CRE Property Owners in NYC Clamor for Renewable Energy
With Local Law 97 coming into effect in a few short years, commercial real estate landlords across New York City are increasingly looking for ways to bring renewable energy to their buildings. Under the new law, NYC buildings with 25,000 square feet or more must demonstrate a 40% reduction in carbon emissions versus 2005. More urgently, landlords of such buildings must start reducing their emissions by 2024 or face steep fines. However, bringing renewable energy sources to commercial buildings in New York is easier said than done.
Across the world, commercial buildings are responsible for approximately 21% of emissions. The vast majority of New York City’s more than 1 million buildings rely on oil and natural gas, and much of it is produced by plants that are more than 50 years old. Roughly 85% of NYC’s local grid uses fossil fuels, while 88% of upstate New York’s grid uses renewable energy – primarily from nuclear and hydroelectric power plants. Due to the complexity of NYC’s infrastructure, it is not feasible to quickly bring renewable energy to its commercial properties; there are not enough transmission lines, and most properties don’t have enough space to generate their own.
As the deadline for Local Law 97 looms over CRE landlords, many are looking for ways to bring renewable energy to their buildings. Recently, the developers of two significant new skyscrapers going up in Manhattan announced that they would power both properties entirely through renewable energy.
Brookfield Properties and JPMorgan Chase plan to achieve this by taking their new buildings entirely off the grid. In late March, Brookfield announced that One Manhattan West, a 2.1-million-square-foot tower completed in 2019, will be powered entirely by hydroelectric energy. The energy will be produced and sold to the property firm by Brookfield Renewable Partners, a subsidiary of its parent company, Brookfield Asset Management. Brookfield Renewables operates dozens of hydroelectric plants and a smattering of wind farms across New York State.
Meanwhile, in mid-April, JPMorgan Chase announced that its new global headquarters at 270 Park Avenue would be entirely powered via hydroelectric energy; the power will also come from plants operated by Brookfield Renewables. Construction of the 60-story, 2.5-million-square-foot tower just started in the summer of 2022 and is expected to be completed by 2025. A more specific timeline is not available at this time.
Although the two new towers are proving it is possible to operate commercial properties in NYC without generating tons of emissions, such options aren’t practical for all properties. In the future, however, many NYC buildings could opt to do the same, buying power directly from private firms offering renewable energy sources. The other option – generating their own renewable energy onsite – isn’t realistic in most situations. Most buildings in NYC lack the surface space needed for renewable energy options like windmills and solar panels. Therefore, such properties will be in especially bad shape when enforcement of Local Law 97 begins in a few short years.
Since most NYC buildings aren’t suitable candidates for generating onsite renewables, many property owners can sidestep the issue by purchasing Renewable Energy Credits, or RECs. By purchasing enough RECs, a building can offset all the fossil fuels being burned to keep it running, essentially earning “carbon neutral” status while still generating significant carbon output. Some critics argue that this doesn’t solve the problem; however, the funds generated through the sale of RECs can be used to promote renewable energy sources, helping to make them more accessible to major urban centers like New York.
The lack of renewable energy in NYC was recently exacerbated by the decommissioning of the Indian Point nuclear power plant in Westchester County. The plant generated 31% of the state’s energy in 2020. Now that it’s closed, it is more challenging than ever for commercial real estate property owners across NYC to bring their carbon outputs into line.
Thus far, it is unclear how many commercial buildings in New York will opt to purchase RECs instead of securing renewable energy from sources like hydroelectric plants and wind farms. The two towers that will be powered entirely by renewable energy are owned and operated by huge corporations with the means to secure it. Many properties in the city don’t fall into this category, so this option will not be practical for a considerable percentage of them.
Starting in 2024, CRE landlords must provide proof of reduced emissions; otherwise, they will face fines. By 2030, all buildings over 25,000 square feet in size must show that they have reduced their emissions by 40% compared with 2005 levels. Once these rules are being enforced, many property owners may struggle to stay afloat.
New York is one of several cities implementing carbon emissions reduction strategies. Boston, for example, has a similar plan in the works. These measures are being taken to ward off the ongoing damage caused to the environment by burning fossil fuels. Commercial buildings – especially massive NYC skyscrapers – have enormous carbon footprints, so they contribute significantly to the problem.
However, without a major overhaul of NYC’s infrastructure, it will continue to be difficult for CRE landlords to acquire renewable energy directly from wind farms and hydroelectric plants like those owned and operated by Brookfield Renewable Partners. In the meantime, there is sure to be an uptick in the investment of RECs by large buildings throughout the region. The money generated by those sales should fuel additional solutions to help bring NYC’s emissions in check.
What does this mean for tenants? In some cases, landlords may feel justified in increasing rent to cover the cost of buying RECs or accessing renewable energy sources. In fact, properties that operate entirely on renewable energy are already more esteemed, enjoying a superior status and commanding higher rents than properties that don’t.
The two Manhattan towers operating entirely on renewable energy will be the first of many. It will be interesting to see how other CRE landlords respond once those properties have been operating for a few years.