, has caused building owners to look more critically at energy and carbon performance, and has shifted fundamentally the focus from energy to carbon in jurisdictions like Boston and New York.”

Some cities have navigated building policies and their challenges better than others. New York, for instance, spearheaded the first carbon-based standard in emissions thresholds, said Myers. As Local Law 97 revs up, New York has shifted away from gas and adopted all kinds of green, low-emissions strategies. Through building performance policies, cities have enough leeway to choose their own adventures, said Myers — and they have. 

On the West Coast, California has similarly made an upgrade. As of Jan. 1, California updated its Title 24 Building Energy Efficiency standards. The 2022 energy code went into effect at the start of the new year with updated requirements for low-rise multifamily buildings and compliance documentation. 

The Institute for Market Transformation (IMT) tracks building performance policies — as opposed to traditional building codes like California’s — and counts 11 North American locations that have adopted building performance standards, and another seven whose standards remain pending. Boston, New York and Washington, D.C., fall under the former category, whereas Cambridge’s building performance standards, per IMT criteria, are still pending.

The differences between Boston and Cambridge don’t stop there. Though side-by-side neighbors, the two Massachusetts cities have embraced separate ESG strategies.

BERDO in Cambridge is all about year-to-year performance, summarized Myers. The city wants to drive buildings to zero carbon, comparing results against the base year. This policy is currently in a period of flux, as Cambridge is deciding whether to move its 2050 net-zero deadline to 2035. If the city does enact that timeline, meeting emissions targets will prove all the more challenging. 

Across the Charles River, Boston has opted for a different approach. Like New York’s Local Law 97, BERDO establishes emissions thresholds, and the building stock needs to remain below that cap, variable by asset type. 

Boston and New York also come with specific requirements spelled out over a long period of time, explained Cliff Majersik, senior advisor of policy and programs at IMT. As deadlines come to pass, these policies will increasingly become more demanding, requiring lower and lower greenhouse gas intensity. 

Meanwhile, Washington, D.C., uses a standard based on an EPA portfolio manager’s score. Rather than set an exact trajectory, Washington recalculates this standard every cycle, so the requirements for each performance period remain in flux. The future parameters and ultimate targets of BEPS therefore remain unknown — and subject to change.  

Due to the intricacies of local policy, it is essential that commercial real estate participates in the dialogue. In Boston and Cambridge especially, the industry’s input is imperative.

“Between Cambridge and Boston, one of the issues that arose was ensuring that their timelines were broadly in alignment in regards to implementation and thresholds for improvement, as many property owners have assets in both jurisdictions,” Brian Swett, Americas East leader at Arup, told Commercial Observer via email. “With this in mind, building owners are also making sure that consistency is front and center as the regulatory process continues and they provide input.”

Because requirements are constantly evolving, companies such as Arup are thinking long term to develop decarbonization strategies, even in buildings where the local policies and codes don’t initially require such changes. 

“The challenge right now is that there are regulations and triggers in terms of timing going into effect going forward that are beyond what the day-one base code requires,” said Swett. “However, a smart owner needs to understand what the most cost-effective way is of delivering the required environmental and social performance of a building over its life.”

No one policy has proven better than any other — at least, not yet. The preferences of policymakers drive the jurisdictions, said Myers, so the frameworks are not scientific. 

“[Policymakers] are very much picking a method that hasn’t been proven to be the best method because none of these are proven to be the best method,” said Myers. “This is brand new.”

Despite the lack of uniformity, cities have widely employed the Energy Star portfolio manager as a unifying organizational framework. IMT, as well as the Environmental Protection Agency, have initiated efforts to create greater cohesion between city standards. 

Federal legislation hasn’t overlooked building performance, either. In December,  The White House announced the first federal building performance standard, intended to minimize energy use and electrify buildings in 30 percent of federally owned building space. With 2030 as its target timeline, the legislation correlates with President Joe Biden’s plan to establish net-zero emissions across federal buildings by 2045. 

Even with federal legislation promoting building performance standards, the hyper-specificity of local performance policies has its place. 

“I think, really, you have to look at building performance standards as a manifestation of climate action plans and carbon-neutral goals, which are city specific,” said Myers. Energy performance — and compliance — is ultimately a local activity, he noted.  

Granted, success doesn’t come easy, especially for companies whose portfolios span geographic markets. Boston Properties is one such company where the hodgepodge of policies has called for extreme organization via internal modeling. Likewise, Legence relies on a compliance tracking tool, which helps clients understand the jurisdictions under which each of their properties may fall. 

As much as companies may prepare, the results — and the consequences — of policies like BERDO, BEUDO and the like have yet to fully play out. The level of flexibility built into these policies is something of a wild card, though Boston Properties isn’t assuming the standards leave much, if any, room for error and loopholes. 

“There are concerns from members of the community and climate activists that providing loopholes or methods of complying that don’t improve the physical building stock will not result in meaningful improvement or will not result in decarbonization,” said Myers. “So there’s a lot of conversation about credible offsets and credibility and whether or not offsets should or could be allowed.” 

Pursuing alternative compliance pathways is a risky strategy that may work in the short term but likely result in more work over time. In December, The New York City Department of Buildings instituted a controversial credit policy allowing owners to reach carbon emission targets by purchasing credits rather than reducing emissions. 

Developers and owners are wondering how emissions offsets can be purchased and applied to their portfolios, said Swett. Flexibility is a major topic of conversation and remains specific to each policy.

To ensure companies are meeting targets at the portfolio level, shooting above and beyond individual building performance goals may provide a buffer against potential mishaps or factors outside of a company’s control.

“For instance, if you’re targeting a 50 percent portfolio reduction from a particular baseline by 2030, it would be strategic to be planning for a 55 percent or 60 percent reduction,” said Swett. “Increasing your internal targets is smart capital planning and builds in more room for error.”

Building performance policies can therefore go one of two ways. 

“Done well, I really believe that performance standards can accelerate energy efficiency investment and the greening of the grid,” said Myers. “But done poorly they could make conducting business in cities more challenging for commercial real estate.”

Anna Staropoli can be reached at astaropoli@commercialobserver.com.