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The Real Estate Roundtable’s Duane Desiderio and CBRE’s Matt Werner join Spencer Levy to analyze what the new federal law—which features incentives designed to boost green energy—means for the buildings where we work, shop and live.
It’s Not Easy Being Green: What the Inflation Reduction Act Means for CRE
September 27, 2022 39 Minute Listen
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Spencer Levy
President Biden this summer signed two major bills into law. First, the $1.2 trillion Infrastructure Investment and Jobs Act, which will invest in projects across all 50 states; roads and bridges, broadband, electric vehicles and more. On the heels of that measure, the Inflation Reduction Act, also known as the IRA, is a $1.7 trillion measure that takes on a range of issues, including drug pricing and health care costs, manufacturing, and perhaps most aggressively, climate change and clean energy. That's what we're going to talk about now. On this episode, the IRA, its impact on sustainability and what it means for real estate.
Matt Werner
I think sometimes people think that sustainability efficiency or facilities management is kind of sitting over here separate from their day jobs, it’s increasingly becoming inextricable.
Spencer Levy
That's Matt Werner, the Global President of Client Care for CBRE. Matt advises landlords, occupiers and institutional investors on their real estate footprints and facilities. Based in San Francisco, he spent 25 years in CBRE’s Global Workplace Solutions Group, where he led the team that advised occupier clients on sustainability for the past seven years before being promoted to his client care roles.
Duane Desiderio
We're going to see a lot of interest in how a market is now created to monetize these incentives.
Spencer Levy
And that's Duane Desiderio, Senior Vice President and Counsel with the Real Estate Roundtable in Washington, DC. The Roundtable is the leading advocacy organization for the commercial real estate sector, and in his area of focus, Duane deals with energy, sustainability, climate and all things ESG. Nerd alert! We may get a little wonky delving into the X's and O's of things like tax credits and construction codes, but the insights you'll take away from this conversation could be invaluable. Coming up, news you can use: an in-depth breakdown of the Inflation Reduction Act. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take. Duane, thank you for joining.
Duane Desiderio
Thank you, Spencer. It's a pleasure to be here this morning.
Spencer Levy
Great to have you, Duane. And then Matt, thanks for joining the show.
Matt Werner
Thanks, Spencer. Thanks, Duane.
Spencer Levy
So Duane, why don't you set the table for us? Tell us what the Inflation Reduction Act is in very basic terms, if you can, and why it might be important to the commercial real estate industry.
Duane Desiderio
Absolutely, Spencer. Well, I think to give a little context to the measure we're talking about today, we have to go back to over a year at this point to something that was originally called the Build Back Better Act or the Triple B, the BBB, and the Build Back Better Act was originally a $3.5 trillion bill. It was advertised as a social safety net bill by the Biden administration, and it was designed to move under so-called reconciliation rules where only a simple majority of Congress needed to pass it. And that meant in our current structure, in the current makeup of the Senate, that every Democratic senator needed to be on board to get the Triple B through the Senate. The initial 3.5 trillion package was ultimately lowered to 1.7 trillion. That was the version that passed the House. But that House passed version couldn't get 100% support from all the Democrats in the Senate. So what was in this initial larger triple B, the safety net package proposed to address a host of issues. It would have provided subsidies for child care, for universal preschool education to immigration, to incentives to utilities to clean the electric grids. And it would have been paid for with increased taxes on corporations and wealthy households. But this was not going to fly by Senator Manchin from West Virginia. As I mentioned, every senator needed to be on board to get this measure passed through reconciliation rules. So what was his concern? He was concerned that the ultimate, the version that passed the House, the 1.7 trillion, he wasn't going to vote for it because the price tag was too high. And he thought that all of that additional spending following years of COVID relief and the bipartisan infrastructure bill would only make inflation worse. So ultimately, we went down a path where the measure was scaled down even further to what we now are calling the Inflation Reduction Act. And so the Inflation Reduction Act is a slimmed down version of the BBB. It addresses some, but not all of the social spending issues that were in the initial proposal. It addresses health care. It addresses climate issues as we're going to talk about. Certainly a lot of impact here on the commercial real estate sector, particularly on what has become the largest federal spending cap package to address climate change in history.
Matt Werner
This act, it is directly relevant to what we do every day. And I think sometimes people think that sustainability efficiency or facilities management is kind of sitting over here separate from their day jobs. It’s increasingly becoming inextricable. We have two kinds of clients. As you know, we have landlords and institutional investors on one side, and we have occupiers, large corporates and organizations on the other. For both of them, decarbonization goals are imperative. On the investor side, the funds that they receive funds from an investor are requiring decarbonization, scope one, scope two, scope three, in order to put their funds in. And buyers of property are putting sustainability goals forward. They're starting to impact valuations, bidders and indeed tenants who generate the income on their properties. We talk about a flight to quality. Spencer I've heard you talk about it. I believe behind that is also a flight to sustainability. So very relevant for the institutional investors up and down their chain of activity. If you look over on the corporate side, we track for our large corporate clients the targets that they're making publicly, and we look especially at something called science based targets. These are the most rigorous. You can't buy your way out of them with credits. And Spencer, we're seeing double digit increases quarter over quarter across just about every sector of big corporate organizations committing to those science based targets. What that means is the kinds of things that this act enables, the kinds of things that this act makes more economically feasible. The kinds of things that this act brings carrots to instead of sticks are something that corporates have to do. And then the last thing I'd like to say just about the overall relevance to us is if we're in the buildings business, we're supported by service providers, right? Constructors, operators, maintainers. And for them, this act is going to unlock some innovation in their service delivery and some pressures, because I think there's going to be a lot of demand for them to respond to.
Spencer Levy
Duane, let's get a little bit more into some of the specific elements of this act that directly apply to our industry. Why don't you give us a summary of those?
Duane Desiderio
Yeah, absolutely. So as Matt mentioned, the overall structure of the climate provisions in the act, you know, Congress decided to take a carrot approach, not sticks. So there's not heavy emphasis here on regulations and mandates, but the overall approach is on incentives, tax credits and tax deductions. $370 billion spending, you know, the largest federal spending specifically to address climate change. There are four in particular that I think are really key for the real estate sector to focus on. One is known as the 179D tax deduction. I note a deduction, not a credit. That is the tax code’s sole or let's say primary measure designed to make commercial and larger multifamily buildings more energy efficient. And it's been around since 2005, but major changes in the IRA to encourage the 179D tax deduction to encourage existing building retrofits. I think in the course of the conversation today, we'll get into the importance of encouraging building retrofits, upgrading older buildings to become more energy efficient. So we're seeing major changes there in the Inflation Reduction Act. The second incentive that I think garners our industry's interest is the investment tax credit. So the ITC at Section 48 of the code would encourage installation, for example, of solar panels of combined heat and power systems. The new bill gets to expansion of energy storage technologies such as dynamic glass and buildings. So Section 48 gives a tax credit to buildings to install certain zero carbon or low carbon technologies in buildings. The third incentive that I think is important to keep in mind is the 30C tax credit for installations of electric vehicle charging stations. We've obviously seen mandates at the state and local level and other market trends that encourage more installations of EV charging stations in buildings. Here, what's interesting in the IRA, Congress took an approach that weds equity with climate. This tax incentive for 30C for EV charging stations goes to EV charging stations that are located in high poverty or low income areas. We'll talk a little bit about that. And the fourth tax credit that warrants some discussion is the 45L tax credit that is geared toward multifamily construction and single family construction, residential construction for both new and significant rehabs. And then overlaying the top of all this, which I know we'll also get into, are new provisions that are designed to monetize some of these credits. So for entities like REITs, for example, that might not have historically been able to take advantage of these tax incentives because of their income limitations. There's new provisions in the IRA that would allow owners of facilities, building owners, to transfer the amount of these credits to non-related third parties. We're going to see a lot of interest in how a market is now created to monetize these incentives.
Spencer Levy
One of the things that Duane mentioned was there's a provision here that will give you a credit for installing things like solar panels. Well, CBRE has a partnership with a clean energy company called Altus Power, which does just that. Install solar panels on commercial rooftops. We had one of the company's founders on the show last year and we asked him back to share some perspective for this conversation. So here's Lars Norell, co-founder and co-CEO of Altus Power, on how the IRA will affect the cost of going solar.
Lars Norell
Based on our current calculations – to the extent that between slight increases in labor costs and increases in prices for solar modules, inverters and other equipment that go into the solar system – when that equipment is manufactured in the US of around 10 to 15%, the act provides increased tax credits that basically neutralizes that cost. And in the act, of course, would like us to source those components from the United States. And it's specifically providing an economic incentive that allow us to source those components at a slightly higher cost, and leave the client in, basically, the same position they would have been in before the price increase, which we imagine was exactly the reason behind that portion of the act.
Spencer Levy
Matt, what's your reaction to the kind of incentives Lars just talked about?
Matt Werner
Well, I think what is exciting about that and a big difference is the legislation we had before, the incentives we had before. We're pretty prescriptive about what kinds of technologies you could use. I think it's fair to characterize this legislation as expansive about the kinds of technologies you can use to get to on site renewables, to incorporate storage and in fact, to unlock continued innovation on what we can do on these buildings. I think the interesting thing here, Spencer, is that we are looking to decarbonize and we're paying for it with efficiency, right. So the overall goal from a policy standpoint is to pump less CO2 into the air and mitigate global warming. But when our building owners look at projects, they're looking to pay for that with savings. So we need great technologies and we need bundling. And that's another thing that I think they did really well in the act is enable us to layer different projects in, different incentives around different kinds of projects, and as I mentioned, a very broad swath of technologies we can use. So we need to do this all the time. Spencer, when we look at a building, we may have some quick, fast, compelling payback initiatives like, say, replacing old lights with LEDs. And then we may bundle into that a little bit more sophisticated technology that requires more upfront investment but has a bigger decarbonization impact like electrifying a building. Duane, I'd love to hear your comment on this. I don't think the act goes directly at the electrification of buildings, but we know that we need to get natural gas and other fossil fuel consumption out of the buildings to help hit our goals. And I believe that this bundling effect is really going to help us get there.
Duane Desiderio
Matt, you raise a great point. What we're seeing happen at the state and local level and even as a result of policy announcements we're seeing from the Biden administration. There is certainly a trend to push buildings toward electrification. So, for example, decommission your gas fired or fossil fuel fired building boiler and move toward an electric heat pump. Unfortunately, I think it's one of the areas where we could see improvement in the IRA and it's something that the roundtable will continue to work on. There is no incentive specifically for commercial electrification technologies in buildings. There are for residential heat pumps, for sure, but electric heat pumps would come in through the 179D tax deduction that we had mentioned. It doesn't single out heat pumps in particular, but under the 179D incentive, if new construction or an older building improves energy efficiency in that building by certain percentage points, then a deduction per square foot can accrue to the building owner. If as part of that retrofit project or as part of that new construction, installation of an electric heat pump is involved as part of the retrofit plan. Then that dovetails into providing an incentive for building electrification. But there's not a specific tax credit or a tax incentive under the IRA as there is for solar panels, as there is for energy storage, that calls out commercial building electrification.
Matt Werner
So if you think of the commercial buildings that we're entrusted with as one of the big economic sectors that's contributing carbon dioxide into the atmosphere, there's an unfortunate fact, which is that when you look at our consumption, setting aside the greening of the electricity grid, which has been compelling since 2005, but if you look at our consumption of the natural gas and other fossil fuels, we're actually up since 2005. So all of our great work on efficiency and retrofits, all the work that our colleagues and friends in the industry are doing, is actually being offset probably by the growth of the footprint. So that is an important one for us to look at. That should be clear. Overall, buildings are consuming less, but we're benefiting from things that are happening outside the building. And so that's why the retrofit piece is so exciting, I think. We have a lot of stock that we want to get after. And as I mentioned before, flight to sustainability. Increasingly, tenants that have an option are going to want to get to a greener building because it's going to impact their reporting and their overall footprint.
Duane Desiderio
I think the latest statistic we've seen from the federal government is 75% of the standing buildings in the United States were built before the year 2000, 75%. So only 25% have been built since the turn of the century. And the energy code that existed in 2003 is like a lot different than the energy codes that exist today. So in terms of climate policy. The most bang for the buck comes from retrofitting existing buildings. Those are the energy hogs that were built in the nineties and earlier. So that's why we're particularly excited about the 179D deduction and some of the structural changes that Congress has made to the tax code, particularly to encourage existing building retrofits. It's great that new construction is also encouraged to become more energy efficient, but that just happens naturally as new construction codes continually get updated.
Matt Werner
So can I lift that back for a quick second, Spencer, to talk about portfolios rather than buildings? If you are a, say, large institutional investor, you're responsible for a swath of buildings across the country. Or if you're a large corporate that has, let's just say, a bunch of branch banks and a bunch of operating centers and office buildings, data centers. You got to step back and look and see, well, where can I get the most bang for my buck, either in terms of efficiency or decarb? And there's a couple interesting things happening in this act. One is when you take solar, for instance, there's ten states where because of their state level policies and incentives, solar projects work great. Then you got like another 20 states that are kind of threshold states. Maybe your project works, maybe your project doesn't, has a lot to do with your consumption patterns and the cost that you get paid to put that solar in. Now, if you take solar as a proxy for these projects in general, when we talk to partners and providers, including Altus who you mentioned, they're pretty excited that of the 20 threshold states, most of those are going to move into a certain column. So now when you're an owner and you look back at your portfolio, you've got, let's say instead of 10, 20, 25, 30 states where these initiatives are going to pencil for you. And I think that's really, really exciting.
Spencer Levy
A lot of people don't see facilities management as part of their core business. They see their acquisition, disposition people as sort of a side business. It's not. It is absolutely core, particularly in a market like today, where gains from capital gains from cap rate compression are going to be few and far between candidly for the next couple of years. So Matt, just talk generally about why facilities management may be one of your key NLI drivers, net operating income drivers, in the years to come and how this accelerates it.
Matt Werner
Well, if facilities management or property management is the term we use, if you're an investor it is really a driver of your NOI, and it can also be a driver of your ability to retain and attract tenants, right. And so when you retrofit a building or when you build it right, a couple of things happen. You can reduce your need for labor by putting, you know, newer equipment requires less maintenance. And the smart buildings, technologies that are not really emerging that have been around for a long time, allow us to go in, fix equipment before it breaks or at least go and maintain it when it needs it, not on scheduled maintenance. So all this adds up to an ability for you to reduce your exposure and your cost. And then the last thing is onsite renewables, solar in particular, can be an income generator, should be an income generator, for your large industrial properties where we can do solutions like community solar, where you're basically renting your roof and then selling yourself as a utility to people around you. And especially if you've got land holdings, large parking lots, that kind of thing can get very exciting. This act to take it back. This act helps that a lot because storage wasn't included before. And also you just have a longer, you have more certainty in your regulatory environment. As I mentioned, more states coming in. Projects are going to pencil cleaner and faster and more compelling to the decision maker.
Spencer Levy
So, Duane, I think for the benefit of our listeners, I think they should know that the roundtable is primarily focused on the federal government and federal changes that might impact commercial real estate. At the same time, I think that a lot of the IRA was focused on some of the local changes, things like local law 97 in New York that changed the rules of compliance with what may be the new energy standards. Tell us a little bit about that.
Duane Desiderio
Yeah, 100% Spencer. Matt’s comments I echo completely. The changes in the tax code and the financial inducements here are really significant. At the roundtable, we have been getting as much interest in understanding what is going on at the federal level in the federal law with questions of, I might need to retrofit my building because of a local mandate, as you mentioned, like LL97. Can I turn to the incentives that are in the federal law to help me make my building meet state and local requirements? We think this is an unintended synergy of what's going to happen as a result of passing this law by Congress. So we've seen now this trend that is taking off at the state and local level. LL97 in New York City is probably the poster child example of a building performance standard where while the IRA does not take the stick approach, more and more localities are enacting or are considering mandates on buildings to become more energy efficient or to reduce their greenhouse gas emissions. And if they don't, again, as a result of state and local laws, you know, fines and penalties might accrue. So to meet those local level GHG reduction targets or efficiency mandates, the incentives in the IRA can help those projects, we think, pencil out. I don't think that any of these tax credits are going to completely pay for the amount of a retrofit project or for the cost of installing all solar panels. But it can reduce the payback period, and it can also reduce regulatory compliance with state and local mandates.
Spencer Levy
The IRA, it was just passed in mid-August, but as we know, Washington, DC, things change. We could see other political changes. So Duane, from your perspective, how solid are the provisions of the IRA? How much should we be changing to apply to it, given that there is some political risk associated with it?
Duane Desiderio
Fair question, Spencer. I think for the foreseeable future, for the next several years, this law is solid. Assuming there is a change in power in the House in November, as a lot of folks predict, we're still going to have President Biden sitting in the White House. So for any changes to happen to this law, it's going to require a unified government in the other direction. So we'd have to wait to see if Republicans take control of both chambers of Congress and also control the White House after the next presidential election. I will say this, though, my opinion and we'll see where it heads. Because the approach that is largely taken in the IRA that we've discussed, they're not regulatory, they're not mandates, they're incentives. I think it's hard to roll back a lot of incentives. These are encouraging businesses to become more energy efficient, to reduce their carbon footprint. These are goals that will accrue to enhanced economic productivity. So I don't think that they're going to be changed anytime soon. Maybe some of the labor provisions that we were discussing, they could be altered with, they could garner some objections to, particularly folks in the Republican Party. But these are not changing again, unless there is unified government at some point in the future after the next presidential election. The IRA is what we are here to live with now for the next several years. And I think the best advice we should be giving to folks is focus on what's at stake right now and see how this law can work for your facilities and for your buildings.
Matt Werner
Sources of capital and very, very large occupiers have made public commitments, science based targets, that they are going to decarbonize their operations. Many, many of those were put in place before the current administration, and they all stretch well beyond the current administration, whatever its successor might be, and on into 2030, 2040, and 2050. Those commitments, I believe these organizations have made with seriousness of intent and that they will realize them. And so that's what I look at, rather than the lifespan of the legislation or the turning of administrations or different parts of Congress, is I look at what our clients want and what they've said they will do. And our job is to help them get there.
Spencer Levy
Indeed. Duane mentioned the payback period. And so, Matt, in your experience in facilities management in particular, how much does the payback period go into the consideration of whether or not to make one of these changes?
Matt Werner
Oh, well, this is kind of what I said at the beginning of the talk, Spencer. We're here to drive decarbonization, but the vehicle through which we do it, our payback analysis, you know, underwriting and trying to beat a hurdle rate or an IRR or whatever the corporation or the institution puts forward. This is the game. Folks need to be looking at their underwriting templates and potentially changing them to reflect a couple of things. One, to reflect, certainly you want to be bundling the potential of these incentives. Two, you want to be bundling in and accounting for emerging regulatory costs in the U.S.. Now, this is not a problem in Europe, where there's already cost on carbon in many countries. So you're already putting it into your underwriting. Here, it's a little more subtle, but you certainly have jurisdictions where you need it, and I think it's probably good business to anticipate you'll have more. So change the underwriting template and ultimately your underwriting template should reflect your goals as an organization and where you want to put your capital. And right now, we're using yesterday's templates, and I think we're making yesterday's decisions when we do that.
Duane Desiderio
Spencer and Matt, can I add another point here that I think we haven't really addressed, but as we're having this really good conversation, there are all of these forces that are just driving facilities managers and building owners to reduce their carbon footprint and to make these investments. One of the also big wildcards that I know a lot of folks in our industry continue to look at concerns reporting and disclosure rules that we expect to be coming from the Securities and Exchange Commission, the SEC. We'll see where this lands. But to a lot of fanfare earlier this spring, the SEC had released a long overdue proposed rule that would compel companies registered with the SEC to report and disclose their financial risks related to climate change. And that was getting into things like reporting and quantifying your scope one, two and perhaps even scope three emissions, tying that into your financial statements. One of the disclosure elements of what the SEC proposed was, how are you investing in buildings? What are the climate opportunities that you're taking advantage of? If there are going to be real estate companies who are driven to consider these tax credits and tax incentives, I think we're going to see that bleed over into corporate SEC reporting. It all depends on how the SEC finalizes their rule. When the SEC finalizes a rule, it's highly controversial. There will be litigation, but in a lot of ways I think the genie is out of the bottle. No matter where the SEC might land, we will see some reporting and disclosure rule.
Matt Werner
There was a lot of chat earlier in the summer about ESG and the difficulty of kind of defining it, measuring it, reporting it. So on the one hand, hopefully the SEC is going to clarify that for US based corporations. On the other hand, this act will help clarify that, right? Because in order to get your credit, you've got to submit to the EPA your efficiency plan. And we're looking and I think we're reasonably optimistic. You tell me that we're going to get some standards. You know, Energy Star is really become the standard for commercial buildings. And it's really been well adopted and people understand it and they mine that data to do things like make investment decisions in their buildings or their business. A huge new ream of data will be coming out from these retrofit plans, put into the EPA databases, and if past performance is an indicator, made available to industry and we'll innovate and grow off of that. I think it's going to be really powerful.
Duane Desiderio
100%, Matt. Not to get too nerdy or too wonkish here, but in the….
Matt Werner
Too late, it already has.
Duane Desiderio
179D… this is the part for it, so I'm going to riff. So in the revised tax deduction under 179D, for retrofits, Congress made very plain and we encouraged Congress to move in this direction, working with the EPA, that the metric to measure improved energy efficiency, to peg the financial incentive is reduction in site energy usage intensity in a building, site EUI. How much energy is being consumed per square foot? None of this is easy for facility matters necessarily to measure or gauge, but that is an easier metric to measure using the tools that are available in the market to have your baseline of how well is my building doing pre retrofit? What will the retrofit encourage me to, you know, how do you measure your post retrofit energy efficiency? The fact that Congress called out site EUI is a very practical nuts and bolts metric that I think facility managers and building owners that that deal with this stuff on a daily basis are going to be able to wrap their heads around and lead to more clear reporting, more clear disclosure, more clear benchmarking of of energy and decarbonization efforts.
Spencer Levy
Duane, so much of what we talked about on today's show is about the physical building itself, and that's the majority of the act. But you did mention at the outset that there are additional incentives available for if you put this into a neighborhood that needs more economic help, affordable housing, things like that, I think is a really excellent innovation of this law. It's not the only one that does it, but it certainly seems to be the trend. What's your point of view Duane?
Duane Desiderio
Absolutely, Spencer. The Democrats in Congress and the Biden administration made sure that environmental justice was a consistent theme weaved throughout this bill. And I think one of the things that we are particularly gratified to see is that the lawmakers were connecting the dots up there, particularly when it comes to affordable housing and low income housing. They make plain that if you qualify for a number of these tax credits and tax incentives, if you get them, that does not reduce the basis and buildings that are built with low income housing tax credit. So again, it's this layering concept that Matt talked about. These incentives that we're talking about just in the energy realm can all be layered on top of each other. If you have a building that puts in new solar panels and new windows, well, look at 179D and look at section 48. If that likewise happens to be low income housing that's financed with LIHTCs, do that. Layer it all on top of each other.
Matt Werner
Hey, and if it's in the right location, throw some EV charging on there with 30C.
Duane Desiderio
That's right. And incidentally, again, I don't think coincidental, the EV charging station locations, the geographies under this new law to qualify for EV charging stations are pegged to the same criteria for the new market tax credit. So look at all these tax credits together. I think we're going to see a lot of creative thinking of building all of this on top of each other to make these projects more economically viable.
Spencer Levy
So talking about putting these letters together. The E, the S, the G. I'm going to introduce another letter here, which is the W, which is wellness. So, Matt, how much of what you have been seeing over the last couple of years has been focused on this W element? And then what are people doing to address it?
Matt Werner
Well, I think that it's important to say the most important place to be well, is residential, where people spend most of their time, and the multifamily and as you say, affordable housing provisions here should make those buildings greener. And greener buildings are generally, by definition, healthier and of course, if we can reduce the environmental impacts coming from burning fossil fuels, just generally, the air will be healthier and better for folks. In terms of the corporate side, I mentioned this quickly in the beginning. We talk about a flight to quality and indeed our big users are saying interesting opportunity right now. Markets are down. People are a little unclear about return to office, and it's a chance for me to get better space for the same or less money. I think it would be naive to think that those users are not looking at this, that the carbon footprint of buildings when they're making their selection and indeed, as you say, Spencer, also naive to think that they're not looking at wellness for their tenant population. We're going to have to have great space to bring people back and keep them back. And this is one of the things people will be looking for. My point of view is it's a real challenge for us in the way that leases are structured today. A great change would be some more innovative lease structures that either share the benefit or put all the costs and all the benefits in one side of the ledger. Then we'll get, that'll help us with more investment and change.
Spencer Levy
Matt, I think you and Duane did a fantastic job talking about what this is, why it's important. I know a lot of the rules are still being written by the IRS, the Treasury Department, but it's a good time to start now thinking about it. So, Matt, and your final thoughts, what would you advise our clients to do to start thinking about it and then implementing it?
Matt Werner
What we advise clients to do is step back. So most clients have made a commitment, right? But few have a plan, particularly one that is driven down to the building level. So step back and start out with a plan. And your plan should be looking at a couple of factors. It should be looking at the decarbonization of the grid. Then you can start doing portfolio planning and locating factors like I just mentioned. Well which states are going to be most attractive for you to do renewables? Where can you get the right labor and technologies bundled then? Where will heat pumps be efficient, etc. etc.. Take it so that that planning piece is really important. Then take a look at your decision making system. One of the things I like to tell clients to scare them a little bit is every decision you make in a real estate portfolio from the big obvious decisions like where are you going to locate, how big is your building going to be, how big is your footprint going to be, to small decisions like work orders. Like small projects about a rooftop unit or an air handler. Every, that entire swath of decisions that all has CO2 consequences. It all has greenhouse gas consequences. So look at your top to bottom decision making system and make sure that every little decision and every big decision you make is adding up to, is getting your goals. Then execute and look for partners that can use their expertise to de-risk these moves for you, simplify these moves for you, monetize these opportunities for you, and then make sure you operate it really, really well. So plan, decide, execute, operate is the continuum that I, I advise people to think through and think about. And the last comment is, I think it's time to move fast. I think there's going to be a lot of demand. For the expertise, the services and the equipment required to do this, and the owners and the occupiers that get after it first will benefit the most.
Spencer Levy
Duane, what advice would you give to real estate operators to get ahead of the changes that are being implemented by the IRA?
Duane Desiderio
Yeah, thank you Spencer. Start doing your scenario analyzes now. It builds on what Matt said. To the extent that you're in a jurisdiction, again, we talked about this where you're facing down a fine or a penalty for meeting local requirements. Make sure you're meshing these laws together. And again, as we discussed, I think a big game changer here is don't forget how these monetization of these credits can avail a company that might have discounted these tax credits or discounted these incentives in the past. Look to see how there might be a market that is emerging to transfer the amount of these credits to other third parties in your universe.
Matt Werner
This is a complicated legislation, but it has some characteristics that are going to enable the supply chain to solve for the owner. It's got a nice, long ten year certainty they can invest around. It's got, we think, very practical provisions. You were just talking about labor, Duane, but there's many other areas where it seems like the authors of this legislation have thought through the practicalities of getting these projects done. So as an owner, as an occupier. Let the market handle it a little bit. I think that's something we can be confident in here. You don't have to know all the provisions of this. What you need to do, and I think you can be confident you're going to get, is seek out providers that can bundle, solve and monetize this for you. And I think that's going to happen. I'm really optimistic about it.
Spencer Levy
Great. I want to thank both of our guests today, starting with Duane Desiderio, the Senior Vice President and Counsel of the Real Estate Roundtable and guru of all things IRA and beyond. Thank you, Duane.
Duane Desiderio
Thank you, Spencer. It's been a pleasure. Thank you, Matt.
Spencer Levy
Then I want to thank Matt Werner, our Global President of Client Care, one of the foremost experts on sustainability facilities management beyond. Matt, great job. Thanks for joining the show.
Matt Werner
Appreciate it, Spencer. Thank you and Duane.
Spencer Levy
For more on this important topic, please visit our Website, CBRE.com/TheWeeklyTake. You can find additional CBRE insights and more on our show as well. From this deep policy dive, we've got a range of informative and entertaining programs waiting in the wings, including a show on Broadway, the real estate side of the theater business. We'll also explore international capital. That is where in the U.S. foreign investors are looking and lots of other real estate stories in the weeks to come. If you like what we're doing here on The Weekly Take, we encourage you to share it with your network and also remember to subscribe, rate and review us wherever you listen. I'm Spencer Levy. Be smart. Be safe. Be well.
Spencer Levy
President Biden this summer signed two major bills into law. First, the $1.2 trillion Infrastructure Investment and Jobs Act, which will invest in projects across all 50 states; roads and bridges, broadband, electric vehicles and more. On the heels of that measure, the Inflation Reduction Act, also known as the IRA, is a $1.7 trillion measure that takes on a range of issues, including drug pricing and health care costs, manufacturing, and perhaps most aggressively, climate change and clean energy. That's what we're going to talk about now. On this episode, the IRA, its impact on sustainability and what it means for real estate.
Matt Werner
I think sometimes people think that sustainability efficiency or facilities management is kind of sitting over here separate from their day jobs, it’s increasingly becoming inextricable.
Spencer Levy
That's Matt Werner, the Global President of Client Care for CBRE. Matt advises landlords, occupiers and institutional investors on their real estate footprints and facilities. Based in San Francisco, he spent 25 years in CBRE’s Global Workplace Solutions Group, where he led the team that advised occupier clients on sustainability for the past seven years before being promoted to his client care roles.
Duane Desiderio
We're going to see a lot of interest in how a market is now created to monetize these incentives.
Spencer Levy
And that's Duane Desiderio, Senior Vice President and Counsel with the Real Estate Roundtable in Washington, DC. The Roundtable is the leading advocacy organization for the commercial real estate sector, and in his area of focus, Duane deals with energy, sustainability, climate and all things ESG. Nerd alert! We may get a little wonky delving into the X's and O's of things like tax credits and construction codes, but the insights you'll take away from this conversation could be invaluable. Coming up, news you can use: an in-depth breakdown of the Inflation Reduction Act. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take. Duane, thank you for joining.
Duane Desiderio
Thank you, Spencer. It's a pleasure to be here this morning.
Spencer Levy
Great to have you, Duane. And then Matt, thanks for joining the show.
Matt Werner
Thanks, Spencer. Thanks, Duane.
Spencer Levy
So Duane, why don't you set the table for us? Tell us what the Inflation Reduction Act is in very basic terms, if you can, and why it might be important to the commercial real estate industry.
Duane Desiderio
Absolutely, Spencer. Well, I think to give a little context to the measure we're talking about today, we have to go back to over a year at this point to something that was originally called the Build Back Better Act or the Triple B, the BBB, and the Build Back Better Act was originally a $3.5 trillion bill. It was advertised as a social safety net bill by the Biden administration, and it was designed to move under so-called reconciliation rules where only a simple majority of Congress needed to pass it. And that meant in our current structure, in the current makeup of the Senate, that every Democratic senator needed to be on board to get the Triple B through the Senate. The initial 3.5 trillion package was ultimately lowered to 1.7 trillion. That was the version that passed the House. But that House passed version couldn't get 100% support from all the Democrats in the Senate. So what was in this initial larger triple B, the safety net package proposed to address a host of issues. It would have provided subsidies for child care, for universal preschool education to immigration, to incentives to utilities to clean the electric grids. And it would have been paid for with increased taxes on corporations and wealthy households. But this was not going to fly by Senator Manchin from West Virginia. As I mentioned, every senator needed to be on board to get this measure passed through reconciliation rules. So what was his concern? He was concerned that the ultimate, the version that passed the House, the 1.7 trillion, he wasn't going to vote for it because the price tag was too high. And he thought that all of that additional spending following years of COVID relief and the bipartisan infrastructure bill would only make inflation worse. So ultimately, we went down a path where the measure was scaled down even further to what we now are calling the Inflation Reduction Act. And so the Inflation Reduction Act is a slimmed down version of the BBB. It addresses some, but not all of the social spending issues that were in the initial proposal. It addresses health care. It addresses climate issues as we're going to talk about. Certainly a lot of impact here on the commercial real estate sector, particularly on what has become the largest federal spending cap package to address climate change in history.
Matt Werner
This act, it is directly relevant to what we do every day. And I think sometimes people think that sustainability efficiency or facilities management is kind of sitting over here separate from their day jobs. It’s increasingly becoming inextricable. We have two kinds of clients. As you know, we have landlords and institutional investors on one side, and we have occupiers, large corporates and organizations on the other. For both of them, decarbonization goals are imperative. On the investor side, the funds that they receive funds from an investor are requiring decarbonization, scope one, scope two, scope three, in order to put their funds in. And buyers of property are putting sustainability goals forward. They're starting to impact valuations, bidders and indeed tenants who generate the income on their properties. We talk about a flight to quality. Spencer I've heard you talk about it. I believe behind that is also a flight to sustainability. So very relevant for the institutional investors up and down their chain of activity. If you look over on the corporate side, we track for our large corporate clients the targets that they're making publicly, and we look especially at something called science based targets. These are the most rigorous. You can't buy your way out of them with credits. And Spencer, we're seeing double digit increases quarter over quarter across just about every sector of big corporate organizations committing to those science based targets. What that means is the kinds of things that this act enables, the kinds of things that this act makes more economically feasible. The kinds of things that this act brings carrots to instead of sticks are something that corporates have to do. And then the last thing I'd like to say just about the overall relevance to us is if we're in the buildings business, we're supported by service providers, right? Constructors, operators, maintainers. And for them, this act is going to unlock some innovation in their service delivery and some pressures, because I think there's going to be a lot of demand for them to respond to.
Spencer Levy
Duane, let's get a little bit more into some of the specific elements of this act that directly apply to our industry. Why don't you give us a summary of those?
Duane Desiderio
Yeah, absolutely. So as Matt mentioned, the overall structure of the climate provisions in the act, you know, Congress decided to take a carrot approach, not sticks. So there's not heavy emphasis here on regulations and mandates, but the overall approach is on incentives, tax credits and tax deductions. $370 billion spending, you know, the largest federal spending specifically to address climate change. There are four in particular that I think are really key for the real estate sector to focus on. One is known as the 179D tax deduction. I note a deduction, not a credit. That is the tax code’s sole or let's say primary measure designed to make commercial and larger multifamily buildings more energy efficient. And it's been around since 2005, but major changes in the IRA to encourage the 179D tax deduction to encourage existing building retrofits. I think in the course of the conversation today, we'll get into the importance of encouraging building retrofits, upgrading older buildings to become more energy efficient. So we're seeing major changes there in the Inflation Reduction Act. The second incentive that I think garners our industry's interest is the investment tax credit. So the ITC at Section 48 of the code would encourage installation, for example, of solar panels of combined heat and power systems. The new bill gets to expansion of energy storage technologies such as dynamic glass and buildings. So Section 48 gives a tax credit to buildings to install certain zero carbon or low carbon technologies in buildings. The third incentive that I think is important to keep in mind is the 30C tax credit for installations of electric vehicle charging stations. We've obviously seen mandates at the state and local level and other market trends that encourage more installations of EV charging stations in buildings. Here, what's interesting in the IRA, Congress took an approach that weds equity with climate. This tax incentive for 30C for EV charging stations goes to EV charging stations that are located in high poverty or low income areas. We'll talk a little bit about that. And the fourth tax credit that warrants some discussion is the 45L tax credit that is geared toward multifamily construction and single family construction, residential construction for both new and significant rehabs. And then overlaying the top of all this, which I know we'll also get into, are new provisions that are designed to monetize some of these credits. So for entities like REITs, for example, that might not have historically been able to take advantage of these tax incentives because of their income limitations. There's new provisions in the IRA that would allow owners of facilities, building owners, to transfer the amount of these credits to non-related third parties. We're going to see a lot of interest in how a market is now created to monetize these incentives.
Spencer Levy
One of the things that Duane mentioned was there's a provision here that will give you a credit for installing things like solar panels. Well, CBRE has a partnership with a clean energy company called Altus Power, which does just that. Install solar panels on commercial rooftops. We had one of the company's founders on the show last year and we asked him back to share some perspective for this conversation. So here's Lars Norell, co-founder and co-CEO of Altus Power, on how the IRA will affect the cost of going solar.
Lars Norell
Based on our current calculations – to the extent that between slight increases in labor costs and increases in prices for solar modules, inverters and other equipment that go into the solar system – when that equipment is manufactured in the US of around 10 to 15%, the act provides increased tax credits that basically neutralizes that cost. And in the act, of course, would like us to source those components from the United States. And it's specifically providing an economic incentive that allow us to source those components at a slightly higher cost, and leave the client in, basically, the same position they would have been in before the price increase, which we imagine was exactly the reason behind that portion of the act.
Spencer Levy
Matt, what's your reaction to the kind of incentives Lars just talked about?
Matt Werner
Well, I think what is exciting about that and a big difference is the legislation we had before, the incentives we had before. We're pretty prescriptive about what kinds of technologies you could use. I think it's fair to characterize this legislation as expansive about the kinds of technologies you can use to get to on site renewables, to incorporate storage and in fact, to unlock continued innovation on what we can do on these buildings. I think the interesting thing here, Spencer, is that we are looking to decarbonize and we're paying for it with efficiency, right. So the overall goal from a policy standpoint is to pump less CO2 into the air and mitigate global warming. But when our building owners look at projects, they're looking to pay for that with savings. So we need great technologies and we need bundling. And that's another thing that I think they did really well in the act is enable us to layer different projects in, different incentives around different kinds of projects, and as I mentioned, a very broad swath of technologies we can use. So we need to do this all the time. Spencer, when we look at a building, we may have some quick, fast, compelling payback initiatives like, say, replacing old lights with LEDs. And then we may bundle into that a little bit more sophisticated technology that requires more upfront investment but has a bigger decarbonization impact like electrifying a building. Duane, I'd love to hear your comment on this. I don't think the act goes directly at the electrification of buildings, but we know that we need to get natural gas and other fossil fuel consumption out of the buildings to help hit our goals. And I believe that this bundling effect is really going to help us get there.
Duane Desiderio
Matt, you raise a great point. What we're seeing happen at the state and local level and even as a result of policy announcements we're seeing from the Biden administration. There is certainly a trend to push buildings toward electrification. So, for example, decommission your gas fired or fossil fuel fired building boiler and move toward an electric heat pump. Unfortunately, I think it's one of the areas where we could see improvement in the IRA and it's something that the roundtable will continue to work on. There is no incentive specifically for commercial electrification technologies in buildings. There are for residential heat pumps, for sure, but electric heat pumps would come in through the 179D tax deduction that we had mentioned. It doesn't single out heat pumps in particular, but under the 179D incentive, if new construction or an older building improves energy efficiency in that building by certain percentage points, then a deduction per square foot can accrue to the building owner. If as part of that retrofit project or as part of that new construction, installation of an electric heat pump is involved as part of the retrofit plan. Then that dovetails into providing an incentive for building electrification. But there's not a specific tax credit or a tax incentive under the IRA as there is for solar panels, as there is for energy storage, that calls out commercial building electrification.
Matt Werner
So if you think of the commercial buildings that we're entrusted with as one of the big economic sectors that's contributing carbon dioxide into the atmosphere, there's an unfortunate fact, which is that when you look at our consumption, setting aside the greening of the electricity grid, which has been compelling since 2005, but if you look at our consumption of the natural gas and other fossil fuels, we're actually up since 2005. So all of our great work on efficiency and retrofits, all the work that our colleagues and friends in the industry are doing, is actually being offset probably by the growth of the footprint. So that is an important one for us to look at. That should be clear. Overall, buildings are consuming less, but we're benefiting from things that are happening outside the building. And so that's why the retrofit piece is so exciting, I think. We have a lot of stock that we want to get after. And as I mentioned before, flight to sustainability. Increasingly, tenants that have an option are going to want to get to a greener building because it's going to impact their reporting and their overall footprint.
Duane Desiderio
I think the latest statistic we've seen from the federal government is 75% of the standing buildings in the United States were built before the year 2000, 75%. So only 25% have been built since the turn of the century. And the energy code that existed in 2003 is like a lot different than the energy codes that exist today. So in terms of climate policy. The most bang for the buck comes from retrofitting existing buildings. Those are the energy hogs that were built in the nineties and earlier. So that's why we're particularly excited about the 179D deduction and some of the structural changes that Congress has made to the tax code, particularly to encourage existing building retrofits. It's great that new construction is also encouraged to become more energy efficient, but that just happens naturally as new construction codes continually get updated.
Matt Werner
So can I lift that back for a quick second, Spencer, to talk about portfolios rather than buildings? If you are a, say, large institutional investor, you're responsible for a swath of buildings across the country. Or if you're a large corporate that has, let's just say, a bunch of branch banks and a bunch of operating centers and office buildings, data centers. You got to step back and look and see, well, where can I get the most bang for my buck, either in terms of efficiency or decarb? And there's a couple interesting things happening in this act. One is when you take solar, for instance, there's ten states where because of their state level policies and incentives, solar projects work great. Then you got like another 20 states that are kind of threshold states. Maybe your project works, maybe your project doesn't, has a lot to do with your consumption patterns and the cost that you get paid to put that solar in. Now, if you take solar as a proxy for these projects in general, when we talk to partners and providers, including Altus who you mentioned, they're pretty excited that of the 20 threshold states, most of those are going to move into a certain column. So now when you're an owner and you look back at your portfolio, you've got, let's say instead of 10, 20, 25, 30 states where these initiatives are going to pencil for you. And I think that's really, really exciting.
Spencer Levy
A lot of people don't see facilities management as part of their core business. They see their acquisition, disposition people as sort of a side business. It's not. It is absolutely core, particularly in a market like today, where gains from capital gains from cap rate compression are going to be few and far between candidly for the next couple of years. So Matt, just talk generally about why facilities management may be one of your key NLI drivers, net operating income drivers, in the years to come and how this accelerates it.
Matt Werner
Well, if facilities management or property management is the term we use, if you're an investor it is really a driver of your NOI, and it can also be a driver of your ability to retain and attract tenants, right. And so when you retrofit a building or when you build it right, a couple of things happen. You can reduce your need for labor by putting, you know, newer equipment requires less maintenance. And the smart buildings, technologies that are not really emerging that have been around for a long time, allow us to go in, fix equipment before it breaks or at least go and maintain it when it needs it, not on scheduled maintenance. So all this adds up to an ability for you to reduce your exposure and your cost. And then the last thing is onsite renewables, solar in particular, can be an income generator, should be an income generator, for your large industrial properties where we can do solutions like community solar, where you're basically renting your roof and then selling yourself as a utility to people around you. And especially if you've got land holdings, large parking lots, that kind of thing can get very exciting. This act to take it back. This act helps that a lot because storage wasn't included before. And also you just have a longer, you have more certainty in your regulatory environment. As I mentioned, more states coming in. Projects are going to pencil cleaner and faster and more compelling to the decision maker.
Spencer Levy
So, Duane, I think for the benefit of our listeners, I think they should know that the roundtable is primarily focused on the federal government and federal changes that might impact commercial real estate. At the same time, I think that a lot of the IRA was focused on some of the local changes, things like local law 97 in New York that changed the rules of compliance with what may be the new energy standards. Tell us a little bit about that.
Duane Desiderio
Yeah, 100% Spencer. Matt’s comments I echo completely. The changes in the tax code and the financial inducements here are really significant. At the roundtable, we have been getting as much interest in understanding what is going on at the federal level in the federal law with questions of, I might need to retrofit my building because of a local mandate, as you mentioned, like LL97. Can I turn to the incentives that are in the federal law to help me make my building meet state and local requirements? We think this is an unintended synergy of what's going to happen as a result of passing this law by Congress. So we've seen now this trend that is taking off at the state and local level. LL97 in New York City is probably the poster child example of a building performance standard where while the IRA does not take the stick approach, more and more localities are enacting or are considering mandates on buildings to become more energy efficient or to reduce their greenhouse gas emissions. And if they don't, again, as a result of state and local laws, you know, fines and penalties might accrue. So to meet those local level GHG reduction targets or efficiency mandates, the incentives in the IRA can help those projects, we think, pencil out. I don't think that any of these tax credits are going to completely pay for the amount of a retrofit project or for the cost of installing all solar panels. But it can reduce the payback period, and it can also reduce regulatory compliance with state and local mandates.
Spencer Levy
The IRA, it was just passed in mid-August, but as we know, Washington, DC, things change. We could see other political changes. So Duane, from your perspective, how solid are the provisions of the IRA? How much should we be changing to apply to it, given that there is some political risk associated with it?
Duane Desiderio
Fair question, Spencer. I think for the foreseeable future, for the next several years, this law is solid. Assuming there is a change in power in the House in November, as a lot of folks predict, we're still going to have President Biden sitting in the White House. So for any changes to happen to this law, it's going to require a unified government in the other direction. So we'd have to wait to see if Republicans take control of both chambers of Congress and also control the White House after the next presidential election. I will say this, though, my opinion and we'll see where it heads. Because the approach that is largely taken in the IRA that we've discussed, they're not regulatory, they're not mandates, they're incentives. I think it's hard to roll back a lot of incentives. These are encouraging businesses to become more energy efficient, to reduce their carbon footprint. These are goals that will accrue to enhanced economic productivity. So I don't think that they're going to be changed anytime soon. Maybe some of the labor provisions that we were discussing, they could be altered with, they could garner some objections to, particularly folks in the Republican Party. But these are not changing again, unless there is unified government at some point in the future after the next presidential election. The IRA is what we are here to live with now for the next several years. And I think the best advice we should be giving to folks is focus on what's at stake right now and see how this law can work for your facilities and for your buildings.
Matt Werner
Sources of capital and very, very large occupiers have made public commitments, science based targets, that they are going to decarbonize their operations. Many, many of those were put in place before the current administration, and they all stretch well beyond the current administration, whatever its successor might be, and on into 2030, 2040, and 2050. Those commitments, I believe these organizations have made with seriousness of intent and that they will realize them. And so that's what I look at, rather than the lifespan of the legislation or the turning of administrations or different parts of Congress, is I look at what our clients want and what they've said they will do. And our job is to help them get there.
Spencer Levy
Indeed. Duane mentioned the payback period. And so, Matt, in your experience in facilities management in particular, how much does the payback period go into the consideration of whether or not to make one of these changes?
Matt Werner
Oh, well, this is kind of what I said at the beginning of the talk, Spencer. We're here to drive decarbonization, but the vehicle through which we do it, our payback analysis, you know, underwriting and trying to beat a hurdle rate or an IRR or whatever the corporation or the institution puts forward. This is the game. Folks need to be looking at their underwriting templates and potentially changing them to reflect a couple of things. One, to reflect, certainly you want to be bundling the potential of these incentives. Two, you want to be bundling in and accounting for emerging regulatory costs in the U.S.. Now, this is not a problem in Europe, where there's already cost on carbon in many countries. So you're already putting it into your underwriting. Here, it's a little more subtle, but you certainly have jurisdictions where you need it, and I think it's probably good business to anticipate you'll have more. So change the underwriting template and ultimately your underwriting template should reflect your goals as an organization and where you want to put your capital. And right now, we're using yesterday's templates, and I think we're making yesterday's decisions when we do that.
Duane Desiderio
Spencer and Matt, can I add another point here that I think we haven't really addressed, but as we're having this really good conversation, there are all of these forces that are just driving facilities managers and building owners to reduce their carbon footprint and to make these investments. One of the also big wildcards that I know a lot of folks in our industry continue to look at concerns reporting and disclosure rules that we expect to be coming from the Securities and Exchange Commission, the SEC. We'll see where this lands. But to a lot of fanfare earlier this spring, the SEC had released a long overdue proposed rule that would compel companies registered with the SEC to report and disclose their financial risks related to climate change. And that was getting into things like reporting and quantifying your scope one, two and perhaps even scope three emissions, tying that into your financial statements. One of the disclosure elements of what the SEC proposed was, how are you investing in buildings? What are the climate opportunities that you're taking advantage of? If there are going to be real estate companies who are driven to consider these tax credits and tax incentives, I think we're going to see that bleed over into corporate SEC reporting. It all depends on how the SEC finalizes their rule. When the SEC finalizes a rule, it's highly controversial. There will be litigation, but in a lot of ways I think the genie is out of the bottle. No matter where the SEC might land, we will see some reporting and disclosure rule.
Matt Werner
There was a lot of chat earlier in the summer about ESG and the difficulty of kind of defining it, measuring it, reporting it. So on the one hand, hopefully the SEC is going to clarify that for US based corporations. On the other hand, this act will help clarify that, right? Because in order to get your credit, you've got to submit to the EPA your efficiency plan. And we're looking and I think we're reasonably optimistic. You tell me that we're going to get some standards. You know, Energy Star is really become the standard for commercial buildings. And it's really been well adopted and people understand it and they mine that data to do things like make investment decisions in their buildings or their business. A huge new ream of data will be coming out from these retrofit plans, put into the EPA databases, and if past performance is an indicator, made available to industry and we'll innovate and grow off of that. I think it's going to be really powerful.
Duane Desiderio
100%, Matt. Not to get too nerdy or too wonkish here, but in the….
Matt Werner
Too late, it already has.
Duane Desiderio
179D… this is the part for it, so I'm going to riff. So in the revised tax deduction under 179D, for retrofits, Congress made very plain and we encouraged Congress to move in this direction, working with the EPA, that the metric to measure improved energy efficiency, to peg the financial incentive is reduction in site energy usage intensity in a building, site EUI. How much energy is being consumed per square foot? None of this is easy for facility matters necessarily to measure or gauge, but that is an easier metric to measure using the tools that are available in the market to have your baseline of how well is my building doing pre retrofit? What will the retrofit encourage me to, you know, how do you measure your post retrofit energy efficiency? The fact that Congress called out site EUI is a very practical nuts and bolts metric that I think facility managers and building owners that that deal with this stuff on a daily basis are going to be able to wrap their heads around and lead to more clear reporting, more clear disclosure, more clear benchmarking of of energy and decarbonization efforts.
Spencer Levy
Duane, so much of what we talked about on today's show is about the physical building itself, and that's the majority of the act. But you did mention at the outset that there are additional incentives available for if you put this into a neighborhood that needs more economic help, affordable housing, things like that, I think is a really excellent innovation of this law. It's not the only one that does it, but it certainly seems to be the trend. What's your point of view Duane?
Duane Desiderio
Absolutely, Spencer. The Democrats in Congress and the Biden administration made sure that environmental justice was a consistent theme weaved throughout this bill. And I think one of the things that we are particularly gratified to see is that the lawmakers were connecting the dots up there, particularly when it comes to affordable housing and low income housing. They make plain that if you qualify for a number of these tax credits and tax incentives, if you get them, that does not reduce the basis and buildings that are built with low income housing tax credit. So again, it's this layering concept that Matt talked about. These incentives that we're talking about just in the energy realm can all be layered on top of each other. If you have a building that puts in new solar panels and new windows, well, look at 179D and look at section 48. If that likewise happens to be low income housing that's financed with LIHTCs, do that. Layer it all on top of each other.
Matt Werner
Hey, and if it's in the right location, throw some EV charging on there with 30C.
Duane Desiderio
That's right. And incidentally, again, I don't think coincidental, the EV charging station locations, the geographies under this new law to qualify for EV charging stations are pegged to the same criteria for the new market tax credit. So look at all these tax credits together. I think we're going to see a lot of creative thinking of building all of this on top of each other to make these projects more economically viable.
Spencer Levy
So talking about putting these letters together. The E, the S, the G. I'm going to introduce another letter here, which is the W, which is wellness. So, Matt, how much of what you have been seeing over the last couple of years has been focused on this W element? And then what are people doing to address it?
Matt Werner
Well, I think that it's important to say the most important place to be well, is residential, where people spend most of their time, and the multifamily and as you say, affordable housing provisions here should make those buildings greener. And greener buildings are generally, by definition, healthier and of course, if we can reduce the environmental impacts coming from burning fossil fuels, just generally, the air will be healthier and better for folks. In terms of the corporate side, I mentioned this quickly in the beginning. We talk about a flight to quality and indeed our big users are saying interesting opportunity right now. Markets are down. People are a little unclear about return to office, and it's a chance for me to get better space for the same or less money. I think it would be naive to think that those users are not looking at this, that the carbon footprint of buildings when they're making their selection and indeed, as you say, Spencer, also naive to think that they're not looking at wellness for their tenant population. We're going to have to have great space to bring people back and keep them back. And this is one of the things people will be looking for. My point of view is it's a real challenge for us in the way that leases are structured today. A great change would be some more innovative lease structures that either share the benefit or put all the costs and all the benefits in one side of the ledger. Then we'll get, that'll help us with more investment and change.
Spencer Levy
Matt, I think you and Duane did a fantastic job talking about what this is, why it's important. I know a lot of the rules are still being written by the IRS, the Treasury Department, but it's a good time to start now thinking about it. So, Matt, and your final thoughts, what would you advise our clients to do to start thinking about it and then implementing it?
Matt Werner
What we advise clients to do is step back. So most clients have made a commitment, right? But few have a plan, particularly one that is driven down to the building level. So step back and start out with a plan. And your plan should be looking at a couple of factors. It should be looking at the decarbonization of the grid. Then you can start doing portfolio planning and locating factors like I just mentioned. Well which states are going to be most attractive for you to do renewables? Where can you get the right labor and technologies bundled then? Where will heat pumps be efficient, etc. etc.. Take it so that that planning piece is really important. Then take a look at your decision making system. One of the things I like to tell clients to scare them a little bit is every decision you make in a real estate portfolio from the big obvious decisions like where are you going to locate, how big is your building going to be, how big is your footprint going to be, to small decisions like work orders. Like small projects about a rooftop unit or an air handler. Every, that entire swath of decisions that all has CO2 consequences. It all has greenhouse gas consequences. So look at your top to bottom decision making system and make sure that every little decision and every big decision you make is adding up to, is getting your goals. Then execute and look for partners that can use their expertise to de-risk these moves for you, simplify these moves for you, monetize these opportunities for you, and then make sure you operate it really, really well. So plan, decide, execute, operate is the continuum that I, I advise people to think through and think about. And the last comment is, I think it's time to move fast. I think there's going to be a lot of demand. For the expertise, the services and the equipment required to do this, and the owners and the occupiers that get after it first will benefit the most.
Spencer Levy
Duane, what advice would you give to real estate operators to get ahead of the changes that are being implemented by the IRA?
Duane Desiderio
Yeah, thank you Spencer. Start doing your scenario analyzes now. It builds on what Matt said. To the extent that you're in a jurisdiction, again, we talked about this where you're facing down a fine or a penalty for meeting local requirements. Make sure you're meshing these laws together. And again, as we discussed, I think a big game changer here is don't forget how these monetization of these credits can avail a company that might have discounted these tax credits or discounted these incentives in the past. Look to see how there might be a market that is emerging to transfer the amount of these credits to other third parties in your universe.
Matt Werner
This is a complicated legislation, but it has some characteristics that are going to enable the supply chain to solve for the owner. It's got a nice, long ten year certainty they can invest around. It's got, we think, very practical provisions. You were just talking about labor, Duane, but there's many other areas where it seems like the authors of this legislation have thought through the practicalities of getting these projects done. So as an owner, as an occupier. Let the market handle it a little bit. I think that's something we can be confident in here. You don't have to know all the provisions of this. What you need to do, and I think you can be confident you're going to get, is seek out providers that can bundle, solve and monetize this for you. And I think that's going to happen. I'm really optimistic about it.
Spencer Levy
Great. I want to thank both of our guests today, starting with Duane Desiderio, the Senior Vice President and Counsel of the Real Estate Roundtable and guru of all things IRA and beyond. Thank you, Duane.
Duane Desiderio
Thank you, Spencer. It's been a pleasure. Thank you, Matt.
Spencer Levy
Then I want to thank Matt Werner, our Global President of Client Care, one of the foremost experts on sustainability facilities management beyond. Matt, great job. Thanks for joining the show.
Matt Werner
Appreciate it, Spencer. Thank you and Duane.
Spencer Levy
For more on this important topic, please visit our Website, CBRE.com/TheWeeklyTake. You can find additional CBRE insights and more on our show as well. From this deep policy dive, we've got a range of informative and entertaining programs waiting in the wings, including a show on Broadway, the real estate side of the theater business. We'll also explore international capital. That is where in the U.S. foreign investors are looking and lots of other real estate stories in the weeks to come. If you like what we're doing here on The Weekly Take, we encourage you to share it with your network and also remember to subscribe, rate and review us wherever you listen. I'm Spencer Levy. Be smart. Be safe. Be well.
Guests
Duane J. Desiderio
Senior Vice President & Counsel, The Real Estate Roundtable
Duane J. Desiderio has advocated on behalf of the real estate industry for over 20 years, seeking policy solutions that promote responsible economic and community development along with environmental, social, and governance (ESG) goals. He is Senior Vice President and Counsel with The Real Estate Roundtable (www.rer.org) in Washington, D.C. The Roundtable represents the leadership of the nation’s top 100 privately-owned and publicly-held real estate ownership, development, lending and management firms, as well as the elected leaders of the 19 major national real estate industry organizations.
Matt Werner
Global President, Client Care, CBRE
Matt Werner is Global President, Client Care for CBRE. He is accountable for supporting the firm’s largest investor and occupier clients by connecting them to CBRE’s best resources, providing timely strategic advice, and rigorously measuring results delivered by our services. His personal mission is to help clients thrive in the competitive, global, and changing real estate marketplace.
Host
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Spencer Levy
Global Client Strategist & Senior Economic Advisor, CBRE
Spencer Levy is Global Client Strategist and Senior Economic Advisor for CBRE, the largest commercial real estate services firm in the world. In this role, he focuses on client engagement and public-facing activities, including thought leadership work performed in conjunction with CBRE Research. He also serves as Co-Chair of the Real Estate Roundtable’s Research Committee.
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