Sustainability Codes Adding More Hurdles For Boston-Area Developers, But New Federal Funding Could Help

As construction projects face pressure from every direction, developers are trying to find new ways to move them forward, and some are looking to federal funding as a solution.

Projects have become harder to pencil due to high interest rates and construction costs, and several building experts speaking Wednesday at Bisnow's Boston Construction and Development event at the Seaport Hotel said a series of new city and state sustainability codes is keeping some developments at a standstill.

However, they said the Inflation Reduction Act of 2022, which aims to invest in domestic energy production and promote clean energy, could help to pull some of the pressure off of developers and help them meet the ambitious climate goals.

"This is a tomorrow problem that you have to think about today," said Steven Burke, senior director of sustainability at Suffolk Construction. "This interplay with the Inflation Reduction Act might actually make some of this a little bit less painful."

In March 2023, the city of Boston filed an ordinance to adopt the state's updated Municipal Opt-in Specialized Stretch Energy Code, which sets energy-efficiency requirements for new projects and major renovations. The city is one of Massachusetts' 300 communities that the stretch code applies to, and 17 of the communities have adopted the specialized code.

Although the code helps move the needle in making buildings more sustainable, developers say it could not have come at a more inopportune time.

"Rolling out the new code, along with the interest rates that we're seeing in the market, is really just like putting salt in a wound right now," IQHQ Director of Development Chrissy Gabriel said. "The code requirements are certainly adding a premium to all of the costs."

The stretch code isn't the only sustainability requirement from the state and local governments that building owners must follow.

Boston has its Building Emissions Reduction and Disclosure Ordinance 2.0, which requires all buildings that are at least 20K SF or have at least 15 units to report their energy and water usage. It also sets mandatory carbon emissions caps starting in 2025. Cambridge has a similar requirement called the Building Energy Use Disclosure Ordinance. 

The state has also rolled out the Massachusetts Clean Energy and Climate Plan, which has set targets of emission reductions of 33% by 2025 and 50% by 2030. A December climate report card showed that the state was on track to meet its 2025 goals but had a long way to go for its next targets, WBUR reported.

The stretch code, on its own, could make it harder and more expensive to build housing in the state, according to a study from the Home Builders & Remodelers Association of Massachusetts. The code could increase construction costs without any added incentives, the Boston Business Journal reported.

"I think for the first time people are empathetic towards developers, right?" Gabriel said. "With the market, the unprecedented outcome of the pandemic, interest rates, code changes, it's just all happening at the same time, and it's just a little hard for us."

Gretchen McGill, senior vice president of construction at The Davis Cos. said the sustainability policies can be difficult to keep up with because planning involves looking 10 to 20 years into the future.

"Can we get those modifications put into the building envelope today so that we're not suffering from the decisions we make today in tomorrow's market?" McGill said. "We spend a lot of time thinking through our due diligence and over early design periods for how we're going to handle those."

However, experts said that the Inflation Reduction Act could help alleviate some of the issues for developers. The federal law, which passed in the summer of 2022, multiplied tax incentives for sustainable development and green building.

Tracey Ogden, vice president of drilling operations at Brightcore Energy, said that one of the effects of this bill was that it increased the geothermal tax credit from 26% to 30% until 2032. She said this increase, coupled with other bonuses, including for developers that source materials made in the U.S. or complete projects in certain "energy communities," could create a 50% bonus rate for developers.

"It's kept my firm busy, and it's kept projects that otherwise would not be able to pencil out because of these dollars for these projects to say, 'Hey, geothermal is now comparable to gas,'" Ogden said.

Such incentives could help relieve some of the stress developers have faced as they try to make their projects comply with the sustainability policies.

Although the act could help developers now, Burke said there are still more regulations to come. The Boston Planning & Development Agency is analyzing potential zoning amendments to require net-zero carbon emissions for new buildings as part of its large-project review.

"As difficult as it is in this moment, we're still in Act 1. This stretch energy code is a new thing that we're dealing with, but this isn't the end of the conversation," Burke said. "We need to help our owners navigate this process in the most cost-efficient way."

CORRECTION, MARCH 27, 10:40 A.M. ET: A previous version of this story incorrectly stated the minimum square footage and unit threshold for BERDO 2.0. The story has been updated.