18 May 2021
Introduction
The United States has not always been a world leader when it comes to buildings that are good for the planet or supportive of human health. Rather, the market has long been fragmented between different regions, with some states and cities leading the way on environmental regulation and market-driven solutions.
However, this is starting to change. Institutional investors are starting to demand that asset managers show strong performance on ESG (environmental, social, and governance) matters. As a result, many asset managers are seeking to outperform their peers on sustainability metrics, and this, along with greater grassroots advocacy and consumer demand, has shifted market appetite for more stringent regulation. This legislative push is happening not just on the coasts but across the country, including some unexpected places.
Key trends
Here are the biggest legislative changes that have already started to take place across the country, and that we foresee expanding in the next few years.
1. Electrification
To be clear, by “electrification” we don’t mean putting electricity in buildings. (Hopefully, you already have that.) Rather, the electrification wave sweeping the country is to push builders to construct new buildings without gas lines, and to replace natural gas in existing buildings with electric appliances like boilers and stoves.
The Building Electrification Institute (BEI) is a non-profit that helps cities to pilot strategies to scale up the electrification of building heating and cooling systems. Participating cities include: Berkeley, CA; San Jose, CA; Los Angeles, CA; Boulder, CO; Denver, CO; Boston, MA; New York, NY; Philadelphia, PA; Salt Lake City, UT; Burlington, VT; and Washington, D.C.
Why is it important to switch to electric heating and cooling options? According to the BEI, “In cities with colder climates, fossil fuel use in buildings can account for 40% or more of total citywide emissions.” Instead, using air source heat pumps and other technologies to heat buildings means that a building can run on clean energy if the electricity grid runs on clean power. (Even better is designing and retrofitting buildings to efficient standards that require as little heating and cooling as possible, such as the Passive House standard.)
Dozens of cities have now passed electrification ordinances, and more are on the way. In a recent wave, 35 cities in California have started phasing out the use of natural gas in at least some building types. In one example in San Jose, CA, Adobe is adding a new, 18-story all-electric tower to their campus.
2. Benchmarking
This is the legislative “trend” that already applies to the biggest spread of locations. The term “benchmarking” refers to the disclosure of energy, water, and waste data, either reporting directly to the municipal government or through Energy Star Portfolio Manager. Energy Star PM is unique to the United States and is a useful (and free!) tool that building owners can use to benchmark the performance of their buildings on environmental indicators.
The list of cities that have now mandated the use of Energy Star PM for at least some building types is too long to list here, but you can use Energy Star’s interactive map to find where benchmarking is either required or voluntary. For example, in Texas, state buildings and higher education buildings must track and monitor their energy and water use in Energy Star. Likewise for all privately owned buildings over 50,000 square feet in St. Louis, MO. San Antonio, Texas is in the midst of a public consultation on the matter right now.
Benchmarking is widely regarded as a necessary step for understanding the performance of a building, by comparing to other buildings in the area. Energy Star also offers a residential certification , and in 2019, 54 percent of new homes (or 18,224 houses) in Arizona were built to the Energy Star standard. By understanding how efficient their assets are, real estate owners can then begin to develop a plan to optimize the use of resources and cut costs.
3. Embodied carbon
We see this as the “reach” legislation in the coming decade. Embodied carbon generally refers to the carbon associated with the manufacturing and transport of materials in construction, rather than the carbon emissions associated with the operation of the building. So far only California has passed “buy clean” requirements for new construction, but more states and cities have introduced legislation that incentivizes the use of lower carbon materials, including Austin, TX, and the state of New Jersey.
Although there is limited legislation surrounding embodied carbon that has actually been implemented, more and more thought leadership has sprung up to spur policy discussions in the last year. For example, the Carbon Leadership Forum (CLF) is a network of experts sharing advice on embodied carbon in the building sector. In November 2019 the Urban Land Institute (ULI) Greenprint Center published their report “Embodied Carbon in Building Materials for Real Estate,” a useful starting point for developers who want to learn about the pros and cons of different materials. The CLF has also made public a policy toolkit which showcases relevant legislation on embodied carbon and helps policymakers and others to navigate this policy space.
What you need to do about it
It may sound obvious, but the first step for real estate owners is to stay on top of regulation that has already passed. Many cities have fines associated with non-compliance and some of these can be quite costly. Longevity Partners can work with you to track regulations and compliance in the regions in which you operate.
The second measure that companies can take is to anticipate these legislative trends and to develop a plan to address them across their U.S. portfolio. Longevity Partners can work with you to create a comprehensive ESG strategy and dive into the details of building optimization on an asset level.
Lastly, if you are a real estate company that wishes to further the ESG agenda in the United States, speak up! Getting involved in local consultations is a great way to show your support and to stay informed of upcoming regulations.