Will standards really drive wide-scale building decarbonization? And what does that mean for smart building technology? Cliff shared his deep knowledge of building performance standards, building ratings and building codes. We discussed Local Law 97 and its impact as a driver of investment in decarbonizing buildings in the US. And how it compares to the Energy Performance of Buildings Directive in the EU.
Transcript of ‘The Building Performance Standards Landscape’
Jim: Hi everybody Welcome to the podcast and Cliff Majersik from IMT, welcome.
Cliff: Thank you very much Jim glad to be here.
Jim: Great and we’re really glad to have you as well because you know I’ve been reading some of your stuff and it’s super interesting so yeah I really been trying to get you on the podcast for a couple of months and glad that you’re here I mean tell us about your work tell us about IMT.
Cliff: IMT The Institute for Market Transformation is a nonprofit our mission is to decarbonize buildings uh improve the performance of buildings as a way to help everyone regardless where they live work or play so very much Equity is part of our mission and to fight climate change uh and we do that by partnering with businesses with uh governments to develop policies both at the corporate level and at the government level to drive decarbonization to create sustained demands for decarbonized high-performing buildings and um there are a lot of opportunities the building sector has terrific return on investment opportunities to improve building performance so by better aligning incentives by addressing externalities um policies well-designed policies can move the market whether at the corporate level or at the government level.
Jim: Brilliant and that’s why I wanted you to come on today of course to talk about policy and in particular building performance standards and I uh I read a recent Axios article where you were quoted and you were talking specifically about local law 97 and you described it as the biggest driver of investment in decarbonizing buildings in any city in the US so I just wanted to you know to get your opinion on that like why do you think that it’s such a big driver.
Cliff: It’s a big driver for a number of reasons one is just there is a real problem in the market with misaligned incentives situations where the landlord uh May uh be responsible for making improvements in the building but the tenant is paying for energy costs um maybe there there multiple tenants and the uh building is Master metered and so each of them doesn’t pay um doesn’t benefit very much if they make an improvement in their space um and so because of the sort of Perfect Storm of misaligned incentives you have a lot of situations where people sort of throw up their hands and say we’re just going to keep doing things the way we’ve done them before even though there are better practices newer technologies that could greatly improve the performance of buildings there are also problems of U first move disadvantage um it’s a very fragmented industry um almost every contractor has different subcontractors that they share with their competitors so it’s diff difficult to be a first mover so there’s a real Collective action problem uh and policies are a great way to overcome that Collective action problem so local law 97 which is a building performance standard it’s New York City’s building performance standard it was adopted in 2019 uh it uh sets bold goals for decarbonizing buildings uh as do the other 12 building performance standards around the United States uh and building owners um must work with their tenants to achieve those goals and if they don’t then there are Financial consequences as a as a result of that um building owners are very focused on this as are their investors and their lenders and to elesse some of their tenants and so this is really driving investment one uh estimate by a task force of IND experts um projected that through 2030 there will be a$2 billion investment opportunity for products and services to decarbonize buildings in New York City alone so that’s a huge dollar figure obviously New York’s the biggest uh city in the country but that’s just one city and um that shows the real Financial power of building performance standards and that money will produce Returns on investment as the building owners uh and their tenants are investing in uh improvements that are going to lower utility bills it’ll also benefit jurisdictions by creating jobs and jobs that have to be done in the building they can’t be offshored.
Jim: Great explanation one thing you know obviously I’m coming from Europe based in uh in Sweden one thing you I guess as from the European perspective it’s difficult to understand why the ll97 then gets picked up by other jurisdictions outside of New York is it because that they people have looking at it and thinking you know this is the right approach?
Cliff: Yes I think it is and in fact New York was not the first um three jurisdictions adopted building performance standards in Rapid succession Washington DC in New York City and Washington State all adopted building performance standards in 2019 uh and now we’ve had a a series of additional states and cities we now have four states and nine localities that have adopted building performance standards across the United States most recently Seattle in December and um yes I mean I think they recognize that building performance standards are the most powerful policy for driving change in the built environment uh and the built environment in cities like New York the built environment can account for More than 70% of greenhouse gas emissions so if you want to address as a city if you want to address your greenhouse gas emissions you need to address your buildings uh and building performance standards uh have great promise to decarbonize our buildings uh and uh be completely compatible with a growing prospering economy in real estate sector
Jim: And then how does it fit into the wider landscape of other standards for example like US Federal Building standards and also SEC climate disclosures?
Cliff: Sure well the federal standard is a standard for federally owned buildings so um building performance standards are powerful in that they apply to all large buildings over a certain size um including you know commercial buildings and residential buildings and typically that would be a floor of like 25 or 50,000 square feet um the Federal Building performance standard applies to almost all federal buildings but it’s just federally owned buildings so it’s a small part of the of the total mix but it’s it’s great that the build the federal government is leading by example they’re showing that they are doing it with their own buildings they carbonizing their own buildings and at the same time the President Biden is leading the National Building performance standard Coalition which is u a coalition of state and local governments totaling more than 43 and uh those governments are all pledged they either already have building performance standards in place or they’re pledged to putting them in place in an equitable fashion so working with their Community especially their Frontline communities to make sure that these bu these policies are cre creating jobs and opportunities and and treating fairly uh all of their residents um and that they’re not leading to displacement um and you know that’s very much in line with the Biden administration’s justice 40 uh commitment which is that 40% of the investment to address climate change will benefit Frontline communities so um the that policy um very much complements the state and local policies and in particular also because uh federal government buildings because of federal sovereignty are exempt from state and local laws so we we need that um to make sure that everybody’s moving in tandem uh and moving the market um and the federal government is the biggest tenant in this country so they have enormous Market power also uh you you asked about the the Securities and Exchange Commission they have proposed a climate risk disclosure rule that would uh do two things it would require that um all publicly traded companies have to disclo over a certain size have to disclose their um their potential risk um from climate change uh and of course that’s physical risk you know what is do I have uh buildings in low-lying areas that could be particularly affected by hurricanes say or wildfires or flooding or you know the many um perils that climate change is driving but also it’s transition risk uh and transition risk is what sort of risks um am I as a company exposed to if uh the our economy is reacting to climate change and one of those reactions is building performance standards building performance standards are government’s attempt to uh react to to reduce greenhouse gas emissions and respond and mitigate climate change uh and so that’s very much a climate risk a climate transition risk uh and the proposed SEC rule will require that companies disclose material risks uh and and no CEO or CFO wants to have to have a conversation on a quarterly earnings call about climate risks yeah so rather than having that conversation they’re going to look to address those risks proactively so that they can reduce those risks so they become immaterial uh and so that is can be a force multiplier for building performance standards if they don’t um get their buildings to perform well then they’re going to be facing liabilities from building performance standards and they’re going to have to disclose those liabilities to their investors something that they don’t want to do so it’s the two again work very well to drive transformation in the market.
Jim: I mean I can see that as being a significant driver right for change absolutely. I wanted to ask you know about your perspective on how ll97 fits into like The Wider like more Global foreign standards so I’m thinking here in the EU the energy performance of buildings directive and even in the UK the MEES. Do you have any thoughts on that?
Cliff: sure yeah I mean the energy performance of buildings directive and the European example and the Australian example were enormously helpful to us here in the United States as we were developing our first benchmarking and transparency laws and they also did help um provide some um basis as we were developing building performance standards but I think the United States has now leapfrogged the rest of the world in terms of building performance standards uh building performance standards actually have significant financial consequences for buildings that don’t achieve minimum levels of performance uh that is on the road map in the Europe in Europe and and in the UK and and I’ve been advising um policy makers in those markets uh and they’re in Europe they’re referred to as minimum energy performance standards and they’re very much on the horizon I think they’ll be coming very quickly but they’re not in place yet so until you have those Min minimum energy performance standards the United States is ahead in terms of requiring higher levels of performance from existing buildings without requiring any sort of external trigger um that uh causes those policies to take effect now you do have policies in Europe that require that buildings reach a certain level of performance before that they can be let out um to to tenants um but in the United States these policies have date certain requirements even if the building is keeping the same tenants or it’s owner occupied is sales subject to requirement that it must improve its energy performance on the set schedule and that schedule uh with well-designed policies is known well into the future 20 30 years into the future which means that building owners can um factor that into their Capital plans uh particular particularly with respect to long-lived assets if I’m going to invest in a heat pump that will last 20 or 30 years I’d like to know that that heat pump will put this building on path to compliance over the life of that equipment uh and so well-designed policies are giving building owners that certainty to make uh Capital Improvements knowing exactly how well their building will be required to perform regardless of what happens in terms of their tenants or sales of the building.
Jim: Exactly you need that long-term view to be able to commit capital and you know have that road map to really be confident right in the standards.
Cliff: Totally that’s right certainty is the friend of investment uncertainty is a hampers investment yeah do you think that you know just again I suppose your opinion and looking specifically at LL 97 do you think it’s tough enough to drive you know widescale building decarbonization yes um it has a uh carbon price of $268 per ton of uh CO2 equivalent above each building’s U budget carbon budget um and that’s a a significant factor especially when coupled with the disclosure requirements both the sec’s proposed disclosure requirement and now the European Union has disclosure requirements that apply globally to buildings to companies with operations in Europe Europe uh California has put in place a similar law that will go into effect uh in the coming years uh so uh yes I think that uh building owners are very much taking local La law 97 seriously uh and thinking about things like uh performance-based leasing uh to make sure that their interests are aligned with their tenants so that they’re all working in concert to achieve those goals uh and it that has provided a really positive example for other jurisdictions I think in terms of making it so that the the well-informed uh rational building owner will invest in improvements that they’re building rather than just um planning on paying um whatever penalties.
Jim: yeah and I get that kind of brings me on to my next question about um return on investment. What do you think is the is the ROI as a building owner for positioning your building as a high-performance building?
Cliff: Well the ROI has been good for many years um and obviously the pandemic has has changed a lot of stuff but in many cases the pandemic has actually improved that ROI um what you see is obviously you’re getting a return on investment from lower utility bills when you you say you’re investing in better equipment you’re putting in heat pumps replacing boilers as an example um you’re you’re getting a return on investment from lower utility bills but also you’re getting a return on investment from uh lower vacancy rates because your tenants want to be in a high performing building um and they their employees want to be in a high performing building and you know you can imagine from the perspective of a tenant CEO he says I have high performing uh High performing employees a high performing company why wouldn’t I want to be in a high performing building especially because my employees view that as a mark of how much I care about them because a high performing building not only has lower utility bills and has uh lower greenhouse gas emissions but it’s also healthier it’s a better more productive place for people to work uh and so you you know there been numerous studies and we have them cataloged on our website im. org uh that show that uh energy star label buildings that’s more energy efficient buildings have uh higher occupancy rates higher rents per square foot uh and they sell for more per square foot and that’s when you control for the normal factors for age and location um for comparing Class A to class A that sort of thing um and a similar study that actually looked at nonpublic information things like tenant concessions for one company found uh similar results you you see um higher Roi per square foot even higher even more than can be um can be attributed to the lower utility costs and other savings uh as a consequence um of investments in Energy Efficiency so in many cases um you know we’re seeing more than $2 uh of return for every $1 invested in energy effic efficiency improvements now as you go farther as you go deeper um and you’re you’re deep decarbonizing buildings and especially if you’re doing things like taking out uh heating equipment and putting in heat pumps often the return on investment is not as attractive but still when you account for things like um higher um occupancy rates uh also potentially lower capitalization rates which means the building is more valuable for every dollar it’s generating because it’s viewed as less risky you’re still in most cases receiving excellent returns and those are bolstered now by federal incentives a variety of tax incentives and other incentives that were part of federal policy most notably uh the inflation reduction act uh which passed more than a year ago those policies uh are providing more generous tax deductions and tax incentives for buildings that are energy efficient uh and investing in things like heat pumps.
Jim: I’ve got a couple more questions for you I thought one I’d be interested you know if you could look from the perspective of um let’s say a technology vendor you know we get quite a lot of people listening who are probably selling software or Services Hardware how would you feel about the kind of the legislation standard landscape in the US? Do you think that um would you be confident that it’s going to drive business? What are your views on that?
Cliff: Yeah I mean I think that these policies um are terrific policies for driving investment in um new technologies and new Innovative services to improve building performance and one thing that’s important to point out is these building performance standards are technology neutral they’re not saying you need to put in a heat pump here or LED lighting there they’re just saying this building needs to achieve a minimum level of performance and that’s typically measured in things like greenhouse gas emissions or sight energy use intensity uh in some cases they’re multiple metrics uh and so that means that whoever can build a better mouse trap they can prosper um they they can um sell it to the market if it’s actually producing better performance then that product will succeed and I think that’s the way we want to go we we want performance-based policies not prescriptive policies so that we can allow the market to inate and we’re not expecting that policy makers are going to understand technology better than techn ologists uh so yeah I think that um the existing 13 building performance standards as well as the Federal Building performance standard are you know driving the market um and the fact that you have more than uh 40 other jurisdictions 40 jurisdictions around the United States that are committing to put in place these building performance standards the fact that you have more than 50 benchmarking and transparency laws across the country that you have these climate risk disclosure requirements uh that have entered into force and are entering into Force these are all creating a real profit opportunity for people who are investing in new technologies to improve the performance of our buildings and and the market is responding um I think that you see that um those companies are are migrating to markets that have these policies in place investors are encouraging their portfolio companies to do that so um yes I think that you know there’s a lot of um room for improvement more jurisdictions can adopt policies existing policies can be improved we have actually created a model building performance standard law that takes the best practices from from all of the existing building performance standards and and Lessons Learned uh and puts them in a way that I think is very Market friendly that is a real estate uh aligned that that helps align landlords and tenants uh and that is performance-based uh and so is going to be really a solid foundation for um investors uh and uh entrepreneurial companies to build on.
Jim: Yeah brilliant Point. Interesting about those 40 jurisdictions then that have made commitments because I was going to ask about that. What does the future look like are they I mean so I mean that would cover I guess the majority of the country?
Cliff: Well it’s not the majority of currently I think it’s um well over 20% of the building stock of the United States is in that group uh includes you know the four states that have already adopted building performance standards as well as California our biggest state um but there’s still a lot of room for more jurisdictions to follow of course.
Jim: Good. well look thank you so much for your time I I guess I want to leave or ask you one last question um if there was one you know based on our conversation here is there one thing that you would want people to take away um today what would it be?
Cliff: I think it would be that uh policy is a powerful driver there has been great movement in the market and um great Technologies but because of these misaligned incentives this real fragmentation if we are serious about climate change which we need to be because it’s an existential threat then we need to have serious policies that are really on Pace to achieve the kind of bold climate commitments required to prevent catastrophic climate change and that is across the economy and when you’re talking about buildings the most powerful policy to drive change our building performance standards which need to be uh in developed uh to complement building energy codes as well for for new construction those two need to work hand and glove um but you need to have a suite of powerful policies and it will benefit um your your Market it’ll benefit Innovation uh it’ll create jobs in your community so there’s a a real win-win opportunity here and we’re IMT is is happy to work with uh governments and companies to work together and we serf serve as a bridge uh they speak somewhat different languages and we’re eager to help them work together to put in place these great policies that will benefit everyone uh and help us prevent climate change.
Jim: Yeah absolutely and I guess if people want to find out more about IMT go to imt.org.
Cliff: if you particularly are interested in our building performance standards go to https://www.imt.org/public-policy/building-performance-standards/ and we have comparisons of all of the building performance standards around uh the country actually um we’ve also worked on the one in Vancouver Canada um a video explainer of what a building performance standard is our model law our model implementation guide a whole wealth of resources on building performance standards there.
Jim: Great. Cliff thank you so much for your time today appreciate you.
Cliff: My pleasure Jim thank you.
Jim: Thanks a lot and thanks to everyone for listening see you on the next one.