This article appeared in the Fall issue of Urban Land on page 220.
Diversity is best defined in one of two ways. Inherent diversity relates to built-in characteristics, such as age, gender, race, and disability. Acquired diversity is derived from the sum of one’s experiences, such as an appreciation for a foreign culture developed as an expatriate during a professional assignment abroad. The combination of inherent and acquired diversity leads to diversity of thought, unlocking innovations that are inaccessible in a homogeneous working environment. Corporate diversity consultant Selena Rezvani notes, “Diversity of thought yields a kind of positive friction from varying approaches, training, and mind-sets.”
Several organizations have investigated the impact and benefits of commitment to diversity in the workplace. Research by management consultant McKinsey & Company concludes that diverse teams are more likely than others to look deeper into the actions of their peers and highlight their biases, sharpening workplace awareness and skills as a result. Diverse thought also promotes creativity and innovation; a variety of experiences, perspectives, and opinions lead to organic ideas that a uniform environment could not inspire. In addition, eliminating the necessity for assimilation or “fitting in” allows every employee to direct his or her full attention and effort toward creativity and innovation. Finally, diverse teams appeal to diverse clients and customers, creating access to previously untapped marketplaces, improving corporate images, and increasing employee satisfaction.
The Yield on Diversity
Once an organization has fully committed to creating diversity, it is likely to see improved performance as well as an increased ability to attract, develop, and retain talent from a broader pool. According to a 2015 report from McKinsey, gender and ethnically diverse teams are respectively 15 percent and 35 percent more likely to perform above the national industry median. The National Association of Investment Companies also reports that “female representation in top management leads to an average increase of $42 million in firm value,” and that diverse firms “outperformed the median Cambridge U.S. Private Equity funds during a majority of vintage years.”
An article released by the Brookings Institution in September 2018 and based on data from the U.S. Census Bureau projects that the United States will become minority white by 2045. As the demographics of the country change, the workforce profiles of domestic industries will inevitably change as well. Nevertheless, many sectors have proved resistant to becoming early adopters of the shift toward diverse teams that reflect the rapidly changing national demographics. Investment management is notably among those resisting.
While extensive research concludes that diversification is among the most enduring principles of sound investment management, a report published by the CFA Institute Research Foundation earlier this year states that “[diversification], and the positive friction that it yields, is remarkably absent from team construction across all spectrums of the investment profession.” This includes senior leadership as well as ownership of investment firms, as evidenced by the mere 1.1 percent of assets currently under management globally that are managed by women- and/or minority-owned firms.
The commercial real estate (CRE) industry is not immune to this trend. In The Diverse Asset Management Project Firm Assessment, written by Bella Research Group and the Knight Foundation, researchers determined that only 0.7 percent of the 889 real estate investment management firms in their data set were women-owned, and a mere 2 percent were minority-owned.
Historical Challenges in the CRE Industry
What is preventing CRE firms across the country from embracing the opportunity that arises from increased diversity? Executives suggest that the industry has been slower than others to promote diversity due to the historical lack of equity investment and firm ownership among minorities. Commercial real estate is broadly viewed as a legacy industry in which family connections or previously established networks are often the determining factors for success. Without these advantages or exposure to the industry, minorities are unlikely to pursue careers in such unfamiliar territory.
There has been little improvement in gender and racial diversity within CRE over the last three decades. For the minorities and women who pursue CRE careers, the pathway to executive leadership is a lonely and difficult one. These compounded challenges that are presented to women and minorities by the CRE industry ultimately turn away many of the few who initially chose to face them as they opt for industries that offer a clearer path to advancement.
In contrast to commercial real estate, other industries have made strides with diversity over the past 40 years. By way of example, Harvard Business School and the Wharton School at the University of Pennsylvania made concerted efforts in the 1970s to enhance their pipelines of domestically diverse students. As a result, the business sector has grown to reflect a more significant presence of diverse teams and managers. A 2016 Forbes article describes how one executive approaches workplace diversity: “As a tax partner at Deloitte Tax, Jorge Caballero takes responsibility for developing a more inclusive workforce and advancing more diverse leaders into senior leadership roles where they can have more of an impact and greater influence. ‘Diversity plays a critical role in everything that we do, including the diversity of thought that we bring to serve our clients,’ says Caballero. Two-thirds of our new hires last year were women and minorities, and I can’t help comparing that to 36 years ago when I was but one of one minorities in my starting class. That’s a huge demographic shift and you have to be prepared to retain those individuals by developing them, providing the right mentorship and sponsorship, and helping them advance into leadership roles. In our case, that ultimately means promoting them into the partner and director ranks.”
White Men Hold More Than 75 Percent of U.S. CRE Senior Leadership Positions
Unfortunately, the broader increase in diversity across the business sector has not yet been reflected in the CRE industry. CRE opportunities are extremely difficult for qualified diverse candidates to access, from entry-level roles through senior leadership positions. NAIOP–the Commercial Real Estate Development Association used data from the U.S. Equal Employment Opportunity Commission as the basis for its Diversity Report, published in 2013, which focuses on employment in the commercial real estate industry. The data show that more than 75 percent of senior executive jobs within the CRE industry nationwide were held by white men. In comparison, 1.3 percent were held by black men. White women were highly under-represented, holding only 14.1 percent, and nonwhite women held less than 1 percent of senior executive jobs. “Among persons employed in commercial real estate disciplines, being a minority or being a woman is a significant barrier to professional advancement,” the report says. “Being both a minority and a woman is a double impediment. Minority women are significantly less likely to advance from mid-level manager to senior executive than either white women or same-minority men.”
Tammy K. Jones, founder and CEO of Basis Investment Group, one of the only commercial real estate investment platforms investing in CRE debt and equity led by an African American and woman in the United States, said, “I can still walk into a room at a CRE conference in 2019 and be one of the few women and the only African American attending. For an industry that prides itself on being focused on the bottom line, the diversity that leads to greater performance is not reflected in our leadership, and it’s time for this to change.”
In short, the historically insular nature of the real estate industry has drastically limited the ability of human resource professionals across the industry to materially influence the composition of its perpetually fraternal corporate culture. As individuals, we naturally gravitate toward the familiar and are not instinctively inclined to venture into the unknown. These tendencies are key elements in understanding the persistent lack of diversity within the CRE industry.
Inclusion in business has been a long-standing problem, despite some modest advancements in certain sectors. Such a deep-rooted mentality in the CRE industry cannot be undone simply with “best efforts.” Change of this magnitude requires a paradigm shift of grand proportion to deconstruct what has effectively become a preordained result. Diversity and inclusion must be interwoven in the industry’s fabric, similar to the way that sustainability has become a part of our everyday lives through legislation, policy, and heightened corporate responsibility. If we hope to see change, we must take action. Here are five strategies to guide that action:
Strategy 1: Change the Industry from Within
Before we can advance inclusion and diversity in the CRE workplace, we must first consider how to change the perceptions of others. Take, for example, a Knight Foundation study of women- and minority-owned investment firms, which concludes that the perceived risk of investing with women- and minority-owned firms is high, despite evidence to the contrary and the subsequent absence of a “legitimate reason to not invest with diverse asset managers in the 21st century.” It is crucial that the strategies for achieving this goal reflect the ethos of the business. Corporate leadership must also be forthcoming and transparent about these strategies. The company may benefit from hiring a diversity consultant or chief diversity officer (CDO) who specializes in developing inclusion initiatives that align with the team’s roadmap. To be effective, the CDO must have the ear of the leadership team; diversity and inclusion must also be an integral part of the DNA of the company and a key element of its strategic plan.
As these initiatives take shape, each member of the leadership team should be accountable for ensuring that the initiatives are taken seriously by the staff. Success is often achieved when coupled with compensation, so diversity and inclusion (D&I) success should become part of the company’s evaluation and compensation procedures. Progress and improvement are impossible without unilateral commitment to a plan for achieving them. Establishing performance metrics and deadlines is a key element in tracking a company’s progress. Furthermore, clear correlations between business development and strategies for diversity and inclusion will ensure that each plan drives the other. In the same manner that many companies have recently prioritized a sustainability strategy, so too should they ensure that diversity and inclusion strategies are prioritized with the same urgency.
Strategy 2: Change Young Minds
In late 2018, Deloitte released the results of its 2019 Commercial Real Estate Outlook on upcoming trends and developments in the industry. Eighty-six percent of survey respondents said that diversity on the boards of CRE firms leads to better returns, and 79 percent said the CRE industry is not doing enough to improve diversity overall.
U.S. Census data show that 10,000 baby boomers will turn 65 every day during the next 10 years, and situational distress (i.e., retirement, declining health, and death) will effectuate the transfer of wealth to the millennials and gen Xers of today. As a result, the flow of capital to real estate firms will be increasingly determined by an investor’s assessment of a respective team’s ability to consider a well-rounded set of opinions and perspectives as they approach every transaction. The progression toward a minority-white U.S. population will make firms with less diverse teams and less likelihood of outperformance less appealing. CRE firms that commit to diversity will be increasingly likely to gain interest from a broader range of investors, attract and retain a wider pool of employee candidates, and ultimately position themselves for outperforming their peers who have failed to make the same commitment.
Today’s millennials will become tomorrow’s investors and senior CRE professionals. It is essential to educate diverse youth on the many career opportunities and entrepreneurship possibilities that the industry offers. Commercial real estate is relatively unknown and not top of mind among many minorities. Companies like Google and Microsoft understand that early exposure to career opportunities is critical in creating an early-stage pipeline. To that end, Basis Investment Group has formed the Basis Impact Group (BIG) Foundation whose mission is to create a pipeline of women and minorities in the commercial real estate industry. BIG’s first initiative was the sponsorship of an educational program designed to introduce young people of color and women to careers in commercial real estate. Through BIG’s work with the Real Estate Executive Council (REEC) and the Commercial Real Estate Development Association (NAIOP), two national real estate trade organizations, BIG will help thousands of young people navigate an industry that historically has excluded them.
Strategy 3: Increase Industry Access through Innovation
Led by older, iconic leaders and their long-term confidants, the CRE industry conducts itself today in much the same manner as it did at its inception. While the prevalence of real estate’s “old boy network” has definitely hampered change, advancements in technology, innovation, and sector disruption over the past few years have created new points of access for minorities to an industry that has been less than open. As the CRE industry continues to evolve, innovations like CRE tech and crowdfunding have already demonstrated their game-changing ability to rewrite the real estate rulebook, much like the introduction of the iPhone altered the course of mobile communication. Not only have these innovations revolutionized the industry’s operations, but they have also empowered diverse individuals from other sectors to exploit these new access points and circumvent the former barriers to entry. Within a very short period, traditional CRE firms have become analogous to landlines and rotary-dial phones while CRE tech and crowdfunding are the cellular connectivity of the industry, creating access for a diverse pool of talent who was previously placed on indefinite hold.
Commercial real estate is a relationship-oriented industry, and the cornerstone of the business is partnerships. There will be increasing opportunities to form real estate partnerships as a result of this technology revolution. In addition, structural innovation fueled by the frenzy we are beginning to see with the advent of Opportunity Zone (O-Zone) legislation is expected to be a game-changer and could create the next crop of CRE entrepreneurs. Minorities who understand these underserved O-Zone communities best, and who connect with the community, could have a tremendous competitive advantage either to raise capital on their own to invest or to create partnerships with nondiverse investors. Firms that continue to follow the industry’s traditional business patterns may miss vital chances to collaborate with the innovative minds of diverse professionals and entrepreneurs who have accessed the industry through nontraditional channels and who bring a fresh perspective on the industry and communities shaped by a wider variety of influences and experiences.
In the marketplace of today, change—particularly as it relates to technology—is inevitable. For those who choose not to embrace it, doing nothing will likely cost something.
Strategy 4: Close the Wealth Gap by Capitalizing on CRE’s Unique Positioning
The need to develop a strong pipeline of young women and minorities stems from one of America’s longest-standing and most divisive epidemics: the racial wealth gap. “Redlining,” a loan practice implemented by the Federal Housing Administration (FHA) shortly after its establishment in 1934, was the catalyst for a dramatic widening of what was already a significant disparity in wealth creation between majority and minority populations. The practice derived its name from government maps that were color coded to delineate “good,” or predominantly white, neighborhoods from declining “bad” neighborhoods—typically black communities—that were highlighted in red. Mortgage loans were regularly extended to residents of “good” neighborhoods, while those who occupied “bad” neighborhoods were intentionally and systematically denied an opportunity to enter the housing market supported by advantageous loans.
The Servicemen’s Readjustment Act of 1944, commonly known as the G.I. Bill, has received extensive praise over the decades. As described by President Bill Clinton, the bill was “the best deal ever made by Uncle Sam” and “helped to unleash a prosperity never before known.” But, while the bill fueled the creation of the white middle class overnight by providing veterans with low-interest-rate mortgages and access to educational opportunities, minority veterans were largely—and intentionally—excluded. For example, of the 67,000 mortgages provided through the G.I. Bill for veterans in New York City and northern New Jersey between 1944 and 1946, fewer than 100 were given to minority veterans. In Mississippi during 1947, 86 percent of the skilled jobs were filled by Caucasian veterans and 92 percent of the unskilled jobs were filled by African American veterans—jobs that were supposed to have been promoted through the G.I. bill. As previously stated, we see a similar trend in the composition of today’s CRE executive ranks. The income generated by the CRE industry and disproportionately allocated to white males through the 75 percent of senior executive roles that they currently hold, in comparison to the 1.3 percent of these roles held by African Americans, demonstrates another barrier to wealth creation through real estate for black professionals and widens the expansive wealth gap between the white and black populations of the United States that grew from the institutionalized discriminatory practices surrounding the G.I. Bill.
According to nationally acclaimed author Brandon Webber, “The lack of access to a family home meant a long-term loss of wealth for African Americans. A family home purchased in 1946 in a good neighborhood with a strong tax base and solid schools became financial wealth to pass on to family members, borrow against to start a business, or send kids to college.” A recent Brookings Institution article investigates the devaluation of assets in African American neighborhoods resulting from racial bias. Researchers investigated the negative perceptions of African Americans and the resulting discrepancies between mortgages issued to white and African American prospective homeowners, which began with the G.I. Bill and continue today, as evidenced by recent events like the disproportionate damage to diverse minority families from the subprime mortgage lending practices that led to the 2008 financial crisis. The results of their investigation demonstrated that homes in predominantly African American neighborhoods are worth 23 percent less than homes of similar quality located in neighborhoods with little or no African American population. This racially motivated devaluation is commonly known as the “segregation tax” and cumulatively equates to a $156 billion loss of wealth across all predominantly African American neighborhoods throughout the United States.
Net worth (or wealth), the sum of the value of total assets minus the value of debts, provides a snapshot of household financial well-being. Striking racial differences are evident when looking at total household wealth. Nonwhite households have only a fraction of the wealth of white households. Whereas white households have a median wealth of $247,500, Dominicans and U.S. blacks have a median wealth of close to zero. Of all nonwhite groups for which estimates could be made, Caribbean black households had the highest median wealth with $12,000, which represents only 5 percent as much wealth as white households.
Racial differences in asset ownership, particularly homeownership, contribute to vast racial disparities in net worth. Homes—the most valuable asset owned by middle-class households—represent the bulk of middle-class wealth. However, unequal opportunities (past and present) to build other assets and to reduce debt are contributors to the vast racial wealth gap substantiated in the analysis titled “The Color of Wealth in Boston,” by Ana Patricia Muñoz et al., published on March 25, 2015.
A main driver of the difference in net worth of average Americans continues to be the ownership of real estate. We can begin to address this inequity by exposing people of color in the next generation to the vast opportunities that exist in commercial real estate. While we cannot go back in time to provide access to jobs, real estate, and opportunities that were provided by the G.I. Bill, we can take proactive steps toward leveling the playing field through the commercial real estate industry.
The CRE industry remains one of the most expedient ways to create wealth, but only if you have access to opportunity. It is not uncommon in our $15 trillion CRE industry for millionaires to be created by investing in one or two deals. Providing a pathway to this type of equity ownership in commercial real estate for African Americans and other minorities across the United States (and particularly in the communities where they live and work) could have a transformational impact on closing the wealth gap. Investing with qualified diverse real estate entrepreneurs will in and of itself have social impact. Taking the bold step to be inclusive and to diversify access to CRE equity investment will also lead to better overall returns. While this will not happen overnight, we can begin to examine strategies for change now.
Strategy 5: Partner to Build the “Diversity Ecosystem”
As in most sectors, change in the CRE industry typically begins at the top of each organization and filters down throughout its supporting staff. Once senior industry leaders have committed to investing with women and minorities, hiring minority vendors, and building a diverse workplace, what do they do next?
Past efforts to improve diversity in CRE have been fragmented. As an industry, we have been poking at the diversity problem over the last 30 years, with a few organizations attempting to eradicate the issue on their own; as a result, very little has changed. Many firms are hiring CDOs whose primary strategies for attracting diverse talent are limited to college campus recruiting.
When diverse undergraduate candidates are identified and introduced to the industry through entry-level roles, the common absence of diversity within the middle or senior levels of real estate organizations may make the candidates’ prospects for longevity seem uncertain and a tangible career path seem unclear at best. Achieving true diversity and inclusion is immeasurably beyond the capacity of a single firm or a handful of trade organizations; it requires industry-wide awareness and commitment. Until the CRE industry has embraced diversity at all levels, from the top down, efforts to induce change will be largely futile.
CRE professionals can fully appreciate the crucial role that strategic partnerships play in achieving desired outcomes. We propose the leveraging of existing partnerships and connectivity networks to build a “diversity ecosystem” that is essential in changing the face of the CRE industry. The diversity ecosystem will approach the problem from multiple angles at once, beginning with early exposure in high school, continuing through college- and graduate-level programs, then moving on to middle and senior management mentorship programs as well as entrepreneurship and board training to develop a pipeline of qualified diverse candidates and drive them toward our businesses.
Despite the significant number of talented diverse professionals, organizations that are open to increased diversity but unsure of the next steps often say that “we can’t find them.” As the diversity ecosystem broadens and develops, this sentiment will no longer be plausible or acceptable. The good news is that a number of organizations and programs focused on improving diversity at various points in the continuum already exist. Some of these organizations include the Real Estate Executive Council (REEC), the Real Estate Associates Program (REAP), the National Association of Investment Companies (NAIC), the New American Alliance (NAA), the Executive Leadership Council (ELC), the National Association of Securities Professionals (NASP), the Hispanic Heritage Foundation (HHF), and the Diverse Asset Managers Initiative (DAMI). As majority firms align themselves with these powerful organizations, they will find some of the most talented and outstanding real estate and investment professionals in the United States. We challenge firms and individuals alike to expand the ecosystem by developing alliances with organizations that are critical to creating a true continuum. As connections are strengthened, the ecosystem will become viable and self-sustaining, creating the continuum for including, developing, and maintaining diverse talent in the commercial real estate industry.
In the age of connectivity, we cannot underestimate the importance of bridging the void between isolated and fragmented initiatives. Building a continuum that unilaterally addresses the diversity challenges facing the CRE industry is the only way to make a long-term and scalable impact. Investing in this targeted continuum through sponsorship and collaboration will yield far better results than singular initiatives like primarily recruiting college-level candidates, which is not always a sustainable strategy. The CRE industry is ready for an innovative solution to an age-old problem; the diversity ecosystem is the future and promises to create the long-overdue change that we seek.
The pathway to success for addressing the lack of diversity in CRE is a multifaceted approach. We highlighted five key strategies to consider that together could transform this industry. It begins with changing the mind-set at the top by incorporating diversity and inclusion metrics into a firm’s DNA and strategic plan. The leadership team must additionally recognize that diversity is not merely a social initiative, but rather a strategic pursuit that will ultimately lead to improved financial performance.
Second, today’s millennials will be tomorrow’s real estate investors and the demographic shifts toward a minority-majority population make embracing diversity a business imperative.
Third, technology has created a disruption in both the customer base and among the providers who will be able to see our industry differently and through a diverse lens. Diversity of thought and perspective will lead to innovation and disruption in the ways we invest in CRE assets.
Fourth, as one of the most expedient wealth-creation industries, CRE is uniquely positioned to have a transformational impact on closing the racial wealth gap, a crisis that has reached epidemic proportions.
Finally, as an industry, the diversity challenge is bigger than one firm or trade organization, and true change will require a new approach. Through strong partnerships and the creation of a diversity ecosystem, an extensive pipeline of talented and diverse commercial real estate professionals and entrepreneurs can be developed, mentored, nurtured, and retained.
John W. Rogers Jr., chairman and chief executive officer of Ariel Investments, said, “When a group of diverse people are considered and included, the very best talent always surfaces and the best outcomes result for all parties. Diversity and inclusion are not only the right thing to do, it’s the best thing to do for our companies and the customers we serve.”
In the CRE industry, we are rewarded for staying ahead of the curve and for identifying opportunities that others miss. If we refuse to acknowledge the competitive advantage that diversity offers in our pursuit of returns, we are willingly accepting lower yields and additional risk. As fiduciaries and industry leaders, none of us should be willing to expose our firms or our investors to the quantifiable risk posed by a lack of diversity. The results are clear: diversity leads to big performance.
Kirk Sykes is chairman of the Basis Impact Group (BIG) Foundation, an arm of Basis Investment Group, which is pursuing an education program to introduce young minorities, youths, and women to careers in real estate. He is also chairman of the Real Estate Executive Council (REEC) and former chairman of the Federal Reserve Bank of Boston. Eyan Mitchell is director of investor relations at BIG, and Sommer Heyman is an intern at the BIG Foundation. Opinions in this article are expressly those of the authors and not the organizations referred to herein.