2024 Decarbonization Progress: Urgency, Technological Innovation, and Capital Investment Go Hand in Hand

As pressure from tenants, investors, lenders, and regulators to decarbonize buildings continues to rise, experts say building operators and facility managers are increasingly turning to digital tools to manage the costs associated with energy efficiency upgrades and retrofits.

Building tenants are increasingly favoring spaces that perform well on environmental performance metrics such as energy intensity and electrification. Although tenants are willing to pay a premium for sustainable spaces, demand for such buildings has outpaced supply. JLL's Global Tenant Outlook released in January 2024 predicts that by 2030, only 25% of total demand for low-carbon space will be met. Decarbonization commitments will also play a greater role in lease renewals—of the 100 largest tenants surveyed by JLL across eight U.S. markets, 77% said their renewals would be tied to carbon commitments.

Second, according to a report by Cortex Sustainability Intelligence, investors are urging companies to be transparent about their sustainability performance. Investors increasingly recognize that sustainable properties hold higher value. A global real estate survey conducted by JD Supra showed that approximately 71% of surveyed investors expect properties with higher energy performance standards to attract higher resale values, greater tenant demand, and higher-quality tenants. Among the same group of investors, three-quarters believe that the "green premium" applies primarily to buildings with official sustainability certifications such as LEED and BREEAM. David Borchardt, senior mechanical engineer at MD Energy Advisors, said during an October energy benchmarking panel discussion that lenders are also increasingly looking for such green certifications and other sustainability-driven budget allocations.

Federal, state, and local governments are increasingly focusing on energy efficiency standards and carbon emissions reporting and reduction for new and existing commercial properties. Relevant laws and policies include New York City's Local Law 97, Detroit's adopted benchmarking policy for energy and water use in existing buildings, and legislative measures in California aimed at regulating corporate climate disclosures—which some market commentators believe echo certain requirements in the U.S. Securities and Exchange Commission (SEC) climate rules, expected to be released in April.

"The urgency for action in the building industry is undeniable," said Lisa Rockefeller, Chief Revenue Officer at Cortex Sustainability Intelligence. "The industry needs to connect corporate ESG goals with engineering goals at the building level" to achieve the building-level changes needed to meet ESG targets. She noted that the SEC's anticipated climate disclosure rules are "critical" for promoting accurate, auditable, and transparent sustainability reporting, and that stronger data collection is equally key. Rockefeller expects commercial real estate professionals to take proactive decarbonization measures this year, focusing on leveraging enterprise-level digital tools that provide real-time actionable data, enabling operators to reduce energy costs and carbon emissions while maintaining tenant comfort.

"Facility managers are trying to figure out how to reduce Scope 1 emissions, particularly those associated with direct fossil fuel consumption within buildings," said Paul Torcellini, principal engineer of the Commercial Buildings Research Group at the National Renewable Energy Laboratory. "The good news is that the industry is responding to this need," he said.

Key starting points for decarbonization

"This year... data- and AI-driven maintenance, automated system optimization, energy reporting, and carbon tracking and reporting will be seen as integral to building operations and management," said Ken Carroll, managing director of corporate real estate consulting and technology at EY, in an interview.

Andre Marino, senior vice president of digital buildings at Schneider Electric, noted: "For many, the biggest question is where to start. With budgets often constrained, implementing solutions that help achieve sustainability and net-zero goals can seem daunting."

As a starting point, building operators and facility managers are turning to comprehensive energy assessments, which provide a holistic view of a building's energy profile, said Ronak Shah, senior energy analyst at InSite. While the focus is on "recalibrating the energy equation in the built environment," IoT devices and building management systems can facilitate real-time monitoring and data analysis, enabling predictive maintenance, forecasting energy use, and participating in demand response strategies, Shah said. Other focal points for initiating building decarbonization include improving building envelope components such as insulation, windows, and roofs to minimize heating, cooling, and electrification needs, he added.

Ensuring an effective building envelope will help owners implement electrification projects later, said Jon Moeller, chief operating officer at climate technology company BlocPower, which manages retrofit projects for commercial properties, community centers, and multifamily apartments.

Despite federal incentives, facility managers still face high costs when investing in energy efficiency technologies. For example, according to estimates by Rosen Consulting Group from June 2022, in New York State, the cost of retrofitting a typical gas-powered office building to a ground-source heat pump can reach $24 per square foot, while deploying an air-source heat pump can cost up to $21 per square foot. Based on these estimates, installing an air-source heat pump in a 500,000-square-foot building in New York could cost up to $10.5 million. The report notes that while heat pump retrofits in office buildings have the potential to consistently "significantly save on energy bills," these estimates are based on additional building envelope improvements, which will partially incur costs.

"We are in an unprecedented period of transformation in facility management, where the dual goals of cost efficiency and sustainable action seem contradictory," said Travis Sheehan, head of Shell Energy North America for Cities and Hubs. He cited energy efficiency measures, equipment upgrades, and advanced energy management systems designed to change energy usage patterns to save costs as other decarbonization pathways.

"Insulation retrofits are often a good first step that is cost-effective and has a quick payback," said BlocPower's Moeller, noting that IoT-connected energy-saving technologies such as air-source heat pumps have had a "tremendous impact" on cost savings and comfort.

NREL'saction plan templateemphasizes that improving building energy efficiency is often "the most cost-effective and least disruptive strategy" to control energy use and implement other carbon reduction strategies. For example, reducing building energy consumption by 50% can double the percentage impact of renewable energy purchased or generated.

Budgeting for emission reductions

Energy efficiency investments can generate savings that owners and managers can use for building decarbonization. However, inflation, high interest rates, and tight labor market conditions for the skilled workforce needed for decarbonization are concerns.

Price and wage inflation and shortages of skilled technical personnel are beyond the control of facility managers, said EY's Carroll. "More efficient equipment is very effective in advancing decarbonization. However, it is unwise to expect and assume that installing newer hardware, such as heat pumps, will operate perfectly and that their sequences of operation will be meticulously designed for optimal performance," he said. A thoughtful strategy involving the use of digital technologies and solutions "needs to be designed and implemented in parallel with these equipment upgrades, not as a substitute," to optimize the performance of energy-efficient equipment in buildings, he added.

InSite's Shah noted that strategically selecting energy-saving technologies with short payback periods can mitigate the risk of inflation eroding the purchasing power of future savings and affect the long-term viability of energy efficiency investments. "For example, LED lighting upgrades not only reduce energy consumption but also provide a quick return on investment, offering a buffer against the effects of inflation," he said.

Shah said that implementing robust monitoring systems based on real-time data enables facility managers to make informed decisions and maximize the efficiency of long-term returns on energy efficiency investments. To strategically select projects, he recommends conducting comprehensive life-cycle cost analyses, guiding phased implementation by prioritizing projects based on potential energy savings and scalability, ensuring these investments align with long-term financial goals.

Owners and operators can also leverage financial support mechanisms from the Inflation Reduction Act, such as the30% tax creditfor certain ground-source heat pump installations (available through 2032), as well as Section 179D, which provides commercial owners withtax deductions for energy-efficient improvements. These deductions range from 50 cents to $1 per square foot and may increase to$5 per square footif certain wage and apprenticeship requirements are met. "That money is enough to cut a third of the cost of a $24-per-square-foot ground-source heat pump retrofit," said NREL's Torcellini, referring to Rosen Consulting Group's estimates.

Carroll said that to effectively utilize these tax deductions and state and local equivalents, owners and operators are working with experts on these regulations. "Section 179D shows that qualifying measures must be calculated and must be calculated using approved software, which highlights the need for a robust digital strategy," he said.

To ensure balanced budgets and actionable methods for emission reductions, organizations should develop measurable decarbonization roadmaps, Marino said. This involves establishing baselines, deploying digital solutions to determine the best use of budgets, and electrifying building loads by leveraging renewable energy and value chains and their emissions. "Commitments are being made," Marino said, "but action needs to be at least three times faster."