What are the opportunities for financial services firms in the US real estate transition?

The built environment is a major contributor to emissions so greening the buildings we occupy should be a top priority.For financial services institutions, providing the capital required to green current building stocks is a huge opportunity to help accelerate decarbonisation and to meet their own net zero targets.

Major capital expenditure will be needed to green the housing stock, refurbishing and retrofitting current buildings to make them more energy efficient won't be cheap, with an estimated cost of $3tn for North America alone.

But there are major costs associated with doing nothing too. Not least is the risk of stranded assets. In the US, we’re already seeing how commercial tenants are unwilling to consider buildingsthat don't make the grade environmentally,

But as well as market forces, state and local regulations to mandate levels of energy efficiency are coming into play. For example, New York's Local Law 97 targets reduction for building emissions, starting at 40% by 2030 and reaching 80% by 2050, with all buildings over 25,000 square feet in scope.

Or take California, where new building standards start this year for rooftop solar, energy storage and electric powered heating. So there's a clear push to green commercial real estate, but there are also some significant pull factors.

First among these are the tax incentives available for the most significant piece of climate legislation passed by the US government:The Inflation Reduction Act, or IRA. As well as the $1 billion available for state and local governments to green their building codes, incentives in the Act support the retrofit of commercial buildings and residential buildings to make them more energy efficient.

Upgrades that reduce annual energy consumption by at least 25% will get tax breaks of $1 per square foot.There are other incentives available too, relating to the use of labor, domestic sourcing and location in underserved communities.

The resulting credits are flexible and can be passed up and down the finance chain. Taken together, they add up to tens of billions for green homes, offices and apartments.So how should financial services institutions respond and capitalize on what's already happening in the US?

They need to see this as an opportunity to play a leading role in the green real estate transition and to avoid being left behind with gray buildings that nobody wants.And to move forward decisively, we need three key steps that they should think about doing sooner rather than later.

First, identify and quantify the exposure you face today.What gray real estate assets have you got in your portfolio? Where are they? And what would be needed to get them up to the energy efficiency standards that local regulations and tenants require

Once you've identified your exposure, you need then to overlay that with the incentives available to fix the problem.

Understanding the costs of retrofittingalong with the tax incentives that will help offseta big proportion of those expenses is essential for the third key step. That's to engage with their counterparties and to accelerate progress towards the redevelopment and refurbishment of assets.

Improving the environmental performance of existing real estate is not only a critical step on our path to a greener world, it provides a wealth of new opportunities for financial services clients to support their clients, to transition and make meaningful strides towards their own net zero targets.