Buildings Are Empty, Now They Have to Go Green - Kanebridge News
Share Button

Buildings Are Empty, Now They Have to Go Green

Rising rates, falling occupancy and new carbon taxes hit building owners

By SHANE SHIFFLETT
Mon, Sep 4, 2023 10:42amGrey Clock 4 min

Their buildings echo with empty offices, their borrowing costs have soared, and now owners of buildings in cities across the U.S. are facing a new tax on their carbon emissions.

Cities are toughening their climate standards and are beginning to tax buildings that don’t meet the new requirements. Landlords are left with a difficult choice between paying for expensive upgrades to reduce emissions or paying the tax.

In New York City, which has one of the first and most expensive carbon taxes, landlords of large buildings (including owners of residential buildings) beginning next year will face a $268 fine for every ton of carbon dioxide emitted beyond certain limits.

“If you’re under cash flow pressure due to lack of tenancy, adding a tax on top of that isn’t a good sign,” said Bank of America CMBS Strategist Alan Todd. “It would be potentially pretty painful.”

The Wall Street Journal tallied the potential impact of the taxes on buildings that borrowed funds from Wall Street investors by issuing mortgage-backed bonds. The Journal also looked at properties owned by three of the country’s largest publicly traded landlords. The tax bill for 128 properties analysed could add up to more than $50 million during the first five-year enforcement period, which begins in 2024, according to the Journal’s analysis of Department of Building data and financial disclosures.

Fines for the same buildings could jump to $214 million if their landlords don’t meet the city’s emissions standards during the period between 2030 and 2034, the Journal’s analysis shows. The Real Estate Board of New York, an industry group, and engineering consulting firm Level Infrastructure said that more than 13,000 properties could face fines totalling about $900 million annually.

Buildings are by far New York City’s largest source of carbon emissions, which come from the fossil fuels used to heat and to provide air conditioning for them.

More than a dozen local laws regulating buildings’ carbon footprints from Chula Vista, Calif., to Boston have gone into effect since 2021 or will come online by 2030, according to carbon accounting firm nZero. Compliance also begins next year for buildings in Denver, while St. Louis properties face penalties beginning in 2025. Four other laws from Cambridge, Mass., to Reno, Nev., will go into effect in 2026.

The impact of the emissions laws initially will be small but will come on top of other, more costly problems faced by landlords. The law, based on New York’s current projections, would cost the 51-story skyscraper at 277 Park Ave. in Manhattan just $1.3 million in fines in 2024. The revenue of the building, owned by private landlord The Stahl Organization, was $129 million last year.

The building’s vacancy rate has jumped from about 2% in 2014 to 25% currently, according to commercial property data provider Trepp. JP Morgan Chase accounts for about half of the building’s space, but its lease expires in 2026. The bank is constructing a nearby tower that aims to produce net-zero carbon emissions and is scheduled to be completed in 2025. It wouldn’t comment on its leasing plans.

Stahl’s $750 million mortgage on the building is scheduled to mature next August. Stahl is now faced with potentially higher rates if it takes out a new loan, the loss of its biggest tenant and fines for carbon emissions.

Stahl declined to comment.

Shares of the three big landlords whose properties were analyzed by the Journal are trading at near historic lows. Shares of Vornado Realty Trust and SL Green, each of which has about 30 New York City office buildings, are down by roughly two-thirds since before the pandemic. Boston Properties Inc., one of the country’s largest office building owners, shares are down more than 50% from before the pandemic.

SL Green faces a potential carbon-tax liability of up to $6.6 million by 2030, according to the Journal’s analysis. The company declined to comment. More than 80 other properties financed using mortgage-backed bonds reviewed by the Journal could have a nearly $27 million carbon-tax bill by 2030.

The costly upgrades needed to comply with the law will hit some properties when they are on the block or when they are trying to attract tenants, who know they will effectively be paying for any improvements. “Tenants are looking to be in a building that is greener,” said Brendan Schmitt, partner in law firm Herrick’s Real Estate Department.

The library at the Manhattan office of Vornado Realty Trust, one of the landlords expected to be on the hook for a significant amount of New York City carbon taxes. PHOTO: VICTOR LLORENTE FOR THE WALL STREET JOURNAL

The new laws coincide with big government spending on climate. Landlords can get generous subsidies for projects that reduce emissions.

Ironically, landlords are also benefiting from emptier buildings, which burn less fossil fuel. New York City says about 11% of buildings covered under the law are projected to face penalties using the latest energy data, down from 20% using earlier data.

The city’s law was passed in 2019 and included a $268 fine for every ton of CO emitted by buildings over 25,000 square feet exceeding limits. Landlords will be required to report emissions to city officials starting in 2025 with penalties based on 2024 energy use.

Some big landlords are facing fines in multiple jurisdictions including Boston Properties, which will likely get hit on properties it owns in Boston, New York and Washington, D.C. The company’s eight New York City offices could face a $2.3 million dollar tax bill by 2030, according to city data.

Ben Myers, senior vice president of sustainability at Boston Properties, said complying with local building standards is important. “We have made energy efficiency a priority,” he said.



MOST POPULAR

What a quarter-million dollars gets you in the western capital.

Alexandre de Betak and his wife are focusing on their most personal project yet.

Related Stories
Property
China’s Housing Market Woes Deepen Despite Stimulus
By REBECCA FENG 18/06/2024
Property
I.M. Pei’s Son Speaks of His Father’s Legacy of Creating ‘Places for People’ Ahead of a Retrospective in Hong Kong
By ABBY SCHULTZ 12/06/2024
Property
THE EAST COAST CAPITAL SETTING THE PACE IN THE AUSTRALIAN REAL ESTATE MARKET
By Robyn Willis 06/06/2024

Home prices declined at a faster pace in May in major cities, while other data show a mixed picture for the world’s second-largest economy

By REBECCA FENG
Tue, Jun 18, 2024 3 min

China’s broken housing market isn’t responding to some of the country’s boldest stimulus measures to date—at least not yet.

The Chinese government has been stepping up support for housing and other industries in recent months as it tries to revitalize an economy that has  continued to disappoint  since the early days of the pandemic.

But fresh data for May showed that businesses and consumers remain cautious. Home prices continue to fall at an accelerating rate, and fixed-asset investment and industrial production, while growing, lost some momentum.

“China’s May economic data suggest that policymakers have a lot to do to sustain the fragile recovery,” Yao Wei, chief China economist at Société Générale, wrote in a client note on Monday.

The worst pain is in the property sector, which has been struggling to deal with oversupply and weak buyer sentiment since 2021, when a multiyear  housing boom ended . The market still doesn’t appear to have found a floor, even after Beijing rolled out its most aggressive stimulus measures so far  in mid-May  in hopes of restoring confidence.

In major cities, new-home prices fell 4.3% in May compared with a year earlier, worse than a   3.5% decline in April, according to data released Monday by China’s National Bureau of Statistics. Prices in China’s secondhand home market tumbled 7.5%, compared with a 6.8% drop in April.

Home sales by value tumbled 30.5% in the first five months of this year compared with the same months last year.

“This data was certainly on the disappointing side and may ring some alarm bells, as May’s policy support package has not yet translated to a slower decline of housing prices, let alone a stabilisation,” said Lynn Song, chief China economist at ING.

Economists had also been hoping to see a wider recovery this month after Beijing started  rolling out  a planned issuance of 1 trillion yuan, the equivalent of $138 billion, in ultra-long sovereign bonds in May. The funds are designed to help pay for infrastructure and property projects backed by the authorities. Investors  gobbled up  the first batch of these bonds.

Monday’s bundle of economic data, however, underlined how the country still isn’t firing on all cylinders.

Retail sales, a key metric of consumer spending, rose 3.7% in May from a year earlier, compared with 2.3% in April, according to the National Bureau of Statistics. While the trend is heading in the right direction, it is still a relatively subdued level of growth, and below what most economists believe is needed to kick-start a major revival in consumer spending.

The expansion in industrial production—5.6% in May compared with a year earlier—was down from April’s 6.7% increase. Fixed-asset investment growth, of which 40% came from property and infrastructure sectors, also decelerated, to 3.5% year-over-year growth in May from 3.6% in April.

Key to the sluggish economic activity data in May—and China’s outlook going forward—is the crisis in the property market, which has proven hard for policymakers to address.

The property rescue package in May included letting local governments buy up unsold homes, removing minimum interest rates on mortgages, and reducing payments for potential home buyers. It also included as its centerpiece a $41 billion so-called re-lending program launched by the People’s Bank of China, which would provide funding to Chinese banks to support home purchases by state-owned firms.

The hope was that by stepping in as a buyer of last resort for millions of properties, the government would manage to mop up unsold housing inventory and persuade wary home buyers to re-enter the market. In turn, Chinese consumers, who have  most of their wealth  tied up in real estate, would feel more confident about spending again, thereby lifting the overall economy.

But the size of the re-lending program wasn’t big enough to convince home buyers, said Larry Hu , chief China economist at Macquarie Group. “Meanwhile, their income outlook also stays weak given the current economic condition,” he said.

For the property market to bottom out and reach a new equilibrium, mortgage rates, which stand at around 3-4% in China, need to be as low as rental yields, which are currently below 2% in major cities, said Zhaopeng Xing, a senior China strategist at ANZ. He said that a large mortgage rate cut will need to happen eventually.

The other key part of China’s push to revive growth revolves around the manufacturing sector, with leaders  funnelling more investment  into factories to boost output and reduce the country’s reliance on foreign suppliers of key technologies.

The result has been a surge in production. But with domestic consumption not strong enough to absorb all those goods, many factories have been forced to cut prices and seek out more overseas buyers.

Data released earlier this month showed that  Chinese exports rose  faster in May than the month before.

However, the export push is  butting into resistance  as governments around the world worry about the impact of cheap Chinese competition on domestic jobs and industries. The European Union last week said it would  impose new import tariffs  on Chinese electric vehicles, describing China’s auto industry as heavily subsidised by the government, to the point where other countries’ automakers can’t fairly compete.

The U.S.  has also hit  Chinese cars and some other products with hefty duties, while countries including Brazil, India and Turkey have opened antidumping investigations into Chinese steel, chemicals and other goods.

Beijing says such moves are protectionist and that its industries compete fairly with global rivals.