Buildings Are Empty, Now They Have to Go Green
Rising rates, falling occupancy and new carbon taxes hit building owners
4 min
Their buildings echo with empty offices, their borrowing costs have soared, and now owners of buildings in cities across the U.S. are facing a new tax on their carbon emissions.
Cities are toughening their climate standards and are beginning to tax buildings that don’t meet the new requirements. Landlords are left with a difficult choice between paying for expensive upgrades to reduce emissions or paying the tax.
In New York City, which has one of the first and most expensive carbon taxes, landlords of large buildings (including owners of residential buildings) beginning next year will face a $268 fine for every ton of carbon dioxide emitted beyond certain limits.
“If you’re under cash flow pressure due to lack of tenancy, adding a tax on top of that isn’t a good sign,” said Bank of America CMBS Strategist Alan Todd. “It would be potentially pretty painful.”
The Wall Street Journal tallied the potential impact of the taxes on buildings that borrowed funds from Wall Street investors by issuing mortgage-backed bonds. The Journal also looked at properties owned by three of the country’s largest publicly traded landlords. The tax bill for 128 properties analyzed could add up to more than $50 million during the first five-year enforcement period, which begins in 2024, according to the Journal’s analysis of Department of Building data and financial disclosures.
Fines for the same buildings could jump to $214 million if their landlords don’t meet the city’s emissions standards during the period between 2030 and 2034, the Journal’s analysis shows. The Real Estate Board of New York, an industry group, and engineering consulting firm Level Infrastructure said that more than 13,000 properties could face fines totaling about $900 million annually.
Buildings are by far New York City’s largest source of carbon emissions, which come from the fossil fuels used to heat and to provide air conditioning for them.
More than a dozen local laws regulating buildings’ carbon footprints from Chula Vista, Calif., to Boston have gone into effect since 2021 or will come online by 2030, according to carbon accounting firm nZero. Compliance also begins next year for buildings in Denver, while St. Louis properties face penalties beginning in 2025. Four other laws from Cambridge, Mass., to Reno, Nev., will go into effect in 2026.
The impact of the emissions laws initially will be small but will come on top of other, more costly problems faced by landlords. The law, based on New York’s current projections, would cost the 51-story skyscraper at 277 Park Ave. in Manhattan just $1.3 million in fines in 2024. The revenue of the building, owned by private landlord The Stahl Organization, was $129 million last year.
The building’s vacancy rate has jumped from about 2% in 2014 to 25% currently, according to commercial property data provider Trepp. JP Morgan Chase accounts for about half of the building’s space, but its lease expires in 2026. The bank is constructing a nearby tower that aims to produce net-zero carbon emissions and is scheduled to be completed in 2025. It wouldn’t comment on its leasing plans.
Stahl’s $750 million mortgage on the building is scheduled to mature next August. Stahl is now faced with potentially higher rates if it takes out a new loan, the loss of its biggest tenant and fines for carbon emissions.
Stahl declined to comment.
Shares of the three big landlords whose properties were analysed by the Journal are trading at near historic lows. Shares of Vornado Realty Trust and SL Green, each of which has about 30 New York City office buildings, are down by roughly two-thirds since before the pandemic. Boston Properties Inc., one of the country’s largest office building owners, shares are down more than 50% from before the pandemic.
SL Green faces a potential carbon-tax liability of up to $6.6 million by 2030, according to the Journal’s analysis. The company declined to comment. More than 80 other properties financed using mortgage-backed bonds reviewed by the Journal could have a nearly $27 million carbon-tax bill by 2030.
The costly upgrades needed to comply with the law will hit some properties when they are on the block or when they are trying to attract tenants, who know they will effectively be paying for any improvements. “Tenants are looking to be in a building that is greener,” said Brendan Schmitt, partner in law firm Herrick’s Real Estate Department.
The new laws coincide with big government spending on climate. Landlords can get generous subsidies for projects that reduce emissions.
Ironically, landlords are also benefiting from emptier buildings, which burn less fossil fuel. New York City says about 11% of buildings covered under the law are projected to face penalties using the latest energy data, down from 20% using earlier data.
The city’s law was passed in 2019 and included a $268 fine for every ton of CO emitted by buildings over 25,000 square feet exceeding limits. Landlords will be required to report emissions to city officials starting in 2025 with penalties based on 2024 energy use.
Some big landlords are facing fines in multiple jurisdictions including Boston Properties, which will likely get hit on properties it owns in Boston, New York and Washington, D.C. The company’s eight New York City offices could face a $2.3 million dollar tax bill by 2030, according to city data.
Ben Myers, senior vice president of sustainability at Boston Properties, said complying with local building standards is important. “We have made energy efficiency a priority,” he said.
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As housing drives wealth and policy debate, the real risk is an economy hooked on growth without productivity to sustain it.
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As housing drives wealth and policy debate, the real risk is an economy hooked on growth without productivity to sustain it.
3 minFor decades, Australia has leaned into its reputation as the lucky country. But luck, as it turns out, is not an economic strategy.
What once looked like resilience now appears increasingly fragile. Beneath the surface of rising property values and steady headline growth, the Australian economy is showing signs of strain that can no longer be ignored.
Recent data paints a sobering picture. Australia has recorded one of the largest declines in real household disposable income per capita among advanced economies.
Wages have failed to keep pace with inflation, meaning many Australians are working harder for less. On a per capita basis, income growth has stalled and, at times, reversed.
And yet, on paper, things still look relatively solid. GDP is growing. Unemployment remains low. But that growth is increasingly being driven by population expansion rather than productivity.
More people are contributing to output, but not necessarily improving living standards.
That distinction matters.
For years, Australia’s economic success rested on a powerful combination: a once-in-a-generation mining boom, a credit-fuelled housing market, strong migration and a property sector that rarely faltered. Between 1991 and 2020, the country avoided recession entirely, building enormous wealth in the process.
But much of that wealth is tied to property. Around two-thirds of household wealth sits in real estate, inflated by leverage and sustained by demand. It has worked, until now.
The problem is the supply side of the economy has not kept up.
Housing supply is falling behind population growth. Rental vacancies are near record lows.
Construction firms are collapsing at an elevated rate. At the same time, massive infrastructure pipelines are competing with residential projects for labour and materials, pushing costs higher and delaying delivery.
The result is a system under pressure from all angles.
Despite near full employment, productivity growth has stagnated for years. In simple terms, Australians are putting in more hours without generating more output per hour. The economy is running faster, butgoing nowhere.
Meanwhile, government spending continues to expand. Public debt is approaching $1 trillion, with spending now accounting for a record share of GDP.
The gap between spending and revenue has been filled by borrowing for decades, adding further pressure to an already stretched system.
This is where the uncomfortable question emerges.
Has Australia become too reliant on a model driven by rising property values, expanding credit and population growth?
As asset prices rise, households feel wealthier and borrow more. Banks lend more. Governments collect more revenue. Migration fuels demand. The cycle reinforces itself.
But when productivity stalls and debt outpaces real income, the system begins to depend on constant expansion just to stay stable.
It is not a collapse scenario. But it is not particularly stable either.
Nowhere is this more evident than in housing.
The National Housing Accord targets 1.2 million new homes over five years, yet current completion rates are well below that pace. With approvals falling and construction costs rising, the gap between supply and demand is widening, not narrowing.
Housing is also one of the largest contributors to inflation, with costs rising sharply across rents, construction and utilities. Yet the private sector, from small investors to major developers, is struggling to make projects stack up in the current environment.
This brings the policy debate into sharper focus.
Tax settings such as negative gearing and capital gains concessions have undoubtedly boosted demand over the past two decades. But they have also supported supply. Removing them may ease prices briefly, but risks deepening the supply shortage over time.
That is the paradox.
Policies designed to make housing more affordable can, in practice, make the shortage worse if they discourage development. The optics may appeal, but the economics are far less forgiving.
It is also worth remembering that most property investors are not institutional players. The majority own just one investment property. They are, in many cases, ordinary Australians using real estate as their primary wealth-building tool.
Undermining that system without replacing it with a viable alternative risks unintended consequences, from reduced supply to higher rents and increased inflation.
So where does that leave Australia?
At a crossroads.
The country can continue to rely on population growth and rising asset prices to drive economic activity. Or it can shift towards a model built on productivity, innovation and sustainable growth.
The latter is harder. It requires structural reform, long-term thinking and political discipline.
But it is also the only path that leads to genuine, lasting prosperity.
The question is no longer whether Australia has been lucky.
It is whether it can evolve before that luck runs out.
Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.
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