Climate resilience and a new era of urban infrastructure
As the largest city in North America, New York represents the enormous opportunity and risk of a metropolitan area of 9 million people operating on 20th century infrastructure.
From the advent of technologies like elevators and subways to policies like PlaNYC and Local Law 97, New York has long been a beacon for urban innovation. With over 500 million square feet of commercial office space in New York (all dependent on fossil fuels or Con Edison’s steam system), how can the real estate and construction industry decarbonize at scale, implement solutions that work over the next 20+ years and recapitalize our architectural fabric?
The path to revitalizing our infrastructure as an engine of future economic growth must begin with a series of “flagship projects” that prove their viability. The energy industry, the real estate sector and the municipal government cannot swallow the elephant whole.
Hudson Square Properties, a joint venture of Trinity Church Wall Street, Norges Bank Investment Management and Hines (led by Nordic systems integrator urbs) has brought to life a replicable example of a building that brings together public and private efforts to implement decarbonization strategies and multigenerational thinking that has proven successful in other markets.
At 555 Greenwich Street in lower Manhattan, a 270,000-square-foot, 16-story LEED-Platinum office tower connected to a former warehouse by a horizontal overbuild is the first speculative office development in New York City to innovate in the wake of the COVID-19 pandemic. It also serves as a tangible example of the first office building to use a thermally activated slab with geothermal wells – a design that reduces carbon emissions by 50% while eliminating fossil fuels used for heating and cooling. With all-electric heat pumps, the building exceeds the targets set by New York’s Climate Mobilization Act, one of the most ambitious climate programs implemented by any city in the world.
Lighthouse projects like Hudson Square operate without fossil fuels, are energy efficient and exceed LEED standards. They are the first step towards the ladder.
Capital providers, including public entities such as NY Green Bank and private entities such as Norges Bank (which manages approximately $27 billion in direct real estate investments on behalf of the Norwegian government’s pension fund) join the ranks of bankers financing commercial and multi-family residential decarbonization projects, including the Empire State Building and the Arverne East project in Queens.
The architecture and design community has for years championed the idea that high-performance buildings promote physical health and mental well-being. Engineering companies are developing practices in Low Voltage Direct Outside Air Systems (DOAS) that provide better ventilation with 100% outside air and decouple sensitive and latent cooling functions from air handlers . Other advanced systems, such as carbon-reducing geothermal and chilled beam systems, are seeing renewed interest and investment. Architects and construction management companies develop their expertise in the planning, design and engineering of net zero buildings. And the development community is learning to talk ESG, driven by tenant demand.
Given statewide goals of 85% GHG emissions reductions by 2050 and a 100% renewable grid by 2040 in New York State, the community of engineering, design and finance working in real estate begins the hard work of electrification, reducing peak demand and emissions and meeting the resilience mandates demanded by our climate reality today.
We are at the start of a challenging new era where remote working, inflationary pressures and the housing crisis are just a few headwinds facing the proptech industry. While some net zero projects may be championed unilaterally by a motivated developer (Veridian at County Farm), others are the result of partnerships between policy makers and communities to advance energy resilience and health and wellness ( Arverne East).
According to the New Buildings Institute, the number of verified zero-energy buildings in the United States and Canada more than doubled between 2018 and 2020, a sign that designers are gaining expertise to meet zero-energy goals set by building owners. . Building on proven pathways in Europe, a new American appetite is emerging for building electrification, district energy systems that can provide heating and cooling, and community microgrids that can provide both energy security, reliability and reduced emissions.
For landmark projects such as Hudson Square to drive broader community-wide change, rather than existing as an isolated example of what could happen if all the Swiss cheese holes lined up perfectly, buildings existing should be commissioned to audit and execute on energy efficiency opportunities; the gateway drug of the energy transition. Federal and local governments must continue to invest in research and development and provide thoughtful policies and tax incentives. With these ingredients, sophisticated capital can step in and lead by example. Competitors in the real estate and construction value chain will adapt, follow or be left behind.
As momentum builds and federal infrastructure funds begin to roll out, we need more repeatable models to decarbonize not just buildings, but entire communities in New York City. This magnitude of change requires large-scale and financially attractive investments in anchor institutions (particularly in public housing and essential infrastructure such as public transport); a strong supply chain for innovation; joint supply partnerships; workforce development and an inclusive approach to environmental justice communities; and dissemination of results.
Mortgage lenders and packagers should abandon their practice of requiring “triple net leases,” which allocate total building energy costs to tenants based on their share of net lettable space in the building, as a precondition for financing or securitization of mortgage loans. The result of this policy, designed to reduce the risk of default due to energy price spikes, is that: building owners have no financial incentive to improve the energy efficiency of their buildings; and individual tenants have no direct financial incentive to reduce energy consumption in the space they occupy.
Perhaps our most significant barrier is cultural: the construction, development and property management industry typically eliminates nearly all execution risk, representing a significant barrier to change for solution deployments that deliver efficiency gains but which are not yet industry standards.
Accelerated by COVID and remote working, the real estate sector is shifting from a commodity business to a service business. That’s not the only monumental change he has to deal with.
The International Renewable Energy Agency has estimated that $7.5 trillion of global real estate could be “locked up”; these are assets that will experience significant depreciation given climate risks and economic transition, making real estate one of the most affected sectors. While buildings that have embarked on a net-zero path may enjoy 6-11% higher rental premiums, laneless buildings are likely to depreciate significantly over the next two decades and could face a obsolescence driven by occupier demands, legislative regulations and penalties, and investor expectations.
The risk mindset is changing, and with more than 142 million homes in the United States and 6 million commercial buildings, the scale of the challenge and the opportunity is enormous. The road can be bumpy. Investing in more flagship projects and increasing success makes the way forward clear.