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Commercial landlords in the U.S. face a $3 trillion bill for weaning their buildings off fossil fuel systems through retrofits, driven by new decarbonization regulations and a growing awareness of the “brown discount” on inefficient buildings. 

As energy prices rise, inefficient buildings will become undesirable assets among potential investors, according to a JLL research report. 

“We know the price of energy is going to increase,” said Jay Wilson, vice president of sustainability for JLL. “Corporations are anticipating those risks and starting to take action, saying, ‘Let’s invest in sustainability.’” 

The JLL report estimates the average cost of decarbonization at 10 to 20 percent of assets under management on a portfolio-wide level. 

Approximately 80 percent of office buildings in mature cities in North America and Europe will remain in use in 2050, suggesting that 3 percent of buildings will have to be retrofitted per year, JLL noted. But many landlords are hesitating to launch projects until there are clearer regulations. 

The costs of retrofits will add to financial risks for office landlords in cities such as Boston, where vacancy rates have hit their highest level in over a decade. 

But payoffs can be significant, with deep energy retrofits for office buildings delivering operational savings of 40 to 60 percent, according to JLL research. And 74 percent of commercial real estate executives surveyed by JLL in 2022 said they would pay a premium to lease a green building. 

A 2020 analysis by The Cadmus Group estimates that retrofitting commercial and multifamily buildings in Greater Boston to meet state and local climate policies will cost approximately $32.6 billion. The study encompassed 101 communities in the Metropolitan Area Planning Council region. 

Healey Pushes for Climate Clearinghouse 

Massachusetts’ landmark 2021 climate roadmap law committed the state to attaining net-zero building standards by 2050 through decarbonization policies. 

And for her part, Gov. Maura Healey has outlined more plans to expand and reshape the state’s investment in climate projects, including in her inauguration speech last week. 

The idea: Replace the existing Mass Save program and its dozens of clean energy incentive programs with a climate project clearinghouse and statewide green bank run by the quasi-public Massachusetts Clean Energy Center (MassCEC). 

Mass Save programs, which are subsidized by utilities’ ratepayers, invest approximately $1.3 billion a year, but are insufficient to meet the scope of building decarbonization needs, according to a Nov. 30 report by the Massachusetts Commission on Clean Heat. 

Climate banks are designed to fill gaps in financing because private lenders are often unfamiliar with energy retrofits, said John Cleveland, strategic adviser to the Boston Green Ribbon Commission. Public funding sources can step in as subordinate lenders, inducing more private investment.  

A 410,000-square-foot office building at 300 Baker Ave. in Concord is being updated by Taurus Investments Holdings subsidiary RENU including installation of a new geothermal HVAC system. Photo courtesy of RENU

No Free Lunch 

Unlike subsidy programs, however, climate bank loans are designed to be paid back in full. 

“When people hear ‘climate bank,’ they think somebody’s going to give them piles of cash,” Cleveland said. “They do, but a climate bank is not a subsidy source. It’s a set of financing solutions with the assumption it’s going to get paid back.” 

Climate banks also can provide bridge loans enabling projects to get under way faster, rather than systems where a developer is reimbursed afterward, Cleveland noted. 

Healey will seek to replace the Mass Save program with a state decarbonization clearinghouse run by the Massachusetts Clean Energy Center. 

Healey’s platform closely aligns with the recommendations of the Massachusetts Commission on Clean Heat’s final report, including the concept of a green bank working hand-in-hand with a state-run clearinghouse providing one-stop shopping for commercial and residential property owners. 

“You really want to make this a seamless process from the owner’s point of view,” Cleveland said. 

Healey’s office did not provide additional details on the target size of the Green Bank investment beyond the campaign platform, which states that it will invest in low-carbon and climate resilient projects “where they are most needed to deliver community benefits, jobs, reduced emissions, and climate resilience. The Green Bank will also provide seed money to clean energy companies founded in overburdened communities and by people of color.” 

Steve Adams

IRA Seen as Major Source of Funding 

Green banks already operate in 21 U.S. jurisdictions. By combining public capital with private investment to fill funding gaps, they invested more than $7 billion in clean energy since 2011, including nearly $1.7 billion in 2020, according to a report by the American Green Bank Consortium and the Coalition for Green Capital. 

“There’s a need for a tremendous amount of financial assistance at the large and small properties and everybody in-between,” said Tamara Small, CEO of commercial developer group NAIOP MA. “The climate bank is something that is very important, and should be handled on a statewide basis. Every community in Massachusetts is trying to figure out how to get to these statewide goals.” 

Federal funding to states for climate initiatives through the federal Inflation Reduction Act could be another major source of funding for a green energy projects, Cleveland said. The IRA earmarks $369 billion for climate change and energy security programs over the next decade. 

“The decision the new administration will need to make is how we move forward on this, and the IRA has a big pot of funding that is very specific to decarbonization projects,” he said. 

Can a Green Bank Offset the ‘Brown Discount’?

by Steve Adams time to read: 4 min