Five Strategies For Commercial Real Estate Under The Biden Administration
CEO and Co-Founder of Green Generation, which engineers and implements comprehensive integrated energy efficiency solutions.
The outgoing executive administration’s lasting impact on the natural environment, clean energy landscape and transition to a decarbonized, climate-aligned U.S. economy is palpable — with the equivalent of 1.8 billion metric tons of CO2 added by 2035, a figure nearly one-third of all U.S. emissions in 2019.
Even an extreme economic disruption like the global Covid-19 pandemic is expected to yield only about a 7% annual CO2 emission reduction. For reference, the UN Environment Programme advises cutting global emissions by 7.6% each year until at least 2030 to have hope of achieving Paris Agreement goals. Compared to 2019, this emissions gap has not been narrowed and — so far — remains unaffected by the pandemic.
Clearly, these challenges will not disappear when President-elect Joe Biden takes the oath of office. But after four years with an administration focused on aims other than increased environmental stability, the Biden administration’s arrival brings ample, profitable opportunity for sustainability-minded commercial real estate (CRE) owners, executives and investors.
The cabinet picks to date are a sign of policy certainty when it comes to legislation and rules centered on environmental sustainability. Former Secretary of State John Kerry, who helped author the Paris Agreement, has been chosen as the first-ever climate czar. Climate Leadership Council co-founder Janet Yellen has been chosen as Treasury Secretary. These picks support the notion that the incoming administration is looking to commit to diverse, equitable, sustainable and effective climate policy. Biden is showing us that policy certainty is once again on the table.
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This means CRE stakeholders will need to get their businesses and assets into compliance with the Biden-Harris climate agenda more quickly than they think. Even without a clear path to passing the kind of multitrillion-dollar green infrastructure plan he advocates, President-elect Biden is expected to issue a slew of executive orders so federal agencies create new climate-aligned regulations under existing laws.
That’s right. Biden is anticipated (paywall) to incorporate climate provisions into the missions and core functions across all federal agencies. This may entail the Department of Commerce introducing national building energy performance standards, strengthening the DOE’s rules for building appliances and equipment or requiring public companies, including financial institutions, to disclose their climate risk exposure, greenhouse gas emissions and other sustainability data to the SEC.
Here’s The Deal
How do you get into compliance with something as unofficial and imprecise as a policy platform? Well, something I urged in an open letter to the incoming administration and seems to be taking place is climate policy platforms guided by an accounting of climate action’s life cycle returns rather than solely costs. CRE owners, executives and investors looking to align with the Biden administration’s sustainability criteria ought to take a similar approach and consider the following:
1. Submit to the staying power of ESG: For obvious reasons (the Covid-19 pandemic, the global climate crisis and the social justice movement), the importance that consumers, investors and producers increasingly place on organizational sustainability is here to stay — and grow. Think of ESG practices as a sort of value-add asset that, according to The Counselors of Real Estate, is critical (paywall) to CRE investment strategies. Better yet, improving the environmental, social and governance performance of assorted properties and CRE investment portfolios doesn’t need to be a rigid, formulaic process. What matters is an approach that aims to commeasure or give the same consideration to conventional financial returns and ESG returns.
2. Recognize decarbonization is your fight, too: Buildings account for nearly 40% of global CO2 emissions, so it’s no surprise the Biden administration’s vision includes reducing the carbon footprint of the U.S. building stock 50% by 2035 through incentives for deep retrofits. This raises the specter of national building energy performance or emissions standards, new rules for equipment efficiency or climate risk disclosure requirements for CRE investors. Best practice is now for CRE executives to set their own voluntary decarbonization targets and comprehensive metrics for evaluating and maintaining progress. Not only will this establish a framework for evaluating the “E” in an ESG plan, but it will also help to identify energy waste, increase energy cost savings and mitigate future compliance risk.
3. Benchmark, adapt, monitor and repeat: It can be difficult to know where to start when setting and evaluating the progress of decarbonization goals. That’s what makes performance benchmarking (of a building’s consumption of electricity, water, gas, heat or waste production) the bedrock of any energy management strategy. With today’s cloud-based AI/IoT platforms, carrying-out an effective CRE energy performance benchmark has never been so easy or affordable. Beyond improving energy cost savings, these digital solutions can be used to bring buildings into compliance with new energy or emissions regulations at a moment’s notice, as well as provide a gauge on the performance of your management team.
4. Play the long game: CRE executives must recognize the value of each decision on their sustainability profiles — even something as routine as replacing equipment at the end of its useful life. Replacement equipment’s value-add impact on a building’s sustainability profile and value depends on the timing and substituting equipment used. Knowing this, responsible parties should seek to develop frameworks for determining when, how and with what equipment such replacements should be carried out that advance the overarching asset’s energy management plan and decarbonization targets. By standardizing sustainability considerations for even routine processes, frameworks like these can advance the “G” in an ESG plan and help to optimize financial and energy performance.
5. Be resourceful: CRE executives may be discouraged by the upfront costs of getting into compliance with the impacts of the Biden-Harris agenda, but thinking of regulations solely based on cost is misguided. In many cases, executives can take advantage of programs such as Property Assessed Clean Energy (PACE) loans, renewable energy purchasing incentives and various tax credits and incentives to offset project costs and reduce energy and insurance costs. In addition, implementing data-driven building energy management plans can lower the cost of borrowing by giving lenders — whose investments are increasingly screened for climate risk — better insight into energy savings potential of retrofits and other upgrades.
Without having legislation and guidance in hand, it may feel difficult for CRE owners, executives and investors to make decisions around ESG initiatives. However, there are considerations and steps to take now that can help not only your bottom line but the visions of a new executive administration.
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