Over the last several years, New York City has shown that it wants to be a national leader in addressing climate change by passing landmark legislation designed to curb emissions. The City Council’s Local Law 97, passed in 2019, requires large buildings to cut emissions by 40 percent by 2030 and 80 percent by 2050, and Albany has also passed ambitious measures itself. In order to comply with LL97, real estate owners and operators will need to engage in extensive energy efficiency and decarbonization retrofits over the next two decades.
Buildings are the source of nearly 70 percent of carbon emissions in the Big Apple, according to the Urban Green Council, consuming 95 percent of electricity and using 80 percent of water. If we are going to meet ambitious climate goals, it is incumbent upon the city’s largest owners and operators to find ways to invest in sustainable infrastructure that will reduce emissions. The next step is to mobilize the stewards of New York City’s existing building stock in order to translate policy ideas into action and leverage innovative tech solutions to get there—and we should start by looking at our affordable housing.
New York City has one million rent-stabilized and rent-controlled units plus another 258,000 subsidized units, making up about a third of the city’s total housing stock. In affordable housing, major retrofits often occur when assets change hands because investors aim to minimize their equity investment by maximizing the debt they put on the properties. Sourcing capital for a major energy retrofit project between transactions can be very difficult due to complicated ownership structures and the fact that most of the cash flow from the properties is already reserved for servicing debt. This means thousands of affordable housing units across the city may not see sustainability upgrades if they aren’t bought or sold, which would be a major blow to the goals set to green our city in the coming decades.
However, energy efficiency retrofits often produce attractive and predictable returns. Investments can and should be made outside of transactions. Many innovative startups in the sector now offer to finance these types of projects against a portion of the realized energy cost savings. Real estate owners and operators often find it easier to enter these types of agreements than sourcing the capital organically, and this allows for retrofits to happen outside of the buying and selling of properties.
While energy efficiency plays a big part in decarbonization, the biggest reductions of greenhouse gas emissions will come through electrification of cooking, and space and water heating through the installation of heat pumps. Governor Hochul just announced a new $70 million initiative to develop new heat pump technology to decarbonize NYCHA buildings. This will be a game-changer for sustainably retrofitting NYCHA properties, and similar programs should open up to all affordable housing properties. Despite their positive impact on the environment, heat pumps are still a costly technology for many property owners because the electricity that powers them is significantly more expensive than gas on a thermal energy basis.
Electrification will also pose a challenge: strains on the electricity generation, transmission, and distribution infrastructure. Peak demand for electricity will shift from summer to winter over the next decades. Utilities, regulators, and the New York State Independent System Operator are already planning and investing in the grid for this transition, but it is a long, complex process with inherent uncertainties. It will require new measures like better insulation, hot water storage tanks, and smart thermostats, when used in conjunction with building heat pumps, to help mitigate potential electrical grid issues so that we don’t suffer curtailments during the winter months when electrified heat will be crucial. The deployment of smart meters to better manage electricity loads, distributed energy resources, and existing and new infrastructure improvements will help balance the needs of utility customers and the environment.
There is a powerful ecosystem of innovative startups incubating in New York City and driving solutions to these challenges. New York is a hotbed of innovation producing the blueprints, technologies, and companies that will ultimately enable decarbonization for the rest of the U.S. However, innovation in affordable housing has been lagging behind the market-rate, luxury, and commercial office sectors that have seen great benefits from proptech solutions.
To reach our transition to more sustainable buildings, affordable housing needs to catch up. Luckily, there are solutions that may make a difference. A good example of technology that can help us make affordable housing more sustainable, resilient, and economical are domestic hot water heaters and boilers that concurrently generate electricity. Developers can also invest in solar power systems for clean power generation, as well as real-time utility monitoring systems to identify water leaks and track overall energy consumption. At Fairstead Ventures, where I lead PropTech investing, we have a $100 million venture initiative to invest in and deploy sustainable technologies throughout our affordable housing portfolio.
Large owners and operators can help lower the costs of bringing these technologies to long undercapitalized affordable housing stock. By investing in and piloting sustainable proptech solutions, we can develop best practices with proven technologies to deploy at scale. These learnings will particularly benefit small- and medium-sized owners, who find it particularly challenging to make investments outside of the day-to-day demands of running a building. These learnings can be shared with other owners, operators, and developers to support a sustainable future for our city, and ultimately lead the way for the rest of the country.