The Impact of Building Performance Standards on Asset Value in North America

It’s 2025. 5 years post-Covid. A decade since the Paris Agreement. Right now, building performance standards (BPS) are rewriting the rules of real estate investment, and asset managers can no longer ignore the financial impact of these standards. Regulations like New York City’s Local Law 97, Washington D.C.’s BEPS, and California’s Title 24, BPS are actively reshaping the way that investment risk is analyzed, posing threats to net operating income (NOI), cap rates, and asset liquidity. Asset managers who understand and adapt to BPS now will protect and grow their portfolio value in the largest urban centers. Those who don’t will face rising penalties, declining valuations, and increased risk exposure. In a rapidly evolving market, staying ahead of these regulations is critical for long-term success.

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Why Asset Managers Need to Care about Building Performance Standards

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BPS enforces decarbonization and energy efficiency by requiring buildings to meet specific energy and carbon performance thresholds. Smart managers have realized that compliance isn’t just about avoiding fines; it’s a direct play for value creation. Non-compliance with these standards can result in significant financial penalties while meeting or exceeding these standards impacts key financial metrics:

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1. NOI Protection: Retrofits drive down utility costs, protecting the bottom line.
2. Cap Rate Compression: Sustainable buildings attract better buyers, reducing perceived risk and boosting valuations.
3. Asset Liquidity: Non-compliant buildings struggle to sell, increasing holding risks.

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In short, for those looking to protect and grow value, compliance with BPS is non-negotiable. The asset managers who discover how to effectively leverage these standards will gain a competitive edge.

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The Financial Impact of BPS

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1. Compliance Protects NOI and Asset Value

Non-compliance is expensive. Regulations like NYC’s Local Law 97 levy fines of $268 per metric ton of CO2e above the allowable limits. It’s not a theoretical risk. Building owners are investing in energy upgrades to avoid these fines and stabilize their NOI.

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Failing to comply can also impact valuations. When buyers and investors factor these liabilities into underwriting, it negatively impacts a building’s attractiveness. Compliance ensures predictable operating costs, maintains competitive positioning, and prevents valuation discounts due to regulatory risk.

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Investment Takeaway: Avoiding fines keeps NOI intact and prevents escalating compliance costs from eroding profitability. Proactively investing in efficiency upgrades stabilizes long-term asset value and enhances liquidity in the marketplace.

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2. Retrofits Drive NOI Growth

Meeting BPS requirements avoids penalties and provides an opportunity to boost NOI through energy savings. The US Department of Energy estimates that efficiency upgrades like LED lighting, high-performance HVAC, and insulation improvements can cut energy use by 20-40%. For a 500,000-square-foot commercial building in New York, that translates to roughly $200,000 in annual utility savings.

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Retrofits also reduce maintenance expenses. Upgraded equipment has a longer lifespan and requires fewer emergency (re: costly) repairs. Smart building technology, such as advanced energy management systems, further optimizes efficiency with real-time insights to prevent costly inefficiencies. 

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Investment Takeaway: Lower energy and maintenance costs directly improve NOI, enhancing asset value under standard valuation models. Energy-efficient buildings also offer a hedge against rising utility rates, making these assets more attractive to investors seeking stable cash flows.

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3. Sustainable Assets Command Premium Cap Rates

High-performing buildings, especially those that achieve certifications like LEED or Energy Star, are increasingly in demand. A 2024 JLL report found that green-certified buildings command rent premiums of 6-11% in major North American markets. Tenants want them. Investors prioritize them. The result is higher occupancy rates, stronger NOI, and a corresponding cap rate compression for these assets.

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Institutional investors are increasingly embedding ESG criteria into their decision-making. BPS compliance aligns with these mandates, unlocking access to premium capital sources and reducing financing costs. Green loans and sustainability-linked finance options further incentivize energy-efficient investments.

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Investment Takeaway: Rent premiums boost NOI while reduced vacancy rates lower risk. Green-certified buildings often see more favorable cap rates, resulting in higher asset valuations. Alignment with ESG mandates offers a competitive edge in securing capital.

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Strategies to Leverage BPS for Competitive Advantage

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BPS are fundamentally reshaping real estate investment. Those asset managers who take a proactive stance will protect their portfolio value and gain a competitive edge over those who scramble to meet compliance deadlines. The key is to integrate broader investment strategies now. 

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1. Identify At-Risk Assets: 
   
   • Assess which properties face compliance risks.
   • Calculate potential fines and retrofit costs.
   • Evaluate which assets require capital expenditures to meet upcoming regulations.
2. Integrate BPS Compliance into Financial Planning: 
   
   • Budget for retrofits early to avoid last-minute compliance scrambles.
   • Align capital expenditure plan with BPS deadlines.
   • Consider phased investments to spread out costs and maximize ROI.
3. Leverage Data for Decision-Making:
   
   • Leverage advanced tools to estimate ROI on efficiency upgrades.
   • Model NOI improvements and future-proof asset valuations.
   • Use performance benchmarking to track efficiency gain over time.
4. Communicate Value to Stakeholders: 
   
   • Show investors how compliance efforts protect NOI and enhance liquidity.
   • Highlight ESG alignment to attract capital from sustainability-focused funds.
5. Go Beyond Compliance: 
   
   • Exceed minimum requirements to capture rent premiums.
   • Future-proof assets against tighter regulations down the line.
   • Differentiate properties through sustainability leadership, increasing brand value and marketability.

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How Audette Can Help

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Audette helps North American asset managers navigate BPS by providing property-level decarbonization plans backed by cost analysis, ROI projections, and actionable retrofit strategies. Our platform aligns compliance initiatives with financial goals that ensure stronger NOI, better cap rates, and maximized portfolio value. 

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Seize BPS for what they are; not a burden but an opportunity. Aligning with these standards is a surefire way to future-proof your assets, strengthen financial performance, and gain a competitive edge. Leaning into these changes is good for the world, good for business, and good for future-proofing and growing your portfolio value.

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