How The Build Back Better Plan Can Power CRE's Path To Net-Zero Carbon Emissions
For commercial real estate, which has increasingly self-regulated its environmental, social and governance bona fides, it could mean hundreds of billions of dollars in play to charge up the industry's ongoing green transformation.
“There’s a lot to be excited about,” said Ben Evans, federal legislative director with the U.S. Green Building Council, the nonprofit organization responsible for LEED building certifications. “We’re talking about unprecedented levels of attention to climate writ large, and to buildings specifically as well.”
The $1.2 trillion infrastructure bill passed by Congress and signed into law last month delivered billions of dollars for climate change response. But that was more limited in its scope with regard to commercial real estate; its most direct impact is a $27B figure directed toward retrofits of public and private buildings. The CRE industry always anticipated greater aid from the Build Back Better framework, which pledges $555B in climate resiliency-related efforts, Evans said.
The BBB framework was passed in the House of Representatives last month and now awaits approval in the Senate. The White House claims the BBB bill could cut greenhouse gas pollution by more than one gigaton by 2030 while delivering a plethora of significant orders affecting CRE.
Industry experts in charge of ESG efforts for their respective firms told Bisnow what aspects of the bill they are eager to see and how much further down the path of climate sustainability the BBB bill could actually take them.
What’s In BBB For CRE?
More than $100B of BBB funding would go toward initiatives directly impacting the nation’s public and private building stock, according to a breakdown by the USGBC. The largest funds include a combined $69B in loans geared toward financing the deployment of clean energy technologies.
In a direct impact to CRE firms’ bottom lines, BBB would extend tax credits and deductions an additional 10 years for CRE energy improvements, including 30% investment tax credits for solar and microgrid investments. The tax credits would be felt immediately, experts said, and be “tremendously impactful,” Evans said.
“There’s also an element in there expanding it where REITs can use it more easily,” Evans said. “New-home construction, which includes multifamily commercial buildings, that’s going to be a much more generous tax credit. We’re excited about those.”
The bill’s initiatives include $360M for workforce development, which could theoretically beef up pipelines of energy auditors, HVAC technicians and other specialists CRE, and the government, need in order to put climate change plans into action.
“Once we make the decision to add renewables to a building, we need people to actually go out and do that work,” said Nuveen Real Estate Americas Head of Sustainability Jessica Long, whose firm has its own net-zero carbon emissions by 2040 goal. “We need people to actually go out and do the work. If we’re going to retrofit almost all of the buildings, that is really encouraging.”
Public Improvements For The Private Good
Funds not explicitly earmarked for privately owned building upgrades will also play a large role in getting CRE’s inventory in line with net-zero carbon emissions goals.
The Build Back Better framework pledges $500M to states for grants for energy grid integration improvements. States like New York and California already have in place mandates to achieve green grids by 2040 and 2045, respectively, while municipalities like Boston require feasibility studies for microgrids for energy storage for any project over 1.5M SF.
The impact of a weak grid was felt dramatically in February in Texas when a winter freeze turned into a deadly and costly disaster as the state’s power grid, independent from the nation’s east and west grids, was caught unprepared for the frigid weather. For CRE firms like Nuveen, which is pushing its net-zero carbon emissions goal across its $138B international portfolio, grid upgrades are vital.
“We have a really aged infrastructure,” Boston-based Finegold Alexander Architects principal and President Rebecca Berry said. “Unfortunately, the wind doesn’t always blow and the sun doesn’t always shine. We have to store energy at a grid level, or at a local level. Microgrids, the U.S. is a bit behind on, frankly.”
The wide-ranging BBB framework doubles down on assistance for governing bodies adopting green building codes, pledging $300M after the infrastructure bill allotted $225M to the same cause. States and municipalities have already pledged net-zero carbon emissions requirements by 2050 and are beginning to back those goals with financial penalties.
Still, many cities and towns don’t have the capacity or resources to overhaul their building codes, and the funding will pave the way to peace of mind for CRE players entering more markets, Evans said.
“If I have a net-zero carbon target and I need to invest in real estate, I want there to be a lot of buildings out there that meet my criteria so I can continue to deploy capital and buy buildings,” Long said. “I’m not going to have to price an unknown amount to that building to bring it to net zero.”
A Baton Pass To CRE
Many of the funds pledged in the BBB framework are directed to non-CRE interests, like the largest single amount earmarked in the bill, $65B, for capital needs to address a public housing backlog. Hundreds of millions of dollars would be funneled to single-family homeowner improvements and federal buildings. Biden earlier this month also issued an executive order addressing the government’s own 2045 net-zero emissions target for its building stock.
The anticipated CRE gains aren’t perfect — the initiatives could have a negative economic impact on the CRE industry and cause short-term pain, Bay Area developer Presidio Bay Managing Director Cyrus Sanandaji said.
“If PG&E was expected to eliminate gas from every project and strictly provide electricity, we would not be able to build buildings. It’s just not going to happen overnight,” he said of the California-based energy company. “It’s a pretty large-scale infrastructure change.”
The industry has been largely left to self-regulate in the six years since the U.S. first entered, then exited and finally returned to the Paris Agreement. Internationally, there is $130 trillion of private sector financing aligned with net-zero targets, a figure revealed during the U.N. COP26 Climate Change Conference in the UK. Major investors are already tying billions in corporate debt to ESG performance, and pressure from lenders and tenants is pushing ESG to the forefront of CRE’s concerns.
ESG leaders from CRE firms said they have seen the industry take responsibility for carbon emission reduction over the last decade, while the climate change agenda has become a serious part of developers’ business models in the past year, Sasaki Director of Sustainability Tamar Warburg said. Nonetheless, the nature of CRE investment has kept the industry from fully grasping ESG goals.
“Many developers are in and out of a project in a very short amount of time,” Berry said. “That’s where I think the regulations are so important. Institutional investors, who hold properties for a long time, I think are the next forefront.”
CORRECTION, DEC. 17, 5:30 P.M. ET: A previous version of this story incorrectly attributed a quote regarding green building codes to U.S. Green Building Council Federal Legislative Director Ben Evans instead of Nuveen Real Estate Americas Head of Sustainability Jessica Long. Another quote about the energy grid was also incorrectly attributed to Long instead of Finegold Alexander Architects principal and President Rebecca Berry. The story has been updated.