Where Sustainability Stands in a High-Interest-Rate Development Environment
Sustainability opportunity lies in operational efficiency and building performance upgrades says new report.
According to Southface Institute, as a nonprofit that works with developers and other stakeholders to increase the sustainability of new and existing buildings, Southface Institute has identified solutions that have both environmental and financial benefits. The two biggest opportunities, operational efficiency improvements and building performance upgrades that are eligible for newly expanded federal incentives, create short- and long-term value that counteracts rising costs.
Operational efficiency
Operational efficiency is easy to deprioritize when an owner does not intend to hold onto a building for long. But for those who intend to own buildings for more than five years, investing in higher performing building envelope and mechanical systems is a major opportunity. The payback periods for these investments are much shorter than they were several years ago and serve to hedge against rising utility costs.
These greatly reduced operational costs can increase the net operating income from a project, and in some cases, they can even be capitalized to add upfront value to a project. Low air leakage rates, high insulation specifications, and mechanical systems that use heat pump technology are often worthwhile investments. Passive improvements like these can enable smaller (and therefore lower cost) mechanical systems, creating value above and beyond the ongoing savings of resource efficiency.
Federal incentives
The 2022 Inflation Reduction Act renewed and expanded tax credits and deductions, which has further enabled sustainability to be the answer to the question of where to find value for new buildings. The three programs that should be on every developer’s radar are the Section 179D tax deduction, the Section 45L tax credit, and the Greenhouse Gas Reduction Fund.
Commercial buildings or multifamily buildings over three stories that fall under the commercial energy code (ASHRAE 90.1) are eligible for the § 179D tax deduction, which now offers up to $1.00 per sq. ft. depending on performance. Meeting prevailing wage and apprenticeship requirements can quintuple the payout, up to $5.00 per sq. ft. For a 50,000 sq. ft. conditioned building, a 50% improvement over ASHRAE 90.1-2019 can mean $250,000 in tax deductions for builders offering prevailing wages and apprenticeships.