The White House Wants to Modernize Building Codes. Here's What That Could Mean for CRE

The Biden administration issued a fact sheet last week for an “initiative to modernize building codes, improve climate resilience, and reduce energy costs.” For commercial real estate, which faces continued rising construction materials, labor, and land expenses, a big question is how much this might add to project costs, especially as a recurring theme in the document is about raising labor rates, something that many developers and contractors might argue has already happened through labor shortages and market forces.

That buildings have to become more energy efficient is clear. “ESG has gone from being interesting, to nice to have, to need to have to now, in my mind, absolutely table stakes,” CBRE Investment Management CEO Chuck Leitner said in 2021.

“Modern building codes and standards provide a range of smart design and construction methods that save lives, reduce property damage, and lower utility bills—for example, by ensuring that roofs can withstand hurricane winds, that construction materials are resistant to flood damage, and that insulation keeps heating and cooling costs low,” the White House argues.

Which is all well and good, but some experts think the approach may not be the most effective. 

“This is a public policy issue, not an engineering design code issue,” Dr. Scott Lawson, chief risk engineering officer at CRE risk management analytics firm Archipelago, tells GlobeSt.com. “I sat on the committee that recently released the 2022 ASCE design standard for structural design, and was active in their seismic, hurricane and tornado committees. The latest design standards are available, both for life safety and performance-based design. They just need to be adopted by the communities more rapidly. Some communities can take years before they adopt the new design standards.”

There’s also the issue of expense. “The higher performance standards already exist, it is simply up to the communities to determine what level of performance they want to enforce for their community,” Lawson adds. “But you should understand that higher performance means higher construction costs and this is the reason why local officials are often reluctant to adopt anything beyond the minimum design standards.”

The administration speaks of using “$225 million in Bipartisan Infrastructure Law funding for the Department of Energy (DOE) to support implementation of updated building energy codes” but then adds that it also wants to “create good-quality jobs, including through workforce training partnerships and direct support to state and local agencies.” 

However, prices of materials and labor are already sharply up in construction. April’s producer price index showed materials up 15.2% year over year and components, a jump of 26.2%. Government figures for compensation by industry in March (the most recent available) noted a 4% labor cost increase since March 2021.

Additional cost increases from government mandates will likely only further complicate financial pressures on developers. They and CRE investors have been addressing these by pushing further into upscale housing where prices and rents are high enough to provide a sufficient return on investment. As trade group Associated General Contractors notes, bid prices in April 2022 were up 19.9% over the same period the year before.

Adding to costs without somehow helping to ameliorate them will likely mean even less affording housing in a residential market painfully short of units.