Real Estate Decarbonization Mandates Are Fueling Green Economy Investments

Everyone in New York City real estate knew the day would eventually come. The Big Apple’s building efficiency mandate, Local Law 97, has been analyzed and debated for a while. But the time for discussion may be ending, and the reality of the energy regulation law will hit NYC property owners like a ton of falling scaffolding. Starting next year, about 50,000 properties over 25,000 square feet will be subject to greenhouse gas emissions limits. The carbon caps will grow increasingly stricter through 2049 with the goal of making New York City carbon neutral by mid-century.

It’s still unclear how NYC will enforce the rules and whether there will be leniency for property owners who show good faith efforts to comply. Opponents argue that the law’s focus on raw emissions rather than energy efficiency unfairly penalizes buildings that were constructed with advanced energy-saving technology. This could lead to energy-inefficient buildings facing fewer penalties than efficient ones, potentially impacting businesses like grocery stores and restaurants. They also claim that the law fails to consider important factors like occupancy density, and creates uncertainty with unknown emissions limits. Opponents further argue that the law’s retroactive application violates constitutional principles by imposing costly retrofits and fines without a clear public purpose, resulting in a lack of due process.

Despite the real estate industry’s continuing opposition, the deadline for compliance is fast approaching, and many building owners are proactively reducing emissions via new technologies like carbon capture, solar-energy-generating windows, heat pumps to replace old boilers, and inventive solar-plus-wind-energy systems on rooftops.

Rather than just relying on fines, the city is offering to help property owners through its NYC Accelerator and a website that lets owners check whether their properties comply. Some energy retrofits may also qualify for federal and state grants. NYSERDA provides funds for properties to switch to electric heat and covers a good bit of the cost.

But that doesn’t mean energy retrofits won’t still be expensive upfront. Many properties may save money eventually because increased energy efficiency lowers utility bills. But upfront costs can be very steep. And that’s not counting the harsh penalties that property owners could face if they don’t meet the new carbon limits.

The Real Estate Board of New York (REBNY) issued a recent report warning that over 3,000 buildings could face more than $200 million per year in fines starting in 2024 under Local Law 97. NYC properties not in compliance face a fine of $268 for every metric ton of carbon dioxide over the limit. REBNY’s VP of Policy, Zachary Steinberg, said their study should be a “wake-up call” that Local Law 97 isn’t designed to secure the carbon reductions the city needs. He argues that even if properties take meaningful steps to comply, many owners may still be unable to do so. REBNY hopes the city will make changes before the first year of compliance to avoid damage to the local economy and not hit building owners with unfair penalties.

REBNY isn’t the only voice crying for leniency. Decarbonizing older building stock, especially multifamily, will be immensely challenging, and NYC co-op and condo owners are rallying hard against the new law. Homeowners for a Stronger New York is battling the terms of Local Law 97 and backing state legislation requiring the city to provide property tax breaks to alleviate compliance costs. The building owners support the goal of the climate law, but they call it “the largest unfunded mandate in New York City history.” 

Amid all this rancor, there are huge business opportunities for the companies that will swoop in and capitalize on the large sums of money it’ll take to decarbonize properties, not just in New York City but worldwide. Some of these will certainly be the climate technology companies selling the picks and shovels of the decarbonization gold rush. Others will be the property investors willing to buy obsolete buildings at a discount and upgrade them. As the property industry is forced to invest substantial amounts of money in decarbonization efforts over the next few decades, vendors in the low carbon economy sector will be raking in the profits.

Blackstone’s bet on green

Blackstone is one of the investors that could take advantage of the net-zero energy transition. The company has staked an enormous claim for ESG in real estate in recent years, along with its renewable energy investments. Back in November 2020 when Blackstone acquired Therma Holdings, a company with a history in HVAC maintenance, Blackstone increased Therma’s staffing by nearly 65 percent, expanding its advisory and decarbonization services and developing and constructing renewable energy projects.

Under the watch of Blackstone, Therma re-branded as Legence in 2022. Blackstone used its branding expertise to refashion Legence as a net-zero expert that works with properties to reduce emissions, implement renewables, and increase energy efficiency. The company has been busy acquiring firms and expanding. Legence recently scooped up on-site renewables company Black Bear Energy, mechanical engineering firm SC Engineers, and mechanical contractor Trinity Process Solutions. All these firms are based in either Colorado or California, where Legence looks to deepen its presence.

Another recent Legence acquisition was the sustainability consultancy LORD Green Strategies in late 2022. The strategy was to strengthen Legence’s ESG consulting and advisory services, a need of real estate firms facing net-zero mandates. With the acquisition, Legence now has more than $1.5 trillion in assets under management and maximizes the energy efficiency of more than 1 billion square feet of real estate across 5,000 buildings.

Meanwhile, Blackstone has committed $15 billion to a fund focused on investing in and lending to renewable energy firms. The private equity giant believes decarbonizing the world’s economy, including real estate, will cost as much as $100 trillion through 2050. Goldman Sachs’ commodity chief, Jeff Currie, agrees with Blackstone’s assessment. Currie said in 2022 that the energy transition will be “the most expensive endeavor humans have ever embarked on.” Through its portfolio companies and funds, Blackstone thinks this transition to net-zero energy could be a $100 billion opportunity for them.

One area of real estate decarbonization that Blackstone has dived into headfirst is solar energy. Blackstone’s investment in Invenergy Renewable Holdings, a Chicago-based renewable energy developer, is one example. Blackstone made a $3 billion equity investment in Invenergy, which has developed over 175 solar projects totaling nearly 25,000 MW on four continents. Invenergy also develops transmission and energy storage projects, and one of the companies it backs, Clean Path NY, is playing a role in New York City’s decarbonization.

Clean Path NY has an agreement with NYSERDA to advance an $11 billion project to develop a 175-mile-long transmission line and 3,800 MW of solar and wind capacity at the New York Power Authority’s Blenheim-Gilboa pumped storage facility. The congestion in New York’s electric grid has limited renewable energy produced in-state from reaching NYC. Carbon-free energy powers about 80 percent of the grid in upstate New York but less than 20 percent further down near New York City. 

The Clean Path project will build renewable energy upstate and deliver it to NYC via an underground transmission line. Carbon-free electricity from the grid like this will be vital in helping New York properties lower carbon emissions and meet compliance with Local Law 97, especially as the emissions limits become stricter. Once the electric grid is cleaner in New York City, some of the pressure on building owners to reduce emissions will be lowered.

Blackstone is also investing heavily in rooftop solar. The company estimates the world will need to produce three times the current annual solar capacity to meet the 1.5°C Paris Accords goal by mid-century. Penetration of rooftop solar remains low, as it surprisingly powers only about four percent of residential, commercial, and industrial buildings in the U.S. To accelerate rooftop solar progress, Blackstone thinks the world will need to ramp up panel mounting systems production, which is the equipment that secures solar panels. This is why Blackstone invested in Esdec, a Netherlands-based provider of solar mounting systems.

Blackstone believes that Esdec’s mounting systems are a vital enabler for expanding rooftop solar in all types of properties. The partnership with Esdec will allow Blackstone to provide solar for other companies it invests in and drive the decarbonization of its own real estate portfolio. Blackstone is the world’s largest owner of commercial real estate, so it has the kingmaking ability to become the largest client of any of the companies it invests in.

Risks and rewards

The PropTech venture capital firm Fifth Wall has gone all-in on investing in the low-carbon economy sector, launching a climate fund last year focused on real estate that has swelled to $740 million as of February 2023. 

Fifth Wall Co-Founder Brendan Wallace laid out his investment thesis in a 2022 Medium post. “Software was bound to remake the real estate industry. But it pales compared to the impact the decarbonization imperative will have,” Wallace said. He claims that despite being the world’s largest asset class, the real estate industry has invested less than $100 million over the last decade into emission reduction technology.

There does seem to be plenty of money looking to invest in the next big climate tech company. According to Pitchbook data, climate tech was one of the most resilient segments of the venture capital market in 2022, raising $13.8 billion. This was despite a bear market and a slowdown in funding across nearly every industry. 2023 hasn’t been as kind for climate tech VC so far, which may have finally been slowed by the weakening economy. Climate tech startups raised $5.7 billion in the first quarter of 2023, a 36 percent decline in deal value from the previous quarter. It was a 50 percent decline from climate tech VC’s peak in 2021.

One of the new frontiers for the decarbonization movement is embodied carbon, which some say accounts for about 30 percent of global building emissions. It is emitted before or after a building’s useful life, such as in the materials, construction, and demolition of properties. The carbon footprint of common building materials like concrete is a massive global problem. If concrete was its own country, it would be the world’s fifth-largest carbon emitter. 

Fifth Wall has invested in Brimstone, which is aiming to produce the world’s only carbon-negative Portland Cement. At scale, Brimstone’s breakthrough could produce the material at or below market prices and significantly further the real estate industry’s efforts to solve tricky embodied carbon problems. The company has attracted plenty of investors other than the Fifth Wall. Brimstone’s series A financing was co-led by Breakthrough Energy Ventures and DCVC and attracted new investors like Amazon’s Climate Pledge Fund.

Despite the slowdown in climate tech venture capital funding, most limited partners (LPs) maintain their interest as they seek to evade scrutiny from climate activists and minimize the risk of potential penalties. Allocating investments to climate tech is one way for large, institutional real estate firms to manage, hedge against, and address these risks. VC firms like Fifth Wall know this, and they see climate tech as a core investment strategy and something that should continue well into the future.

Here come the regulators

The International Energy Agency estimates that the pace of building retrofitting must triple its current rate globally to meet the ambitious, and some say unrealistic, “net-zero by 2050” climate goals called for in the Paris Agreement. New construction will have to increasingly focus on net-zero buildings. Net-zero properties currently account for less than one percent of global building stock, but according to the IEA this must increase to 85 percent by 2050.

Even if real estate firms could make these investments, they are not likely to make them willingly, no matter what they may say in the glossy print of their annual ESG brochures. Unsurprisingly, a recent report found a strong correlation between regulations and how quickly real estate firms progress toward net zero. Almost half of all the 75 largest institutional investors, investment managers, and listed companies in the real estate industry have no decarbonization target for their portfolios. The reality is that decarbonization is largely voluntary worldwide as of now, though that’s starting to change.

Regulation will act as the catalyst driving the real estate industry towards its net-zero transition, with an impending surge of additional mandates on the horizon. Nationwide, rules are being adopted that often target the industry. As of February 2022, 35 of the 50 largest U.S. cities by population have adopted local climate action plans. That’s not counting smaller U.S. cities, a lengthy list that includes places from Akron, Ohio, to Woodstock, Illinois, to Ithaca, New York. While many compliance deadlines haven’t started yet, they are looming. And like in New York City, the rules are expected to become stricter over time.

A shift in the political winds at the federal level likely won’t stop the tide of local ESG rules, either. C40, the global network of cities advocating for increased green regulations, was established in 2005 and has continued to grow stronger, independent of shifts in national policies. Thirteen U.S. cities are involved in C40, where they share information with each other on ways to scale up climate action, including regulatory policies. The U.S. cities in C40 doubled down on climate initiatives during President Trump’s term when the federal government moved away from climate action.

The era of voluntary green building standards, which have brought notable sustainability and energy efficiency advancements to real estate, is likely ending. While the industry’s calls for discretion may lead to some regulatory changes, the overall push toward decarbonization will continue to accelerate. As the pressure increases, climate investments will rise in tandem. A slowing economy may pump the brakes on some investments for now, but the long-term trajectory appears forgone. Investors like Blackstone and Fifth Wall know this all too well, and are actively positioning themselves to benefit from the decarbonization shift. If these major investors can demonstrate that addressing climate concerns and assisting building owners in reducing emissions can also be a viable business approach, it is likely to motivate others to follow suit.

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