Tension Over Municipal Gas Bans Creates Uncertainty for Real Estate Developers

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Municipal-gas-1324724627-300x200On November 15, 2021, the New York City Council approved a bill banning gas hookups in new buildings, making the biggest city in the U.S. the latest in a string of municipalities to prohibit natural gas infrastructure in new homes and buildings. In the two-and-a-half years since Berkeley, California, passed its then-novel municipal ban on new natural gas infrastructure, numerous cities have found themselves at odds with state governments and industry groups on the issue of full electrification in residential and commercial real estate. The resulting disputes, litigation and regulatory uncertainty have created headaches for the real estate industry. Although not all view the restrictions as negative, and many developers have embraced the push for more climate-neutral buildings, these bans introduce complexity to the real estate market, raising additional legal and commercial challenges.

Background
According to the U.S. Environmental Protection Agency, the use of natural gas in homes and businesses accounts for 13 percent of annual U.S. greenhouse gas emissions. For that reason, advocacy groups have pushed cities to prohibit natural gas infrastructure in new construction and encourage full electrification of newly constructed buildings. In addition to New York and Berkeley, cities that have either passed or considered such ordinances include San Francisco, Sacramento, Seattle and Denver, as well as numerous smaller cities. New York City’s newly passed gas ban, in particular, prohibits natural gas hookups in new buildings under seven stories by 2024, and in taller buildings by 2027, but exempts hookups in commercial kitchens.

Legislative pushback, particularly in red states, has been swift and fierce. At least 19 states have enacted laws aimed at preventing local municipalities from enacting gas bans. These state laws—which proponents have called “energy choice” legislation—therefore prevent municipalities from imposing full electrification requirements in new buildings.

States’ energy choice laws may be very broad, potentially implicating municipal ordinances or regulations that do not directly ban natural gas infrastructure. For instance, the city of Lawrence, Kansas, has committed to transitioning to renewable energy sources in all sectors citywide by 2035. However, the Kansas Energy Choice Act, passed in April 2021, broadly prohibits any municipality from passing an ordinance that impairs “an end use customer’s use of a [natural gas or propane] public utility.”  S.B. 24, §§ 1(a)(2), 1(b) (emphasis added). Similarly, Mississippi’s All Fuels Act of 2021 prevents municipalities from passing any ordinance or adopting any policy which “has the effect of prohibiting the expansion, utilization connection or reconnection of a service based upon the type or source of energy to be delivered to an individual customer.” H.B. 632 § 2(1). These broad statutory prohibitions could potentially apply to local clean energy incentives and/or energy efficiency programs passed by cities that impact the use of natural gas, complicating real estate decisions by introducing uncertainty about the validity of other building codes, policies, or incentives which municipalities may institute to reach climate change goals.

Impact on the Real Estate Industry
Some developers say it is unclear whether these restrictions actually increase costs and may even support the natural gas restrictions. Others say they recognize the need for the industry to adopt cleaner practices and. Large property holders may accelerate the industry’s movement away from natural gas—for example, Kilroy Realty, a large and influential developer, has openly stated they want to reduce the total emissions of their portfolio and view electrification as a way to do so. However, many other developers are opposed to such restrictions, arguing that they reduce options for potential customers and residents and add additional costs for users (and thus potentially hurt marketability of new construction). While these developers may support increased building efficiency, promote electrification, and view early adoption as a potential selling point, they object that the reduction in options and increase in costs exacerbate challenges within a market already contending with increasing prices and supply chain issues.

Whether they support or oppose the regulations, though, the differing requirements, restrictions and exemptions cause uncertainty for real estate developers. Some are scrambling to address the new laws that apply to in-progress developments. Others are contemplating development plans given the possibility that new bans may be imposed, or current bans may be overturned. As various restaurant associations have pointed out, the restrictions also reduce the potential pool of tenants of new developments, as some restaurants may avoid spaces that cannot accommodate gas stoves and grills. Similarly, residential developers are faced with the challenge of educating buyers and tenants about electric and induction stoves.

As cities pivot to transit-oriented, mixed-use development and pursue alternative methodologies to reduce carbon emissions from within their jurisdiction, the additional layer of complexity will likely drive away some developers and detract from the cities’ stated goals. Time will tell which cities are able to strike the proper balance.


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