The real estate world has recently seen a shift toward a more sustainable future. Developers are obtaining and renovating properties with sustainability in mind, and governments are implementing new standards and regulations to promote sustainable infrastructure. In theory, our society is taking great action to improve the future for younger generations. However, the immediate impact for real estate investors has proven slightly challenging.

The introduction of these new standards has affected financial projections, directly impacting transactions within the sector. This article details how government regulations in California have directly impacted CRE and the future of sustainability. We look into Title 24 and explain how CRE investors can benefit from going “green.”

Why a Push for Sustainability?

Over the past century, we have experienced a progressive decline in our environment. Our actions as humans have had a deteriorating effect on the world around us. Overpopulation, deforestation, pollution, and burning fossil fuels have triggered climate change and led to undrinkable water, poor air quality, and soil erosion. As we begin to understand the consequences of our actions, industries worldwide are starting to promote the transition to a more sustainable future.

Real Estate and Sustainability

In response to environmental decline, the real estate industry has started to take a proactive approach to preserve our future. We have redirected our focus on sustainable development.

For those new to the term, sustainable development involves meeting the present generation’s needs without compromising future generations’ ability to meet their own needs.

Elements Contributing to a More Sustainable Future

From development to operations, real estate developers and landlords have implemented new practices to promote sustainable development. The most common are as follows:

● Utilizing construction materials and interior finishes that don’t have to travel far distances or be heavily processed
● Installing high-efficiency lighting
● Leveraging renewable energy sources, such as solar energy
● Incorporating efficient HVAC systems, roofing, and water systems

California Energy Code: Building Energy Efficiency Standards – Title 24

In addition, communities worldwide are taking action to help combat current global issues by reducing our carbon footprint. In 2019, California updated the California Energy Code (Building Energy Efficient Standards) to ensure our youth’s operational future. The goal is to “reduce wasteful and unnecessary energy consumption in newly constructed and existing buildings.”

Title 24 focuses on setting standards for new developments within the state and identifies upgrade requirements for CRE renovation projects. Areas of concentration include lighting, roofing, windows, skylights, water heaters, HVAC, insulation, etc. New and existing projects must now focus on improving efficiency within non-residential buildings related to these systems.

Impact of Title 24 on California CRE Investors

The 2019 regulations have dramatically impacted property owners, especially those in the commercial real estate sector. Required upgrades have proven to be costly, often negatively impacting an investor’s bottom line.

For example, real estate owners planning to renovate more than 10% of their property must improve efficiency across the board during these renovations. As a result, returns on specific projects may be delayed. Those interested in selling in the short term are therefore deterred from upgrading their buildings.

Similarly, the latest regulations on new developments have decreased values for existing properties. The investor community is starting to expect energy-efficient upgrades, driving down value and demand for older assets.

Benefits of CRE Investors Implementing Sustainable Practices

Although Title 24 has its downside, energy-efficient or “green” practices also have their upside.

● Energy-efficient projects are slightly more expensive in the early phases, yet the long-term returns are dramatically higher. A Dodge Data Analytics report found that new and retrofitted green buildings can see up to a 9% decrease in operating costs over 12 months and a 13% to 14% decrease over five years.

● Properties that meet modern sustainability standards and use green principles recognize a significant reduction in their energy bills. A government analysis identified that “on average, 30% of energy used in commercial buildings is wasted, which presents building owners and managers with a huge opportunity for operating cost savings.”

● Today, sustainable real estate is in greater demand. As buyers recognize the risks and expenses associated with older and unimproved buildings, they are less inclined to pursue an acquisition at a competitive asking price. As a result, properties that have been upgraded to meet today’s standards are valued higher in the marketplace. Not only do they provide less risk for buyers, but they also provide peace of mind.

● Energy-efficient upgrades are tax-deductible. You can discuss the details of what and how much is tax-deductible with your CPA; however, many California investors are finding that 100% of their upgrades are now tax-deductible.

The Future of Sustainability

As we move forward, new legislation will continue to be introduced, setting a path for more changes to come. However, the key to navigating these times is understanding how to leverage your position. It may not be as black and white as before, but profitable commercial real estate returns are still attainable.

Whether you are a buyer or a seller, we encourage you to speak with a professional to learn more about Title 24 and the ways you can improve your position.a