The Impact of Building Emissions Regulations in New York's Real Estate Leasing

Buildings account for 40% of greenhouse gas emissions worldwide, but in New York City, buildings are responsible for nearly 70% of local emissions. As The Big Apple continues to crack down on carbon, new regulations are causing ripples throughout the real estate market, according to the latest research from Jones Lang LaSalle (NYSE:JLL), a global commercial real estate and investment management company.

As part of the city’s Green New Deal plan, New York Local Law 97 (LL97) aims to drastically reduce greenhouse gas emissions. One of the most ambitious decarbonization regulations in the nation, this landmark piece of legislation sets emissions limits for buildings over 25,000 square feet starting in 2024. These limits will become progressively tighter over time, with the goal of reducing emissions by 40% by 2030 and 80% by 2050.

By incentivizing building owners and corporate tenants to rethink their approach to sustainability, these regulations will have significant impact on real estate — even beyond the five boroughs.

“New York City is paving the way and setting the standard nationally for building performance legislation,” said Adam Fisher, Vice President at JLL, where he leads the sustainability consulting group in New York City as well as JLL’s North American ESG Strategy & Advisory Practice focus on Corporate Occupiers. “We are one of the primary, if not the primary, real estate hub in the United States, and other cities are increasingly following New York’s lead. Making sure this is successful here in NYC is critical to broader adoption around the country.”

Staying in compliance

Although LL97 took effect in January 2024, the city has been laying the groundwork since the law passed in 2019. Prior to that, in 2009, the city’s Greener, Greater Buildings Plan began requiring annual benchmarking of building performance — generating more than a decade of data to determine an appropriate starting point for these limits.

“By design, approximately 80% of buildings will already be in compliance in 2024,” Fisher said, “so 20% of buildings needed to make changes for this first performance period; otherwise, they’ll be subject to fines.”

Buildings that exceed emissions limits per square foot will face penalties of $268 per ton of carbon dioxide equivalent over the limit. These thresholds vary, based on building use and occupancy type, but ultimately, “the landlords are the ones who are primarily responsible,” Fisher said. “So, as we’re talking about strategies moving forward, we have to understand how building owners are going to collaborate with their tenants to meet these compliance requirements.”

Retrofitting real estate

Collaboration between building owners and occupiers will become even more crucial over the coming years as LL97 regulations becoming increasingly more rigorous.

While 80% of buildings are already in compliance for the initial LL97 reporting period starting in 2024, 4 out of 5 of buildings will have to make additional changes to comply with stricter restrictions that take effect in 2030. “Just because you’re in compliance today does not mean that there are no actions required to stay compliant into the future,” Fisher said.

To prepare for lower emissions limits, Fisher recommends a “waterfall” approach to prioritizing decarbonization efforts. Initial low- to no-cost actions include optimizing existing building systems — including heating, cooling, lighting and building envelopes — to reduce emissions. As aging systems approach the end of useful life, consider replacements that increase efficiency and reduce reliance on fossil fuels.

Beyond that, building owners can explore more extensive (and capital intensive) retrofits, including electrification and on-site renewable energy generation. Additional efforts may include the procurement of off-site renewable energy and the purchase of carbon offsets, which have a less direct impact on a building’s total emissions.

“Building owners need to be thinking about this now,” Fisher said, “because many of these are strategic long-term efforts that require capital allocation and forward planning.”

Sharing responsibility

The biggest question surrounding these retrofits is where the financial burdens fall.

“Historically, standard leases for commercial office space in New York City had a simple pass-through clause for costs associated with local compliance requirements,” Fisher said, which meant that tenants ultimately paid the price. “Now, both landlords and tenant/corporate occupiers are becoming more sophisticated and making sure that there’s an equitable distribution of responsibility.”

When representing tenants seeking leased space in New York City, Fisher and his colleagues at JLL underscore the importance of understanding who’s responsible for making capital investments in a building and paying any penalties incurred under LL97.

“It’s becoming a collaborative co-creation of value,” Fisher said, “because the tenant demand for these spaces directly impacts long-term valuation, cashflow and revenue opportunity for these buildings into the future.”

Addressing the gap

As sustainability moves to the forefront of leasing decisions, LL97 is pushing New York City’s real estate market toward “the green tipping point,” according to JLL’s research. Corporate tenants are increasingly seeking sustainable buildings to meet their internal ESG targets, which is driving up demand for low-carbon office space. Without significant retrofitting, the supply is struggling to keep pace — not just in New York City, but beyond.

Specifically, JLL’s research predicts that 30% of projected global demand for low-carbon space will not be met by 2025, escalating to 70% by 2030. In New York City, an estimated 65% of demand will be unmet by 2030 — underscoring the need to escalate real estate decarbonization efforts.

“There are a lot of risks associated with not decarbonizing buildings. There’s a reputational risk, and there’s also a real business risk of not being able to acquire high-profile tenants,” Fisher said. “We’ve reached a point where it’s less about green premiums and more about avoiding a brown discount,” referring to the potential devaluation of buildings that don’t meet market expectations, let alone LL97 regulations.

Decarbonization presents a win-win pathway for owners and occupiers — differentiating sustainable real estate assets while helping tenants meet corporate ESG targets. Yet, with a long list of potential deductions, exclusions and other nuanced exceptions to the law, LL97 “is a complex, multifaceted regulation,” Fisher said. “This is a combination of a real estate challenge, a regulatory challenge and a technical engineering challenge, and so finding partners like JLL who can help navigate that intersection is critical to success.”

For more insights into New York City’s decarbonization laws, and their impact on the real estate market, download JLL’s “Green Tipping Point” report here.

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