Building Energy Performance Tracking is Here in Canada. What’s Next and What Does it Mean for Large Building Owners?
It is generally accepted that addressing climate change means addressing energy use in buildings since they account for a significant amount of a city’s overall carbon footprint. In the City of Toronto more than 58% of the City of Toronto’s greenhouse gas (GHG) emissions come from the building sector.[1] To meet their own net zero goals, cities, municipalities, and governments, have sought ways to compel real estate owners to make their properties more energy efficient.
It Starts with Benchmarking Energy Performance…
Reliable data regarding building energy use is the first step in tracking progress in GHG reductions and efficiencies. In 2010, New York was one of the first American cities to mandate the reporting of data about the energy and water for large buildings (those over 25,000 square feet in size). Such benchmarking data can be leveraged by policymakers to implement policies that promote energy efficiency and reduce emissions (i.e., “climate policies”).
Benchmarking and disclosure programs for private owners of larger buildings are becoming widespread across North America. In addition to New York, over forty other US state and municipal governments passed similar requirements, including those in California, Chicago, and Atlanta. In 2023, Canada’s most populous province, Ontario, implemented the Energy and Water Reporting and Benchmarking Initiative (“EWRB”), requiring owners of buildings over 50,000 square feet to report annually to the Ministry of Energy. Notably, the City of Toronto is developing a by-law that will require even smaller buildings (all buildings over 6,500 square feet) to report their annual emissions performance, with initial implementation targeted for 2024.[2] Manitoba and Vancouver have also imposed GHG performance targets to varying degrees.
…Then Come the Fines
In 2019, after several years of mandated reporting of energy and water usage data in New York City, the Department of Buildings (“DOB”) passed a law known as Local Law 97 (“LL97”). This imposed requirements for building owners to meet certain carbon emission standards starting as early as 2024, with targeted emissions reductions of 40% by 2030 and 80% by 2050. The city also imposed fines for failing to submit the annual benchmarking reports or for submitting a false report.
The policies have encouraged progress, with 89% of properties meeting the city’s energy goals this year. However, as we approach 2024, thousands of buildings continue to require significant capital expenditures to avoid over $200 million in fines for failing to comply with LL97 targets.[3] These fines are imposed on an annual basis. In terms of order of magnitude, the estimated penalty at the 2.1 million square foot Bank of America Building, is $2.4 million per year. This property was formerly dubbed the “greenest building around,” as it was the first commercial high-rise to earn LEED Platinum certification. Clearly such certifications are not sufficient indicators of whether a building can achieve these new emission targets.
In Ontario, fines for exceeding targets set by the government have not yet been imposed; however, across Canada, we have a similarly punitive carbon tax, intended to encourage significant reductions in usage. So far, in Ontario, we don’t even have full compliance in terms of reporting to the EWRB or imposition of penalties for failure to report to the database. Based on the evolution of similar energy performance regulations in other North American cities, it’s reasonable to assume these are only a matter of time. It should be noted that Crown is fully compliant in reporting the benchmarking data to the EWRB for the buildings we manage. While data reported to EWRB is anonymized, our own review of the data suggests a staggering number (potentially over two-thirds of reported buildings over the size of 50,000 square feet in the City of Toronto) would not comply with the City’s targets to achieve net zero by 2040. This may have been behind the headline-making statement by a Toronto-based office REIT CEO that nearly one-third of our office buildings are ‘obsolete.’
Who Pays?
In the case of LL97, large building owners who have not implemented upgrades that will send their buildings on a path to net-zero face significant penalties starting next year, while those who can demonstrate the ability to meet the city’s emission standards have been granted a two-year grace period.[4] Given the current office leasing market dynamics, it’s unlikely that the businesses occupying these buildings will share the financial burden with building owners. In today’s market, where we continue to witness a flight to quality, office tenants have their pick of amenity-rich buildings and are focusing their leasing efforts on these to assist in the attraction and retention of top talent, to demonstrate sustainability efforts, and to achieve their public net-zero targets.[5]
What’s an office building owner to do?
Decarbonization planning, or the process of identifying a roadmap to achieving significant reductions in GHG emissions and energy savings, is an important part of resilient asset strategy and mitigating risk in the current environment. The process considers capital expenditures as well as operational changes during the ownership cycle to optimize energy efficiency, all while considering the return on each investment. This planning takes time, specialized knowledge, and collaboration across the property team. It cannot be done by third party consultants alone.
Over the medium to long term, when executed thoughtfully, these plans pay back through reduced operating costs, efficiency gains, and reduced fines or taxes payable. In more advanced markets, there may be “brown discounts” applied to assets that are not on a credible path to decarbonization.[6] Crown continues to overlay decarbonization planning with our broader repositioning strategies. The investments we are making in reducing carbon emissions, enhancing energy efficiency, and improving the overall sustainability of our assets will impact their long-term value. Leading businesses will seek tenancy in these buildings, their workforce will favor occupying these workspaces, lenders will be more inclined to lend on them and discerning investors will want to own them.
To learn more about how our responsible investment practices together with our practical, value-add mindset can ensure you’re also prepared, please don’t hesitate to reach out to me.
Emily Hanna, PhD
Managing Partner, Investments
Crown Realty Partners
Crown is Prepared:
- Ranked 1st in our peer group of non-listed Canadian office funds and 2nd in a broader peer group in the Americas in GRESB.
- Expanded our GRESB disclosures beyond our core properties to other special purpose investment vehicles managed on behalf of institutional investors and has achieved similar success.
- Initiated and/or completed decarbonization plans for almost 5 million sq. ft. of assets across our portfolio.
- Expanding our Sustainable Investments team to improve integration of ESG principles across the firm and further our decarbonization planning across the Fund Portfolio.
- Committed to transparent disclosures and report regularly, guided by TCFD and SASB frameworks.
- Integrated climate change and decarbonization considerations into the investment process for new acquisitions.
[1]The common statistic is that buildings are responsible for 40% of emissions as per the World Economic Forum. This takes into consideration building materials and operating emissions. The City of Toronto’s Sector-Based Greenhouse Gas Emissions Inventory for 2020 is available here.
[2] The City of Toronto has published an Emissions Performance Reporting primer outlining reporting requirements and proposed implementation timelines.
[3] As reported in the Commercial Observer.
[4] This September, the DOB announced a change to LL97, granting a two-year grace period for building owners that enter into an agreement with the city to upgrade lighting, conduct an energy audit, and submit benchmark reports as well as a detailed long-term roadmap to reduced emissions.
[5] According to a recent JLL client survey, sustainability is a top priority for most commercial real estate decision makers.
[6] As noted in a recent PERE network article. In addition, analytics firm MSCI identifies a 25%-35% gap in the selling price of buildings that have meaningful sustainability ratings.