Federal Regulation At Its Finest

4th Quarter 2015 Hotline

Market Watch
by Joe A. Hollingsworth, Jr.

In the midst of an energy revolution and where the cost of BTUs are dropping like a rock, the international committee for tree huggers has endorsed a code known as the International Energy Conservation Code. A copy of the map is at Energy Codes

Each of the states are being virtually forced by the federal government to update to this code. The problem with this code in the industrial sector is that the code is not designed to accommodate facilities that are not intended to be a comfortable 72 degrees. The code works fairly well, although it is very, very expensive for office and residential properties. However, in industrial properties, we have everything from an icehouse to a smelter with resulting temperatures in the facilities which are radically different. The IECC only recognizes differences in the application of its standards based on two criteria: 1) geographical climate based on arbitrary political subdivisions; and, 2) building use which is only differentiated into two simple subcategories of residential and commercial. There is no separate provision for industrial or warehousing.

Why does the above matter? The return on investment is virtually nil and in some cases a negative. When you over insulate a building designed to be a smelter, you now have to ventilate or air condition it; therefore, the net use of energy is far greater. We estimate the cost increases to over insulate concrete tilt-up due to the 2012 code alone being adopted will be 7% to 8% increase; and the costs of primarily metal structures will be 9% to 14%.

The smart states are slow to adopt the new energy code and resisting the federal government forcing this code forward. Pennsylvania and Michigan have code authorities that both rejected the 2012 IECC as too costly to justify the significant construction cost increases.

Most of the states have adopted it this past July. All previously issued building permits have a distinct cost advantage as they are presented to the market as a finished product. Regulation does have a cost. Over regulation has a tremendous cost. In this case, it’s not only money; but, it’s costing jobs.
We are just now seeing build-to-suit inquiries from sophisticated companies asking about current building codes and energy codes as they survey various states. Obviously, companies will leave some states for the “not so green” pastures where they can be more profitable.

So, the net result is builders will be more hesitant to speculate on new facilities in the states that have adopted the new code taking away one of the most important resources a community can have to attract new jobs. Existing buildings not required to update the energy code will enjoy an increase in rents over the next couple of years as replacement costs of new energy compliant structures push even higher.

“Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction.” — Scott Kelley, President and CEO, Service Center Metals