An EU Regulation Could Affect US CRE Bank Lending

A new EU carbon emissions directive — part of an expanding set of environmental regulations — has large banks rethinking how to value their commercial real estate loan portfolios. This is a global trend that could expand to U.S. banks, whether through international financing of EU projects or American adoption of similar regulations.

The intent of the Energy Performance of Buildings Directive (EU/2024/1275) is “to achieve a fully decarbonised building stock by 2050.” The European Commission calls buildings the “single largest energy consumer in Europe” at 40% of energy used. About 85% of the buildings in the EU were built before 2000 and three-quarters of them have “poor energy performance,” data from Eurostat energy balances and EEA Greenhouse Gas Inventory, 2023. And a third of the EU’s energy-related GHG emissions come from buildings.

“Acting on the energy efficiency of buildings is therefore key to saving energy, reducing bills for citizens and small enterprises, and achieving a zero-emission and fully decarbonised building stock by 2050,” the European Commission wrote.

The revised Energy Performance of Buildings Directive (EPBD) requires reaching emission reductions of at least 60% of 2015 levels in the building sector by 2030. Then the second stage is zero-emission building stock by 2050. There is also a “binding target to decrease the average energy performance of the national residential building stock by 16% by 2030 in comparison to 2020, and by 20-22% by 2035, based on national trajectories.” Fossil fuel boilers have to be phased out by January 1, 2025, solar has to be included on new buildings (like California requires), collection of building data, increased rollout of EV charging stations, and more.

Directives do allow different countries to decide which renovation measures are “best-suited to their specific national context.” Countries can also establish exemptions for building categories.

As Bloomberg writes, “At some of the world’s biggest banks, loans to commercial real estate face new litmus tests that promise to shape the sector’s access to financing.”

What worries the banks is how much investment it will take to upgrade buildings enough to meet the timeline of requirements and what the impact on their portfolios will be.

“BNP Paribas SA, the European Union’s largest bank, now targets cuts that could be as deep as 41% of the emissions intensity of its commercial real estate portfolio through 2030,” Bloomberg wrote. “Others, including Banco Santander SA, Barclays Plc, ING Groep NV and NatWest Group Plc, have either already taken — or are exploring — similar measures.”

Any bank in the U.S. with a portion of its CRE lending in the EU already must be concerned about the capital borrowers will need to bring their properties up to standard, only adding to the burden of heavy refinancing costs. Then there are two questions. One, if and when federal and state regulators in the U.S. will impose similar measures. Two, whether international investors will want to see similar standards.