February 21, 2019

High Carbon Emissions Reduce Building Value. Here's Why.

Traditionally, the value of buildings has depended on their location and the features they offer. However, New York City is changing the rules of the game for commercial real estate, and sustainable construction is gaining importance. Energy efficient buildings are now rewarded with a high energy grade that is publicly displayed, while inefficient properties face the highest penalties under the Climate Mobilization Act.

NYC buildings with high energy consumption and carbon emissions will suffer the negative impact of low energy grades and high penalties. These issues will make properties less competitive in the real estate market, and their value will plummet as a result. By investing in energy efficiency measures and building retrofits, owners can achieve several benefits:

  • Reducing their electricity and gas bills.
  • Increasing their energy grade under LL33.
  • Avoiding penalties under LL97.
  • Increasing property value.

To save energy and cut emissions, the best starting point is a professional energy audit. You can know exactly how your building is using energy, and the consulting firm will identify the most effective measures. This allows better investment decisions, maximizing the energy savings and emission cuts.

Importance of Building Energy Grades (LL33)

Under Local Law 33, each building covered by the law gets an energy grade based on its ENERGY STAR score. The law does not demand a minimum grade, and there are no penalties for low grades either. To stay compliant, you only need to submit the energy consumption data and reports that are required to calculate the score. However, a low grade can severely affect the value of your building, even if there are no legal consequences:

  • Tenants will associate a low grade with increased electricity and gas bills, and they will prefer a similar building with a higher grade.
  • Selling a building with a low grade can also be challenging: buyers will also expect higher utility bills, and eventual penalties when LL97 takes effect in 2024.
  • Even if there are no plans to rent or sell a building, a low grade can hurt the corporate image of the owner - hiding the grade is not allowed under LL33.

In a few words, the public will know which buildings are working to become greener, and which ones are not giving priority to energy and emissions. Building energy grades are updated each year, and they can improve or worsen depending on owner decisions.

To get an “A”, buildings must have an ENERGY STAR score of at least 85, where the maximum value is 100. The minimum score is 70 for a “B”, 55 for a “C”, and buildings below 55 get a “D”. You only get an “F” for not submitting energy information.

To increase your energy grade quickly, an effective strategy is focusing on energy efficiency measures with a short installation time and payback period. Since energy grades are updated each year, you can see short-term improvements.

How LL97 Penalties Can Reduce Property Value

LL97 places emission limits for buildings based on their area and occupancy classification, and there is a penalty of $268 per metric ton of CO2-e, paid annually. The first emission limits will apply from 2024, affecting around 20% of the buildings covered by law. More stringent limits are coming in 2030, affecting 75% of buildings.

If a building is subject to large penalties for emissions, tenants will look for alternatives before they are locked into a high-rent contract. Since LL33 is already active and buildings display their energy grades, tenants and buyers can easily predict which properties have the highest penalties. Buildings with “D” grades can expect higher vacancy, while buildings with “A” and “B” grades will be in high demand.

Reducing emissions below the 2030 limits will represent a major technical challenge for the least efficient buildings. They may reach the 2024 limits with less complex upgrades, but the 2030 limits will likely require a deep energy retrofit.

Having a good location and useful features will no longer be enough to compete in the NYC real estate market. If your building is wasting energy, you must deal with low energy grades each year, and major penalties starting from 2024. These issues are likely to drive off tenants and buyers, since they are also affected when renting or purchasing.

Energy efficiency is an excellent investment for building owners, even when there is no pressure from local laws. However, NYC landlords and real estate companies have even more reasons to improve their properties - they can save electricity and gas, they can attract more tenants and buyers, and they also avoid major penalties for carbon emissions.

An Energy Efficient Building is a more valuable building.
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