California’s New Warehouse Emissions Law Will Be a Challenge for CRE

Surveys and studies are showing chances of a strong CRE rebound over the next 12 months, with logistics properties being one of the stronger growth areas.

That may be a good news/bad news scenario for the industry in Southern California because of the new Warehouse Indirect Source Rule adopted by the South Coast Air Quality Management District, which serves large portions of Los Angeles, Orange, San Bernardino, and Riverside counties.

Warehouses of more than 100,000 square feet must “directly reduce nitrogen oxide (NOx) and diesel particulate matter (PM) emissions, or to otherwise facilitate emission and exposure reductions of these pollutants in nearby communities.”

The release quoted Wayne Nastri, South Coast AQMD’s executive officer: “About half of the air pollutants that contribute to smog come from the goods movement industry, with the largest source being heavy-duty trucks heading to warehouses across Southern California.”

A menu-based points system requires operators to collect an annual number of points though such actions as “acquiring and using natural gas, Near-Zero Emissions and/or Zero-Emissions on-road trucks, zero-emission cargo handling equipment, solar panels or zero-emission charging and fueling infrastructure, or other options.”

The rule doesn’t come from nowhere. Southern California has the “nation’s largest concentration of warehouses,” according to the New York Times and this is “a precedent for regulating the exploding e-commerce industry, which has grown even more during the pandemic and has led to a spectacular increase in warehouse construction.”

Driving the rule are “2023 and 2031 federal deadlines for reducing ozone that carry sanctions if they’re not met,” according to the law firm Stone Dean.

The region has notoriously poor air quality. For example, even with the pandemic, 2020 was one of the smoggiest years in the history of Los Angeles, according to the Los Angeles Times.

The warehouses face an acute example of an issue CRE companies will need to address: quantitative metrics on climate risk to satisfy investors and, now, regulators.

One of the questions has been how a building owner gets climate impact information from tenants to then roll up with its own. Under this new Southern California rule, warehouse operators seem to become responsible, at least in part, for the types of trucks that appear at their facilities, although they likely do not own the vehicles. The emphasis on types of vehicles sounds as though warehouses will have to require their clients and transportation companies to move to less polluting vehicles if the warehouses cannot gain enough from cargo-handling equipment, solar panels, and more.

While the largest warehouses are locations of the greatest density of population, there’s the open question of at what point smaller warehouses might also have to comply, if the improvements through this rule are not enough to meet federal standards.

Also, while the regional may have the highest concentration of warehouse space in the country, might major metropolitan areas in other parts of the country face similar requirements in the future? Such locations as the areas around Chicago, New York, northern New Jersey, Miami, and other centers of commerce and cross-border transit would seem ripe for future ruling.