Market View: Green Cities Focus on Buildings

In recent years, the world’s 40 largest cities have adopted a combined 4,700 measures to combat climate change, according to survey results by the Carbon Disclosure Project Cities program. Despite these efforts, 90 percent of cities participating in the survey said they face risk from climate change.

In recent years, the world’s 40 largest cities have adopted a combined 4,700 measures to combat climate change, according to survey results by the Carbon Disclosure Project Cities program. Despite these efforts, 90 percent of cities participating in the survey said they face risk from climate change, and 79 percent believe the threat, if realized, could affect the ability of companies to operate in their cities.

Meanwhile, the International Energy Agency reports that 2010 had the highest carbon dioxide emissions in history. About 70 percent of CO2 emissions come from cities, with buildings responsible for 65 to 75 percent of total emissions in most cities. So owners and tenants can expect city governments worldwide to continue to intensify their focus on energy reduction strategies in buildings.

The public-sector attention can mean more work and perhaps cost for owners. Many cities require new construction projects to conform to LEED standards, and New York and San Francisco have passed laws requiring commercial buildings to get energy audits and make improvements that auditors deem cost effective.

Several cities also require owners to benchmark energy performance via the ENERGY STAR Portfolio Manager program and disclose the results, at least to prospective tenants and investors. Greater transparency will benefit our industry by enabling better leasing and acquisition decisions.

Other municipal programs offer carrots rather than sticks. Most cities offer some form of grant or tax incentive for alternative energy projects and retrofits. A great example is the Property Assessed Clean Energy, or PACE, program that funds energy improvements with municipal bonds, repaid via special tax assessments on the properties where improvements are made. Owners without access to capital avoid the upfront cost of a retrofit, and the annual energy savings are supposed to be greater than the incremental tax amount, so tenants come out ahead as well.

Municipalities in 27 states were establishing residential and commercial PACE programs until the Federal Housing Finance Authority, which oversees Fannie Mae and Freddie Mac, objected to what it viewed as a voluntary tax lien that would supersede the first mortgage in the event of foreclosure. PACE programs screeched to a halt last year, but cities and states continued to look for a way around the FHFA’s opposition. A year later, there are several commercial PACE programs in the works and efforts under way to overcome the federal objections on the residential side.

Which raises the question: If climate change is a global threat with national implications, why are cities often ahead of the federal government in pursuing a green agenda? One answer is that cities compete with one another for residents and businesses, and a green city is more appealing to both groups.

In fact, companies are most likely to grow in cities with the right demographics, which means a lot of young, college-educated people. A green city will attract environmentally conscious workers, who in turn attract businesses—and that means more opportunity for real estate developers and investors.

To date, there has not been a comprehensive way for investors and tenants to compare the quality of various cities’ approach to energy and climate issues. The CDP Cities program may change that over time. In the first round of its survey, CDP Cities achieved a 72 percent response rate, and 91 percent among U.S. cities. This high level of engagement reinforces the idea that municipal governments recognize the danger of ignoring climate change threats, and also realize there are economic growth opportunities in being proactive on green issues.

The central role of buildings in reducing urban energy consumption guarantees that our industry will continue to be affected by these efforts, for better or worse. We can help ensure that the impact is for the better if we maintain a high level of engagement with city governments, tenants, investors and other stakeholders in the process.