The Inflation Reduction Act has been hailed as the biggest piece of climate-related legislation Congress has ever passed. But it’s not the only regulatory action on greenhouse gas emissions that we can expect. With strong majorities of Americans in favor of taking more action on climate change, we are finally starting to see the American government—and governments around the world—pushing all sectors of the economy towards carbon neutrality. And real estate is no exception. Here’s a look at a few of the ways regulatory changes could affect the real estate industry in the near future.
Let’s start with the Inflation Reduction Act. First, this major bill includes some funding that will enable the federal government to buy more carbon-neutral materials. This alone could shift the industry, since any actions the federal government takes at scale have a large impact.
But there are also two specific tax breaks for landlords included in the bill. One, called the 179D incentive, allows building owners to take up to a $5 per square foot tax deduction if their buildings meet certain energy efficiency standards. This is a big increase in the available tax deduction for making this type of improvement, and it’s available for both new buildings and improvements to existing buildings. This benefit can be claimed repeatedly, if building owners continue making new improvements. New rules will allow building designers to claim some tax breaks, too. The one catch: building owners will need to get third-party certification of the improvements they’ve made.
Besides tax breaks for energy efficiency and standardized EPD metrics, the IRA also provides funding for government to buy more low-carbon materials, which could increase their availability at scale.
There’s also a tax credit in the bill, called the 45L. This one’s specifically for multifamily buildings, and it renews a tax credit for energy-efficient buildings that expired in 2021, and increases the total amount possible to claim.
Another, more technical, aspect of the bill could ultimately also have huge ramifications for the real estate sector. The bill provides some funding to create standardized metrics for carbon reduction, based on the existing Environmental Product Declaration system. This could make it a lot easier for developers to evaluate their options when it comes to carbon-neutral building—and to prove that they’ve chosen the highest-quality, lowest-impact products.
The Inflation Reduction Act isn’t the only game in town. New York City’s Local Law 97, passed in 2019, created new emissions limits that come into effect in 2024, with even stricter limits set to take effect in 2030. Most large buildings in the city are prepared for the 2024 limits, but the 2030 thresholds look to be a bigger challenge. Any developer with projects in New York has to take this law into account, as the fines for noncompliance are significant.
Washington, DC, also passed a law affecting real estate in 2019. The Clean Energy DC Omnibus Act focuses on energy efficiency rather than carbon emissions specifically, and basically requires all buildings to meet an energy efficiency bar set by evaluating the current efficiency of a specific type of building. So all office buildings must be at least as efficient as the median office building, all apartment buildings as efficient as the median apartment building, and so on. The law also re-sets the bar every five years, to require continual improvement from the real estate sector.
The Inflation Reduction Act did a lot to change the narrative that Congress is stymied on climate change, but there is still a lot of momentum at the state and local levels, and emissions from buildings are a big target. According to the National League of Cities, 83% of local governments’ climate action plans include measures to improve the energy efficiency of the real estate sector.
The SEC has proposed new financial disclosure rules that would require companies to disclose information about risks that climate change presents to their business. These new disclosure rules would also require companies to regularly report on their total greenhouse gas emissions, including emissions from energy they use, and in some cases to report on emissions from up and down their supply chain. These new rules, when finalized, would not only require publicly traded companies with real estate portfolios to report on their own emissions, but would also create a new incentive for corporate tenants leasing office space to look for carbon-neutral buildings in order to report lower emissions overall.
Pending SEC disclosure rules about climate risk to businesses will push corporate tenants with climate pledges to seek lower-carbon buildings to meet their mandates.
Here in the U.S., there has been a lot of pushback to these proposed rules. It is likely to take months for regulators to work through the thousands of comments they’ve received. The Supreme Court’s decision in the West Virginia vs. EPA case also sets up possible legal challenges to the rules once they’re finalized, as the decision requires federal agencies to have a clear mandate from Congress before creating any new rules with major economic effects.
However, there are already similar reporting rules in the UK and the EU, and the International Financial Reporting Standards Foundation has proposed even more stringent guidelines. It’s clear that momentum is on the side of greater disclosure of companies’ emissions, and that means that commercial real estate tenants will continue to demand greater and greater reductions in carbon emissions from the buildings they rent space in.
What all this means is that regulatory momentum continues to build. Change is coming for the real estate industry, and it’s coming on multiple fronts, from greater incentives for climate action, to penalties for lagging behind on emission reduction, to greater pressure from corporate tenants who need to clean up their own carbon balance sheets. Building owners and developers who get out in front of this trend will benefit from the coming flight to low-carbon quality.
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