CRE Industry Prepares As Potentially Pricey New Green Energy Rule Comes To California

As ESG investing takes hold in companies across the country, and governments seek ways to slow climate change, California is poised to ramp up its existing green power initiatives with a new rule that goes into effect Jan. 1.

The rule requires new commercial and taller multifamily buildings to have solar panels and batteries installed at their projects, and the costs that come with meeting the new standard can be hefty, depending on building type and its location in the state. But some developers are getting creative with ways to offset those costs, working together with solar companies to share the burden.

Trammell Crow Co. has one such partnership with Altus Power for its Southern California projects. And although TCC Director of Sustainability James Murray-Coleman sees the new rule as a “stick” used by the government, rather than the proverbial carrot, he acknowledged that the changes are inevitable in California and beyond.

“I think what California is doing is basically showing the way that the rest of the country will be behaving in the next few years,” Murray-Coleman said.

Earlier this year, TCC announced the partnership with Altus Power, an electrification company, to bring solar power and battery storage to its projects. Altus leases the roof of TCC buildings, paying rent. For its part, Altus gets solar panels and batteries in place and offers a discount on power to tenants of the building. 

“It's really a win-win scenario for us as a developer, and it's doing exactly what California needs, creating more power on-site,” Murray-Coleman said. 

Without this partnership, getting solar into a development project would certainly be more costly, but this and other sustainability issues matter to TCC’s investors, Murray-Coleman said, providing the motivation to get into solar apart from regulatory pressure.

“We would definitely still be doing solar, we would just have to work each deal a little bit differently,” he said. “There would be a little more homework.”

Solar panels and arrays have gotten more affordable as technology has advanced, but this requirement still tacks on notable costs to a project, according to CalSolar. It’s hard to put a price tag on exactly how much — the calculations that determine what size of battery and solar panels a project needs take a number of variables into account, including the so-called climate zone and the property type.

Still, estimates by CalSolar indicate that the added cost for solar panels and energy storage at a 100K SF building in San Diego might be in the neighborhood of $1.4M. But, the added cost to a similarly sized medical building in Bakersfield could be significantly less, at an estimated $166K. 

And in some parts of the state, a regulation like this one is old hat, as some local governments already had their own version in effect, KTGY principal Ben Kasdan said. 

“There are places where this is not a big deal at all,” he said. But he acknowledged that in places where solar and battery storage haven’t already been required, the cost impacts are not insignificant.

Kasdan said that his company has installed rooftop solar arrays on a variety of projects for years, and that while some developers shy away from adding these features because of their cost, many others look at it as “a relatively easy way to provide value to the tenants of the building.” 

But even for those who have resisted the changes, California’s new rule comes as no surprise. The precursor to this regulation is in effect now, and requires that buildings be “solar ready,” meaning that they have space available for solar panels to be installed on the building and are prepared to receive this infrastructure. 

The ongoing push from investors for more attention to ESG is potentially facing a big test with rising interest rates and inflation weighing heavily on all aspects of commercial real estate. Some developers have begun to jettison planned sustainability additions to projects in order to cut costs and keep projects on track. With these new regulations taking effect at the beginning of the coming year, that’s not as viable an option here.

Plus, not everyone is on board with the idea of ESG investment strategies, although many in CRE have dismissed this pushback.

And, there are challenges beyond costs that come when trying to fit solar into projects. 

Industrial projects, which are often expansive rectangles, have plentiful roof area, but other types of projects, like multifamily or offices, have a lot of uses already on the roof, including HVAC systems and, especially in recent years, amenities including outdoor lounge space, gyms or pools. On high-rises that might be seeking to cut a dramatic shape on the skyline, finding space for solar could prove to be quite a puzzle. 

“There’s only so much roof on all these buildings,” Kasdan said.  

Even an industrial building might need additional solar capacity via a solar canopy, which raises the panel up, if it’s an energy-intensive building, like a cold storage warehouse or a data center, Safari Energy Senior Vice President of Business Development Ron Wedeking said.

His company develops, owns and operates commercial solar projects, and installed solar panels on the rooftops and parking garages of the Glendale Galleria and the Village at Westfield Topanga. 

Challenges aside, the element of inevitability seems to accompany these regulations. After a summer of narrowly avoiding power outages, the vulnerability of the power grid is fresh in the minds of many.

By having solar panels and the capacity to store what they generate, the requirement does offer a potential buffer from outages to those relying solely on the grid, experts said. 

And as extreme weather events become more common across the country, California's experience with regulations such as this one could inform similar changes in other states.

"Often, what California does becomes the example for the rest of the country and the rest of the world," Kasdan said. So I think that when this goes into full force, this will convince other states, cities and countries around the world to follow suit, and we can start to make some meaningful progress here."