In November 2022, CBRE Econometric Advisors (CBRE EA) published a report outlining how local and state government mandatory regulations are aimed at combating greenhouse gas (GHG) emissions in the real estate sector. Over the past decade, these mandatory Building Performance Standards (BPS) policies have gained momentum, as an increasing number of local jurisdictions act to mitigate climate change impacts and support building decarbonization. In 2023, 10 more local jurisdictions across the country joined the growing list of BPS implementation.
The adoption of statewide policies for BPS is also on the rise, reflecting the commitment of states to address climate change and foster sustainable practices on a broader scale. New Jersey joined California and Colorado in 2023. Maryland, Massachusetts, Minnesota and Washington are scheduled to do the same over the next three years. Statewide adoption ensures that compliance and community benefits will cover every corner of the state and not just cities. While Maryland’s statewide policy awaits implementation, some local legislators enacted the BPS policy at a countywide scale instead of within city limits. Montgomery County, MD, which is a suburb of Washington, D.C., is a primary example of such efforts.
Momentum is growing for a more collaborative approach
In January 2022, the federal government launched the National Building Performance Standards Coalition, a collective partnership between state and local governments to advance building performance legislation. The Coalition set a goal to implement building performance policies and programs by Earth Day 2024, with many jurisdictions already having existing policies in place. This growing momentum for the adoption of BPS throughout the United States suggests policy adoption is not slowing down anytime soon. Several cities have stipulated strict financial penalties for policy violations. The cumulative effect of such penalties will help encourage accountability and help accelerate decarbonization.
Penalties and their impact on commercial real estate
Penalties for non-compliance with BPS vary depending on the specific regulations in place. By implementing penalties, local authorities aim to create a level playing field for all market participants and incentivize building owners to invest in energy efficient and sustainability practices. However, it’s important to note that these penalties are intended to encourage building decarbonization rather than penalize building owners for failing to reduce the building’s energy consumption and carbon footprint. Some jurisdictions have relatively low annual penalties, whereas others have heavy penalties.
Another penalty is reputational through the public disclosure of non-compliant assets. Some jurisdictions will publicly disclose non-compliant buildings, which could negatively impact the reputation of the building owner or operator. In today’s society with growing stakeholder concerns about climate change1, investors, tenants, and regulators increasingly expect businesses to display their commitment to sustainability and demonstrate progress. Non-compliance with BPS can be seen as a lack of commitment to responsible business practices, leading to negative perceptions among stakeholders. Commercial tenants, especially those with corporate social responsibility and sustainability policies, prefer leasing spaces in energy efficient and low or zero carbon buildings2. Non-compliance could make it challenging to attract and retain such tenants, leading to higher vacancy rates and lower returns on investment.
Calculating non-compliance penalties
The penalties for non-compliance are designed to encourage asset owners to make all efforts necessary to decarbonize the built environment and comply with local regulatory policies. Avoiding penalties can reduce business expenses, which can be quite significant. While most jurisdictions impose annual fines on a per-day basis, three jurisdictions took a step further and base penalties on energy consumption over a 12-month period.
Following are examples of the potential impact on net operating income (NOI) in three jurisdictions — Denver, Boston, and New York City — that will impose financial penalties on properties that fail to meet carbon reduction mandates. Figure 2 outlines the calculations described for each city.More info