The Biden administration on Tuesday released principles to enhance the integrity and effectiveness of voluntary carbon markets (VCMs) and incentivize companies to prioritize reducing their emissions. These principles can guide real estate businesses that seek to offset greenhouse gas (GHG) emissions. (White House fact sheet, May 28)

All-of-Government Approach

• The principles and joint policy statement were signed by the Treasury, Energy and Agriculture Secretaries, and White House officials directing national economic and climate policy.

• VCMs can “channel a significant amount of private capital to support the energy transition and combat climate change, with the right incentives and guard rails in place,” they wrote

• Markets that provide credits for greenhouse gas (GHG) mitigation are crucial for meeting the administration’s climate goals to cut emissions in half by 2030 and reach net zero by 2050.

Focus on Market Integrity

• The principles support carbon markets based on independently verified emissions savings. “[S]takeholders must be certain that one credit truly represents one tonne of carbon dioxide (or its equivalent) reduced or removed from the atmosphere.”

• Specific actions cited in the White House fact sheet to support the new principles include proposed guidance from the U.S. Commodity Futures Trading Commission (CFTC) for high-quality carbon offsets. (Roundtable Weekly, Feb. 16)

• The principles reflect the U.S.’s intentions to play a leadership role in standardizing international carbon markets.

• Today, VCMs are around $2 billion annually. With the potential of more private capital into climate projects through VCMs, Morgan Stanley projected that the voluntary market could grow to $100 billion by 2030. (Axios, May 28)

Relevance for CRE

• Companies may finance GHG mitigation projects such as reforestation, carbon capture, and increasing renewable energy supplies. (WSJ, May 28)

• These tools can help real estate and other companies offset their Scope 1 “direct” emissions, as well as controversial Scope 3 emissions from supply chain sources.

• “Concerns about the credible use of credits (for example, to address a portion of Scope 3 emissions) must also be adequately addressed for VCMs to truly drive decarbonization.” (Joint Policy Statement, May 28)

• Specific instruments known as Renewable Energy Certificates (RECs) are commonly used in U.S. markets to address Scope 2 emissions, which are generated by power plants for the electricity used by tenants and other building occupants. (US-EPA, “Offsets and RECs – What’s the Difference?”)

The Roundtable’s Sustainability Policy Advisory Committee (SPAC) continues to work closely with the White House on climate initiatives impacting commercial real estate.

Recent reports show property conversions are on the rise as commercial real estate and cities continue to undergo significant transformations to adapt to new post-pandemic realities. (Multihousing News, May 20 | (CBRE Report, May 29)

Report Data

• Adaptive reuse projects are on the rise, with 17.6% more apartments converted from outdated buildings in 2023 than the prior year, according to a recent RentCafe report.

• There are currently 151,000 units underway in various stages of conversion projects across the U.S., of which 58,000 are to be redeveloped from office properties. (CRE Daily, May 30)

• Adaptive reuse projects from former hotels are at an all-time high in the U.S., with a 38.8% increase since the previous year and almost double the volume of 2021. (RentCafe report).

• CBRE’s “Shaping Tomorrow’s Cities” report identified six key factors that can help cities rebuild and thrive: economic dynamism, demographic potential, lifestyle vibrancy, distinctive identity, responsive governance, and resilient infrastructure.

Rebuilding Strategies

• Converting underutilized buildings to residential use can be a cost-effective means of developing new housing, creating jobs, and generating critical sources of local property tax revenue while saving energy and reinvigorating communities.

• However, conversions can be costly, and local governments and developers must work together to bridge the gap and aid in rebuilding cities and communities.

• For example, Chicago is providing $150 million in public subsidies to property developers to convert four buildings in the business district to more than 1,000 apartments, with the assurance that one-third are set aside as affordable units. (WSJ, May 28)

• In New York City, Mayor Adams created the Office Conversion Accelerator Program, which brings city agencies together to work collaboratively with developers and aims to streamline converting offices into housing. (CRE Daily, May 30)

• “Public and private stakeholders have an integral role to play in shaping American cities. By having an all-hands-on-deck approach, the collective impact of experiences and rich data will drive insights and strategies to transform our cities,” the report said. (CBRE Report, May 29)

Roundtable Recommendations

• The Roundtable has urged policymakers to create a robust tax incentive to help overcome the significant financial, architectural, and engineering hurdles associated with repurposing older commercial buildings as housing.

• The incentive should complement actions taken by state and local governments to encourage property conversions.

• The Roundtable is working with the House and Senate sponsors of the Revitalizing Downtowns Act (H.R.419) to update and improve the bill, which would create a 20-30 percent tax credit for qualifying conversion costs.

• The credit is based on the highly successful historic rehabilitation tax credit and would apply to buildings that set aside 20 percent of their housing units for low- and moderate-income tenants.

• In April, The Roundtable recommended a series of actions to the Biden administration to support commercial-to-residential property conversions, including leveraging various federal loan programs and tax incentives to provide financial support for CRE conversions. (Roundtable Weekly, April 19)

Property conversions and the Revitalizing Downtowns Act (H.R.419) will be discussed at The Roundtable’s Annual Meeting on June 20-21 in Washington, DC.