IN FOCUS
The Environmental Protection Agency’s recent designation of perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS) as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) will have a significant impact on real estate transactions, creating uncertainty in the industry and affecting due diligence for current property owners, prospective buyers, and developers. The new rule, which took effect July 8, 2024, gives EPA more authority to remediate PFAS-contaminated properties and recover cleanup costs from responsible parties.
Because PFAS are so ubiquitous in the environment and can exist almost anywhere, any property could be affected by the new designation. CERCLA is a strict liability statute and applies retroactively. Liability for environmental contamination, including PFOA and PFOS, is based solely on property ownership without regard to fault or negligence. Therefore, under CERCLA, former and current property owners and other potentially responsible parties can be held strictly liable for the total cost of cleaning up hazardous substances, even if multiple parties are responsible.
This new designation means higher investigation and remediation costs, increased potential for litigation and lending uncertainty, and a greater demand for environmental insurance to mitigate risk.
Environmental Due Diligence Considerations
Before the final rule, ASTM’s E1527-21 Standard Practice for Phase I Environmental Site Assessments (Phase I ESAs) did not include PFAS within its scope because they were not designated as CERCLA hazardous substances. Despite this, in certain circumstances, assessments were recommended for these compounds in anticipation of the potential designation. Now that PFOS and PFOA are designated as CERCLA hazardous substances, they must be evaluated within the scope of E1527 Phase I ESAs.
Therefore, assessments should now include PFOS and PFOA, particularly for properties with a history of PFAS use, or near known contamination sites. However, if further testing is indicated, soil sampling can be costly, and sellers may be hesitant to permit it. The presence of PFOS or PFOA may trigger reporting obligations and can lead to federal and state liability issues, potentially deterring prospective buyers from completing transactions, making effective risk management crucial.
Liability Considerations and Enforcement Discretion
Concerned stakeholders filed more than 60,000 comments on the proposed rule,
largely due to the high costs of PFAS cleanups and the potential for litigation over contamination. In response, EPA released an enforcement discretion policy shielding “passive receivers” from Superfund liability. These efforts haven’t been enough to assuage concerns, and many in the regulated community want formal statutory liability protections. The U.S. Chamber of Commerce and two other trade groups have also challenged the hazardous substance designation in court.
Without formal liability exclusions, owning a property with PFOA or PFOS contamination or unearthing these substances during environmental due diligence could delay or completely upend real estate transactions.
Uncertainty in Real Estate Transactions
There is significant uncertainty for parties acquiring property that may have PFOA and PFOS contamination, stemming from both the new designation and lack of cleanup standards for PFOA and PFOS to meet legal remediation obligations. Currently, there's a patchwork of state standards, health advisories, and federal maximum contaminant levels for some PFAS, often regulating PFOA and PFOS at parts-per-trillion levels, complicating investigation and remediation. Other reasons for this uncertainty are:
- The science of remediating and treating PFAS in soil and groundwater and understanding PFAS exposures and pathways is still evolving.
- It’s very difficult and expensive to remove PFAS from the environment given the extent of PFAS contamination across the country and ineffective cleanup technologies (the Bipartisan Infrastructure Law dedicated more than $5 billion to clean up legacy pollution at Superfund and brownfield sites, including PFAS).
- Even prior to the final rule, EPA had announced it planned to reopen Superfund cleanups due to PFAS contamination. In light of the new rule, this policy may significantly increase financial liabilities for commercial real estate and environmental cleanups at “closed” sites where cleanup efforts were completed.
Reassess Strategies to Move Deals Forward
In light of the recent designation of PFOA and PFOS as CERCLA hazardous substances, environmental due diligence and risk management strategies are more crucial than ever. Having a good team in place – including attorneys, consultants, and insurance professionals – can help you evaluate any PFAS concerns, consider how to address PFAS in purchase and sale agreements, and keep real estate deals moving forward.
To learn more, join us Wednesday, July 31 for an upcoming webinar on this topic. You can register here.
CRE MARKET UPDATE
The Latest Market Updates in the U.S. Commercial Real Estate Industry
Q1 2024 Saw Less Steep Decline in Investment Volume
According to CBRE Research, U.S. commercial real estate (CRE) investment volume totaled $71 billion in Q1 2024, reflecting a 19% decline compared to the same period last year (Fig 1). This decline is less severe than the 40% drop in Q4 2023. Over the past four quarters, the total investment volume fell by 46% year-over-year to $339 billion, the lowest since Q2 2013. Notably, entity-level investment volume increased by 34% year-over-year to $12 billion in Q1, ending a streak of five consecutive quarterly declines. This rise was mainly driven by the Healthpeak Properties merger with Physicians Trust Realty. Single-asset investment volume decreased by 23% year-over-year to $51 billion, while portfolio volume fell by 35% to $9 billion.
The multifamily sector led with $20 billion in Q1 volume, followed by industrial and logistics at $16 billion, and retail and office at $15 billion each. Retail investment volume saw a 15% year-over-year decline to $15 billion. Office investment volume would have decreased without $5.3 billion in mergers and acquisitions activity (Fig 2). Multifamily and industrial properties are expected to remain the most attractive for investors. Despite the overall decline in volumes, the relative resilience in retail investment highlights its improved standing among investors, even in a challenging capital markets environment.
On a trailing four-quarter basis, New York was the top market with $33 billion in volume, followed by Los Angeles with $26 billion and Dallas with $18 billion (Fig 3). Private investors accounted for $38 billion, or 54% of Q1 investment volume. Private and cross-border investors were net buyers, while institutional and REIT investors were net sellers. Inbound cross-border investment decreased by 58% year-over-year in Q1 to $4 billion (Fig 4).
To view larger images and dive deeper into the data, click on the images above.
Latest Developments
ICYMI: EPA Guidance Cuts Lead Screening Levels in Half for Residential Sites
Earlier this year, EPA updated its guidance on the recommended regional screening and removal management levels at all residential sites with lead contamination subject to CERCLA response and RCRA corrective actions. The screening levels were lowered from 400 parts per million (ppm) to 200 ppm after the Centers for Disease Control and Prevention lowered the reference value it uses to identify children with high levels of lead exposure from 5 ug/dl to 3.5 ug/dl in 2021.
Scope of Residential Sites Affected
“Residential” sites include “any areas where children have unrestricted access to lead-contaminated soil which include, but are not limited to, properties containing single- and multi-family dwellings, apartment complexes, vacant lots in residential areas, schools, daycare centers, community centers, playgrounds, parks and other recreational areas and green ways.”
As EPA acknowledges in the new guidance, a “significant number of residential properties could undergo evaluation and cleanup because of this guidance.” Note that screening levels are not cleanup levels. While EPA uses the screening levels to identify areas that might need additional investigation, EPA makes cleanup decisions based on site-specific risk factors and conditions.
Impact on Superfund and Brownfield Sites
The new guidance is already in effect and can trigger the reopening of Superfund and brownfield sites where lead contamination has already been or is being treated. Reopening previously closed sites can have significant logistical and financial ramifications.
Understanding how EPA utilizes screening levels and how they might affect a specific property is important to consider during the environmental due diligence process.
Exploring the Future of Climate Risk Assessment in CRE
A recent ERIS Risk-E-Business podcast examined climate risk assessment and its increasing importance in environmental due diligence. It featured speakers from our strategic partner, ClimateCheck.
ClimateCheck founder and CEO Cal Inman explained how the company assists clients in understanding and mitigating climate-related hazards, with a focus on the commercial real estate sector. The extensive data sourced from global climate models helps users evaluate risks such as floods, wildfires, and extreme temperatures. The data itself is queried on the individual parcel, similar to what is done for an environmental site assessment. “Our goal is to help folks understand, assess, and protect themselves against climate-related hazards," Inman said.
Transition Risk, Physical Climate Risk
Nicole Engels, Chief Growth Officer at ClimateCheck, described the two primary categories of climate risk: “We usually divide climate risks into two buckets: transition risk, which deals with energy and greenhouse gases, and physical climate risks, which arise from extreme weather events like floods and wildfires." She also discussed the evolving dynamics in the industry, where risk is shifting from insurers to lenders and investors.
Consultants' Vital Role in Assessments
The vital role of environmental due diligence consultants was also discussed, particularly their role in analyzing site-specific risks and developing adaptation plans, as they increasingly use climate risk data. “The volume and demand for this kind of information and these services, especially for consultants, is definitely going to grow significantly in the next 6 to 18 months," Engels said, with risk management and regulatory disclosures two primary drivers for climate risk assessments. “I think we'll continue to see this trajectory of adoption amongst all sorts of groups within the investor space … particularly lenders," Inman added.
To learn more about climate risk data and assessment, you can listen to the full podcast here.
State Developments
Oversight Change to California’s Unified Program
This spring, California’s Certified Unified Program implemented a series of amendments, which took effect July 1, 2024. The Unified Program consolidates administration and enforcement of environmental programs related to hazardous waste, hazardous materials, and emergency management across local regulatory agencies for consistency in permitting, inspections, and enforcement. Many amendments in this rulemaking are related to the change in oversight authority transferred to CalEPA from the California Governor's Office of Emergency Services and updates to the program’s administrative rules.
CalEPA now oversees the Hazardous Materials Business Plan (HMBP) and California Accidental Release Prevention (CalARP) elements of the program. Accordingly, the amendments moved those rules, appendices, and tables to a new Division of Title 19, Division 5. The remaining amendments are in Title 27, Division 1, which governs the California Unified Program Agency (CUPA) and runs the program. These changes include modifications to definitions, the addition of “incidental finding” (Article 2), updates to rules related to fees, training, and educational requirements (Article 5), and clarifications on CUPA self-auditing and reporting (Article 6).
California Adopts EPA’s Generator Improvements Rule
Effective July 1, 2024, California’s Department of Toxic Substances Control (DTSC) adopted the federal EPA’s Generator Improvements Rule (GIR). The changes significantly amend, recodify, and restructure rules applicable to small quantity generators, very small quantity generators, and large quantity generators in relation to acute hazardous waste, extremely acute hazardous waste, and non–acute hazardous waste.
The provisions DTSC included in the rulemaking are all more stringent than the provisions they replace, which made their adoption by the department mandatory. These include 1) a new generator re-notification requirement, 2) new marking and labeling requirements for containers and tanks, 3) new requirements for closures and satellite accumulation areas, and 4) new spill procedure-related requirements for small and large quantity generators. The new structure now mirrors the federal rule for consistency.
Illinois Oil Wells Affected by New Boundaries
The Illinois Department of Natural Resources created a path to relief, effective March 27, 2024, for owners and operators of certain noncompliant, nonconforming oil production wells. The amendments apply to pre-existing wells, originally drilled before October 25, 2021, near new lease external boundary lines because of the department’s change in its 2021 well spacing rules, which eliminated tiered acreage permitting. Permits to drill or deepen oil production wells now have a single location size of 10 acres. Unchanged is the 330-foot minimum distance from any other lease external boundary lines.
As oil well permits renew, under the revised spacing scheme, new lines can run too close to existing wells. This new rule allows revision to the requirements of their drilling unit to bring them into compliance. A well on a boundary line can be attributed to the permit of an abutting well of the petitioner’s choosing, or a well located less than 10 feet from the boundary line can get a waiver and be deemed compliant. The petition costs $400.
Thank you to STP ComplianceEHS for contributing the articles under State Developments in this edition.
The Why and How of Background Threshold Values
In a recent webinar, Kenneth Tramm, PhD, PE, PG, CHMM, gave an engaging presentation that provided a comprehensive explanation of why background threshold values are so important during the risk assessment process. As one of the foremost experts on the subject, attendees were clearly impressed by his knowledge and clarity of explanation: “Excellent presentation…very well done!”
Watch the webinar and access the slide deck here to get best practices and solutions to improve your future site investigations and risk assessments.
LENDERS' CORNER
The Impact of Climate-Related Events on CRE Insurance Costs
It isn’t breaking news to report that extreme weather events are on the rise. In fact, the U.S. experienced more billion-dollar natural disaster events in 2023 than in any other year on record. As a result, commercial and residential real estate insurance rates have risen to unprecedented levels.
States like Texas, Florida, and California, which are all considered to be higher-risk states in terms of climate-related risk, have seen insurance costs increase by 31% year-over-year and are up an alarming 108% in the past 5 years. Moody’s estimates that insurance rates will increase 13.5% in 2024.
Last year, the 28 separate billion-dollar natural disaster events accounted for nearly $93B in recovery costs. This led some insurers to increase rates, reduce coverage, or leave states entirely. State Farm, one of the largest insurers in the country, decided to no longer write new homeowner’s policies in California.
With the frequency and severity of these extreme weather-related events continuing to rise, major insurers across the U.S. are pressuring state regulators to approve large rate increases that would discourage insurance companies from exiting higher-risk states.
The high rates have put additional stress on property owners to adapt quickly. Some have decided to simply pay the higher premiums, while others opt to go uninsured. Other options have also emerged. Several insurance companies are encouraging their policyholders to take the initiative to help mitigate the risk.
There are several strategies that business owners can use to work with insurance companies to reduce risk, lower their premiums, and access better coverage. Conducting regular risk assessments is a great start. By understanding the property and location-specific risks, owners can take measures to make the property more resilient. These tactics range from the installation of early warning and monitoring systems to the use of more robust building materials.
It is important to tailor these measures to the specific property and consult with a risk management professional or insurance expert for guidance.
ASTM’s Standard Guide for ESG Disclosures Now Available
ASTM recently finalized its “Standard Guide for Environmental, Social, and Governance (ESG) Disclosures Related to Climate and Community."
Developed by ASTM Committee E50’s Subcommittee E50.07 on Climate and Community, the new standard guide provides a comprehensive overview of ESG disclosure frameworks applicable to various organizations, detailing the history, purpose, components, and challenges of these disclosures. It highlights regulatory developments in the U.S. and internationally and features standardized frameworks such as GRI, TCFD (now part of IFRS), and the Stakeholder Capital Metrics framework. It also includes standardized terminology for ESG disclosure related to climate and community.
Intended as a resource for a wide range of stakeholders, including industries, regulators, consultants, investors, and community constituents, the guide emphasizes the importance of professional judgment, reliable data, and clear documentation in ESG disclosures. Users are encouraged to use the guide alongside regulatory requirements to enhance their understanding and application of ESG frameworks in both regulated and voluntary contexts.
ASTM Releases New Standard Guide on Determining PFAS In Indoor Air
Measuring per- and polyfluoroalkyl substances (PFAS) in indoor air is critical for accurate exposure analysis and risk assessments, but it is an evolving practice. Various sources, including consumer products, building materials, food packaging, and outdoor air, can introduce PFAS into indoor air. While standards exist for sampling PFAS in water and soil, sampling PFAS in indoor air has different requirements and challenges because analytical methods vary between PFAS compounds. To address this issue, ASTM’s Committee D22 on Air Quality developed a new standard guide that will help parties identify PFAS in the indoor air environment. Published in May 2024, the Standard Guide for Determination of Airborne PFAS in the Indoor Air Environment (ASTM D8560-24) covers eight different PFAS groups and provides “practitioners, regulators, and testing companies a roadmap to the appropriate collection and analysis techniques for specific PFAS found in indoor air,” the committee says. “The new standard provides an overview of all the different approaches that have been used for measuring different PFAS types.”
Featured ERIS Data Set
Historical Aerial Photos
Aerials provide vital information for a multitude of land use management and research purposes, including agricultural, forestry, geology, conservation, urban planning, and environmental assessment. Specifically for environmental due diligence, aerial images play an important role in the historical review component of a Phase I environmental site assessment. Along with topographic maps, fire insurance maps, and city directories, historical aerial imagery aids environmental professionals in identifying a property’s past and current uses, as well as, past, current, or potential contamination risks.
ERIS has an impressive collection of high-quality Historical Aerials from multiple sources nationwide. Each site is carefully reviewed to ensure the best coverage is provided based on this vast in-house collection. Most of the aerials have a scale of 1” = 500’. ERIS’ average decades package includes 12-plus photographs, typically ranging from the 1930s or 1940s to the near present. It also offers several options for delivery, including standard PDFs, JPEGs, and GeoTiffs, all of which are accessible through ERIS Xplorer.
A recent enhancement for ERIS aerials is the ability to view and analyze multiple and enhanced images for large custom areas and linear projects seamlessly within ERIS Xplorer. As always, users can overlay images effortlessly and use the Opacity and Transition tools to assess environmental changes and risks with accuracy regardless of property size. Learn more about this enhancement and how these images can be integrated directly into your workflow.
Spotlight On
Special Profile: Amy Wearden, Director, Aerials
Amy joined the ERIS team in 2020 with over 15 years of experience producing a multitude of due diligence products during her time at GeoSearch. After working with fire insurance and topographic maps, among other deliverables, she realized that she favored aerial photography.
At ERIS, she manages our talented aerials team, which collectively has over 100 years of experience in the field of aerial imagery. With input from her team, other ERIS departments, and customers, she leads continual improvements and enhancements to workflow tools to deliver the highest quality products for customers.
Amy says, “ERIS has a strong foundation in product development. It has been exciting that ideas for improvement can materialize with the help of departments working collaboratively.” About her passion, “I am still amazed that after all this time, I find myself learning new things about aerials. Every new source, new archive, and uncovering differences in cataloging is exhilarating.”
Outside of work, Amy spends time chauffeuring her 15-year-old daughter to softball team events and cooking for friends and family, with brunch being a favorite. She loves traveling abroad, especially off the beaten path. Recent family trips include Havasu Falls, Arizona, and Peru. She is currently researching a family trip to Cambodia for November of this year.
Upcoming Events
Jul 25, Phoenix, AZ: Join Melissa Perkins-Nelson at EPIC’s Do-Duck-athon.
Jul 31, Virtual: ERIS Webinars presents New CERCLA PFAS Designations: Strategies for Managing Risks and Moving Deals Forward.
Aug 6, Point Pleasant Beach, NJ: Join Ashley Miller and Noel Roman at LSRPA's Battle at the Beach Cornhole Tournament.
Aug 20-21, Corvallis, OR: Join Maggie Losoya at the Oregon Brownfields Conference.
Aug 21-23, Jekyll Island, GA: Join Jeanie Bunt at the Georgia Environmental Conference.
Sep 10, Westminster, CO: Join Melissa at the CEMS 2024 Fall Conference.
Sep 10-12, Corpus Christi, TX: Join the ERIS Team at the TxDOT Environmental Conference.
Sep 11-12, Virtual: Join the ERIS Team online at the EBA Annual Virtual Conference.
Oct 6-11, Orlando, FL: Scott Davis will attend the ASTM E50 Committee Week.
Oct 24, Salt Lake City, UT: Join Melissa at RemFest.