Lean and green

The role of buildings in contributing to global carbon emissions has put the real estate industry under increasing pressure to decarbonize. Two critical policies driving the industry to achieve climate targets are benchmarking ordinances and building performance standards (BPS). With benchmarking ordinances, properties are required to report their energy use to the city or state annually. In some jurisdictions, that data is publicly accessible. With BPS, properties are required to meet a certain threshold of performance and, if necessary, make energy efficiency upgrades to meet that threshold.

The spread of these rules across U.S. cities and states has been both embraced and met with controversy within the industry. The laws also hold the potential to accelerate climate action in commercial real estate. To sort through this, let’s delve into the history of benchmarking and BPS, uncover opportunities and challenges with these laws, and explore how the industry is navigating compliance in the face of economic uncertainty.

From best practice to industry standard: the rise of benchmarking

Julia Paluka, CPM^®, LEED Green Associate, CBRE, Inc., AMO^®

“It all started with the Environmental Protection Agency’s ENERGY STAR^® certification program,” recalls Julia Paluka, CPM^®, LEED Green Associate, general manager for CBRE, Inc., AMO^®, and 2023 chair of IREM’s ESG Advisory Council. “It was something that helped us look at our energy performance, see where we could obtain efficiencies, and demonstrate to owners how well we were taking care of their assets.”

As more managers sought out the ENERGY STAR certification and tracked their buildings’ energy consumption in ENERGY STAR Portfolio Manager^®, benchmarking spread throughout the real estate market and rapidly advanced from best practice to industry standard.

Required benchmarking

In 2008, Washington D.C., and Austin, Texas, became the first U.S. cities to officially require energy benchmarking. Over the next 15 years, according to the Institute for Market Transformation, at least 43 other cities and seven states would implement a benchmarking ordinance, generally requiring energy (and often water) reporting for public, commercial, and/or multifamily buildings of a certain size, with thresholds ranging between 5,000 and 100,000 square feet.

Managers’ familiarity with energy tracking made it easier to comply with emerging ordinances. In most cases, jurisdictions provide online reporting links that simplify the submission process. Often, links automatically connect with Portfolio Manager profiles, and in some cities, like Seattle and Washington, D.C., a manager can share their profile permanently, easing future reporting efforts.

Ordinances are often implemented alongside requirements for utilities to share aggregated, whole-building data with owners, reducing the need to coordinate with tenants. When responsible for the entire building’s utility bill, landlords can also take advantage of data automation service providers that reduce reporting effort by adding data to Portfolio Manager.

Dominique Hargreaves, American Realty Advisors

For Class A buildings with leading energy performance, disclosing energy use can provide a competitive edge. Dominique Hargreaves, director of sustainability and corporate social responsibility at American Realty Advisors (ARA), says that benchmarking data is the “backbone for ARA’s entire sustainability program,” helping them meet energy reduction goals, report to the Global Real Estate Sustainability Benchmark (GRESB), and achieve green building certifications like LEED and the IREM Certified Sustainable Property (CSP). With greater opportunity to incorporate energy efficiency data into leasing decisions, tenants with sustainability goals can also benefit from this transparency.

Still, acceptance of benchmarking hasn’t been universal. Hargreaves recalls representing the U.S. Green Building Council Los Angeles in stakeholder workshops that preceded Los Angeles’ 2016 benchmarking ordinance. “There were several real estate companies that owned Class B and C buildings that found the draft laws daunting,” says Hargreaves.

Kelsey Ceccarelli, CEM, LEED Green Associate, Fitwel Ambassador, Verdani Partners

Many owners also highlight issues around the burden of collecting utility data from individual tenants in cases where whole-building utility data isn’t available. Kelsey Ceccarelli, CEM, LEED Green Associate, Fitwel Ambassador, director of engineering at Verdani Partners, says, “Even if benchmarking ordinances require that utilities provide energy data, without written permission, many utilities will not provide data for buildings with less than five tenants to protect tenant anonymity.”

Though data is not reported at the tenant level, owners may encounter resistance from hesitant tenants due to privacy concerns or fear that disclosures could put them at a competitive disadvantage. Many jurisdictions don’t publicly release data, but some, like San Francisco, provide an online platform where anyone can access benchmarking records.

With climate goals come building performance standards

As adoption of benchmarking increased throughout the last decade, many cities and states put forth their first greenhouse gas emissions (GHG) reduction targets, particularly following the 2015 Paris Climate Agreement. Benchmarking and climate action planning go hand in hand, and in most cities, like San Francisco, Chicago, and San Diego, benchmarking was implemented to support an existing climate commitment.

From the perspective of climate policymakers, BPS are the natural evolution beyond benchmarking for the built environment, serving as the existing building equivalent of energy codes for new construction. Whereas benchmarking establishes a baseline for energy performance, BPS mandate energy and carbon performance improvements to meet long-term climate targets reliably.

According to the International Energy Agency’s 2022 World Energy Outlook, achieving net zero emissions by 2050 (less than 30 years away) will involve retrofitting 85% of existing buildings to “zero-carbon-ready” standards. Yet, a May 2023 report from the American Council for an Energy-Efficient Economy estimates it would take more than 50 years to retrofit all existing commercial buildings at current rates.

To speed up retrofit rates, more jurisdictions are favoring a regulated approach through BPS, with major policies including Washington, D.C.’s BEPS (2018), New York City’s Local Law 97 (2019), and Boston’s BERDO (2021).

BPS penalties and compliance challenges

While benchmarking only requires energy data disclosure, complying with BPS is more involved, often demanding major upgrades or retrofits. Fines for noncompliance with BPS are also significantly higher in comparison to benchmarking.

In New York, owners out of compliance with benchmarking laws are responsible for an annual $2,000 fine per property, according to the city’s website page on the ordinance. For

Local Law 97, however, failure to meet building emissions limits would, beginning in 2025 (for the 2024 reporting year), result in an annual penalty of $268 for each metric ton of carbon dioxide exceeding the limit. A 2023 study commissioned by the Real Estate Board of New York estimates that more than 3,700 properties could face penalties by 2025 cumulatively exceeding $200 million per year—equating to around $54,000 per property.

Class A buildings are less likely to face obstacles in complying. When asked how ARA’s three New York properties could be impacted by Local Law 97, Hargreaves says, “There is plenty of time to plan for the future.” Because ARA was proactive about investing in newly built properties, its New York buildings are forecasted to be compliant through 2030 without making any upgrades.

Older, less efficient buildings face an entirely different challenge, as they need far more investment to reach the same level of compliance. Paluka echoes concerns raised across the industry that BPS may not adequately take owners’ financial situation into account. “Improving energy efficiency can benefit owners’ NOI. However, prioritizing compliance with BPS may undermine more urgent needs related to safety, risk management, and critical improvements.”

Hargreaves raises a similar concern. “Between COVID-19 and the economic downturn, access to capital is limited,” she says. “It’s the type of environment where every real estate owner is focused on cost control.” Even if capital is available, the process to assess, approve, and implement energy efficiency upgrades can be lengthy and may be difficult to complete before penalties come into effect. “Ideally, owners want to know requirements several years in advance to allow for adequate planning and budgeting, especially for more expensive upgrades like electric boilers.”

Implementation at the portfolio level is also challenging due to the patchwork of BPS, which varies in terms of targets, compliance pathways, and metrics. Across the U.S., BPS performance metrics range between annual GHG emissions, energy use intensity (EUI), and ENERGY STAR scores. Each metric requires a different approach, particularly when considering the distinctions between energy- and carbon-based strategies.

To mitigate these issues, Paluka underscores the importance of giving the real estate industry a seat at the table in the policy creation process to ensure the resulting BPS can realistically be implemented in an equitable manner. “The real estate industry is already voluntarily improving energy efficiency and reducing emissions. Policymakers should tap into our years of expertise around appropriate strategies and technologies, as well as the economic feasibility of potential compliance requirements.”

Strategies for achieving compliance and maximizing benefits

To strategize across multiple jurisdictions, owners should think back to most BPS’ original

Sean Birnbaum, P.E., CEM, LEED AP, Fitwel Ambassador, Verdani Partners

intention: to reduce GHG emissions and meet long-term climate targets. When helping real estate companies work toward emissions reduction targets, Sean Birnbaum, P.E., CEM, LEED AP, Fitwel Ambassador, senior director of engineering at Verdani Partners, recommends prioritizing energy conservation, decarbonizing on-site operations, and employing renewable energy credits (RECs) and offsets only as a last resort. To reach targets faster, owners should advocate for utilities to increase the percentage of renewable sources in their power mix.

Financing compliance measures can be achieved through self-financing and traditional loans. Owners may be able to target their borrowing and strengthen return on investment by taking advantage of incentives and rebates from local governments and utilities, such as on-bill financing and Property Assessed Clean Energy (PACE) programs. Owners can also negotiate cost-sharing via green leases for upgrades from which both owners and tenants can benefit.

Managers should demonstrate how upgrades will help reduce operating expenses and increase market competitiveness. Paluka recommends starting with LED lighting, which has a favorable payback period even without rebates. Another cost-effective strategy is replacing gas-powered heating and cooling systems with electric heat pumps. While more capital intensive, adding on-site renewable energy can help attract tenants, create promotional opportunities in annual ESG reports, and help achieve green building certifications, like LEED, IREM CSP, and ENERGY STAR, which may help increase rental income and occupancy rates.