Navigating decarbonization for commercial real estate

This article is sponsored by Wells Fargo.

Whether the view is the New York City skyline or an office park in Seattle, commercial real estate owners and developers are scanning the horizon, looking for their next best step towards decarbonization. The commercial real estate (CRE) sector includes an estimated 5.9 million commercial buildings that are responsible for 16 percent of U.S. carbon emissions, and the clock is ticking. The sector is predicted to see increased pressure from investors and regulators concerned about carbon emissions, insurers assessing for climate-related risk, and tenants seeking to reduce their own carbon footprint. Then there are the rising energy costs of lighting, heating and cooling.

The path forward can be confusing. Without a standardized federal policy, state and local governments are enacting their own building performance standards. These regulations can vary by jurisdiction. Some focus on greenhouse gas (GHG) emissions, some seek to bolster renewable energy generation, and others are concerned with energy efficiency. This patchwork of regulations can quickly become a significant challenge for building owners and investors.

Navigating the building performance standards landscape

Major metropolitan areas, including those mentioned above, are enacting costly penalties for noncompliance with building performance standards. To better understand the landscape, Wells Fargo partnered with Helios Exchange, a building analytics platform, to compare standards across major cities. This type of analysis is one way that Wells Fargo’s Sustainable Finance team brings insights to support clients’ strategy development, which is augmented with customized financing solutions to support the implementation of the strategy.

The analysis included New York City’s Local Law 97 (LL97), one of the early-adopted building performance standards in the U.S. The law established GHG emissions limits for many residential and commercial building owners (based on square footage) and requires significant GHG reductions over the coming decades. As a major real estate lender in New York, Wells Fargo has a keen interest in finding ways to finance building decarbonization and support the availability and deployment of clean tech innovations that can help clients achieve building performance improvements.

New York seeks solutions for heating

Wells Fargo is a key sponsor of the Empire Technology Prize, a $10 million cleantech competition to help deploy low-carbon heating technologies that can work in existing commercial and mixed-use buildings. The seven finalists for this prize were recently announced, and the challenge is on to demonstrate solutions for low-carbon heating and distribution systems in tall residential and commercial buildings—without displacing tenants.

Finalists from New York to Norway are proposing solutions that could open new decarbonization pathways for both multifamily and commercial tall buildings in New York. The proposed technologies include steam and high temperature hot water heat pumps leveraging both air and water heat sources, a variety of future-proof low Global Warming Potential (GWP) refrigerants, and a distribution solution enabling the adoption of existing low temperature heat pumps.

Scaling solutions for the right fit

U.S. commercial building stock varies widely, and one building can have multiple uses, including residential, office, commerce and/or light manufacturing. Many buildings may need specialized solutions, even tailored tenant by tenant. Off-the-shelf or widely available technologies might not be the right fit. To support the scaling of new technical solutions, the Wells Fargo Foundation funds several initiatives that are pushing the commercialization of clean technologies to make them more widely available, more easily understood and easier to finance.

Startup companies that participate in the Wells Fargo Innovation Incubator (IN2) are getting the extra boost needed to move from prototype to proven in the initiative’s Emerging Tech Track with nondiluting capital from IN2 and technical assistance from National Renewable Energy Laboratory experts. Corporations and public entities can join the IN2 Scalable Tech Track to access vetted solution providers and receive technical assistance for implementation. Ten organizations were recently selected to participate in the inaugural cohort of the Scalable Tech Track program. They are engaging in workshops focusing on how to address barriers and implement new technologies in the built environment through digitization and change management.

Multifamily residences present their own challenges, particularly for retrofitting. The Housing Affordability Breakthrough Challenge is a $20 million competition from the Wells Fargo Foundation and Enterprise Community Partners that seeks to scale innovative housing solutions. As one of six winners in 2023, Hydronic Shell Technologies, also a finalist of the Empire Tech Prize, received a $3 million grant to develop a prototype for its prefabricated, modular panels with heating, cooling and ventilation, which are installed onto a building’s façade, including those on multifamily affordable housing buildings. The panels can support a retrofit instead of a costly rebuild.

These initiatives, along with others, are aimed at the wide commercialization and scaling of solutions that can help meet the variety of needs for a successful CRE transition.

The long view

Tackling the decarbonization of commercial buildings is a complex but increasingly important task for the CRE industry. It requires ongoing efforts from policymakers, innovators, technology solutions providers and building operators. The right financing partner is not on the sidelines. Banks, with expertise to navigate federal incentives and financing opportunities, specialized underwriting and loan guarantee experience, and insight into the evolving building performance standards can be valuable partners to support the industry. As CRE companies explore decarbonization strategies, working with a forward-thinking bank can provide the financial and strategic guidance needed for a successful transition to the low-carbon economy.