External Factors Driving Resilient Development

During Mission 2130, my colleagues and I were challenged with imagining the world 100 years into the future to develop a roadmap for a better society through the lens of design. The overarching conclusion of AIA 2130 is that the AIA 2030 goals are unachievable in a silo: we must engage the development community and government officials to form the framework for legislative change—improvements that are backed by financial incentives to encourage responsible development that is resilient, livable, and beneficial to all stakeholders involved. We must also get involved politically and connect with the local community to explain the importance of sustainable, responsible design and how we can work together to collectively shape our future.

Following the AIA 2130 program, global, national and Californiabased developers, lenders, and equity partners provided their take on how the architecture community can advocate for sustainable and resilient real estate. The three emerging themes as primary drivers included:●

• Property Lease & Sale Values●

• Legislation & Risk Management

• Tax Credits & Financial Incentives

Advocating for a balance of the factors above can create meaningful progress toward the emergence of a better society, which prioritizes long-term success over short-term gains. With respect to these three categories, here are some of the current ways developers and debt and equity partners are incentivized to participate in ESG development, and the challenges they face toward progress.

Property Lease & Sale Values

According to sources cited in this article, the commercial office sector is providing strong financial backing to green buildings in response to tenant demand. This demand is especially coming from companies that are looking to attract a younger workforce whose social beliefs often influence their employment and purchasing decisions. The office sector tends to prioritize features that support employee retention, which naturally lends to sustainable practices. Certification programs, such as LEED, Fitwel, and WELL are often used as benchmarking standards to entice tenants who can advertise these wellness benchmarks to attract and retain talent.

Both tenants and landlords can benefit from high-performing buildings through common office lease structures. Triple Net (NNN) leases are a popular structure for office spaces, where tenants pay for the property’s operating expenses such as utilities, taxes, insurance, and maintenance fees in addition to their base rent. This lease structure encourages tenants to look for highperforming buildings to save on costs. Meanwhile, landlords can enjoy more predictable and lower operating expenses with a fullservice lease, where they assume the responsibility of covering property operations costs.

But what about the multifamily sector? According to a recent survey,1 Americans are spending an average of 32% of their wages on rent. Only the most privileged renters can consider sustainability in their apartment choices, and even then, many are prioritizing location and amenities over the environmental impact of their apartment buildings. Until there is U.S. tenant demand for sustainable apartments or wide-scale legislative requirements, market rate and luxury apartment developers may not prioritize sustainable development unless there is a mandate by local law or building code.

As noted by one source, a California-based developer, when local laws don’t align with utility requirements, this can create a financial burden. For example, if a city requires solar panels, EV charging, and battery storage but the local utility agency does not take electricity offsetting into account, the development may have a surplus in transformers, which creates added development cost without improving building operations. Creating alignment between agencies will support the elimination of dated infrastructure requirements and ensure the power grid can support new electrification requirements. Architects can also support these issues by thinking about the sustainable requirements and compliance needs at the beginning of each project.

Several sources interviewed for this article also stated that they are not seeing investors other than Fannie Fae and Freddie Mac willing to take a lower rate of return to finance deals that are sustainable. Any efforts to reduce the cost of sustainable development through incentives, tax credits, and building design will support an increased adoption of sustainable building design.

Legislation & Risk Management

While recent legislation, including Iowa’s Senate Study Bill 1094, aims to prohibit consideration of ESG into state contracts for investment funds2, these policies are in the minority. On the other end of the spectrum, New York’s Local Law 97, is one of the most ambitious sustainability laws in the nation,. The legislation will require most buildings over 25,000 square feet to meet new energy efficiency and greenhouse gas emissions limits by 2024, with stricter limits coming into effect in 2030 to reduce the emissions produced by the city’s largest buildings by 40 percent by 2030 and 80 percent by 2050. The lenders and developers interviewed for this article noted that advocacy at the state and local level will be most impactful in making nationwide changes in carbon emission and sustainability standards, as these policies tend to trickle down to other states.

Furthermore, several sources stated that ESG goes beyond a political issue and will impact the ability to profit from and finance projects due to global and domestic investment standards. Market demand will weed out low-quality properties from the market; therefore, will not be enticing developments.

The EU’s recent adoption of the Corporate Sustainability Reporting Directive (CSRD) standardizes corporate ESG reporting similar to accounting standards and brings more companies into reporting requirements. Corporations meeting certain thresholds with parent companies outside the EU are required to report on a global basis, including U.S. companies.3 As the definition of ESG is formalized and reported, greenwashing will hopefully become a practice of the past.

FOOTNOTES:

1 (Source: https://www.businessinsider.com/advisors-recommendonly-spending-30-of-your-income-on-housing-2022-3)

2 (Source: https://www.forbes.com/sites/anthonytellez/2023/02/23/ what-is-esg-investing-and-why-these-republican-led-states-aretrying-to-ban-it-from-retirement-funds/?sh=40f009814d7c)

3 (Source: https://corpgov.law.harvard.edu/2022/11/23/eus-new-esgreporting-rules-will-apply-to-many-us-issuers/). As the definition of ESG is formalized and reported, greenwashing will hopefully become a practice of the past.