Large NYC buildings will soon be sporting a conspicuous A to F letter grade at their public entrances. Modeled after the NYC’s restaurant grades and similar building rating programs in Europe, Local Law 33 mandates building energy efficiency grades, starting in 2020.
Why bother with grades when we already have benchmarking, you might ask? The theory behind benchmarking is that transparency will galvanize the market to reward better-performing buildings through higher rents and lower vacancies. But this can only happen if renters and buyers are aware of a building’s energy use. Few are. And while sites like Urban Green Council’s Metered.nyc help, energy grades will have a more widespread impact.
Under the new law, people entering NYC buildings will immediately see the energy grade. Some may not even know what the grade represents, but they will see that they’re walking into an “A” building or an “F” building. And, given an alternative, who wants to rent or buy in an F building?
Grades are based on Energy Star scores:
- A: 90 or above
- B: 50 - 89
- C: 20 - 49
- D: 0 - 19
- F: buildings that don’t submit required benchmarking information
- N: buildings exempted from benchmarking or not covered by the Energy Star program
The energy label will include both a letter grade and the building’s Energy Star score, with the latter included to soften the margins between grades. (For instance, a building with an Energy Star score of 89 is a strong performer but only a B under the grading system. By including the score, an owner can still draw attention to the building’s relative efficiency.)
The law also includes a requirement for the Department of Buildings to annually conduct spot audits of benchmarking information. This is an important addition, as the temptation to fudge benchmarking data will likely grow with the arrival of energy grades.
How Has It Gone in Europe?
Since 2002, the EU has required building energy labels, known as Energy Performance Certificates (EPCs). Because individual EU members are responsible for implementation, programs have varied and results have been mixed. There are studies in certain countries showing that EPCs impact rents and sales, but there isn’t enough public data to analyze in most jurisdictions.
It’s important to note that many EU EPCs are not based on actual energy usage (e.g., benchmarking), as the NYC law requires, but on a physical assessment of the building. This “asset rating” is akin to the U.S. miles per gallon (fuel economy) labeling for cars and EnergyGuide label for appliances. But it can become more difficult to create useful and accurate asset ratings as buildings grow more complex. Case in point: JLL conducted a study of EPCs for large buildings in the UK, comparing asset scores with actual energy usage. They found no correlation between the two, and therefore- concluded that a label based on actual energy consumption would be more meaningful for large commercial buildings.
What position did Urban Green take?
An earlier version of the law would have required buildings to post asset scores created through a largely untested DOE asset rating tool. Urban Green successfully advocated against this provision, both because the DOE tool is too new and the value of asset ratings is unclear based on EU findings. If the city is going to put a letter grade on a building, it behooves us to ensure the grade is fair and meaningful.
The law instead requires the city to undertake an assessment of the predictive value of energy asset scores in addition to implementing letter grades. So we may yet see a solution that pairs operational and asset ratings for a complete building energy profile.
We also recommended the inclusion of numerical Energy Star grades with letter grades, as well as benchmarking data audits, for the reasons already discussed.
In the years ahead, we’ll be able to see if and how building energy grades impact the real estate market and drive efficiency. No doubt that in this hyper-competitive market, many will strive for A buildings. The degree of impact will depend on how much importance consumers and commercial tenants eventually place on energy grades and convey their concerns to brokers and owners.