Mapping the future of real estate finds the industry taking a different path than in the past, with companies redesigning their business models around ESG goals.
One thing that was obvious at the 2022 ULI Europe Conference is a major shift in how investors view real estate that is likely to predominant the industry for the foreseeable future. Discussions of the role of ESG (environment, social, and governance) dominated every session.
“Mapping the Future of Real Estate” was no different, as moderator Nathalie Palladitcheff, president and CEO, Ivanhoe Cambridge, noted that she has been working in real estate for 31 years, and this was the first time the focus was more on people, not just capitalization rates and asset classes.
The Opportunity in Uncertainty
Peter Ballon, global head of real estate at Canada-based CPP Investments and global chairman of ULI, began the session discussing the impact of current uncertainty in markets. “Our business as investors is managing uncertainty,” he said. “Our job is to understand what’s the opportunity out there, and have a different view sometimes than the rest of market.”
While there is uncertainty around ESG, Ballon noted, “We have faced other major obstacles as real estate investors.” “Now there is urbanization and immigration of populations. These are new challenges, and investors that can figure it out will make more money,” he said, adding that going forward investors can make higher risk-adjusted returns than in the last few years. “It’s going to more complicated now, but the investors that can figure it out will get outsized returns.”
Sustainable Retrofits Key to Housing Affordability
Ger Baron, chief technology officer for City of Amsterdam, offered advice for getting the public and private sectors to cooperate on challenges to housing affordability.
“Affordability of housing is one of the most important issues for many European cities,” he said, noting that energy costs also have doubled over the last few years.
“Combining social strategies with sustainability and affordability goals is key,” Baron added, noting that cities have a limited supply of money and want to do this in cooperation with the private sector. “One of the reasons it’s not working is because city planners make more and more rules that the private sector needs to comply with,” he contended.
Baron also called for a more agile approach to urban planning, which focuses on the next 20 years, by integrating teams with different roles to create mutually shared responsibilities.
Making Public-Private Projects Work
Peter Denton, CEO of Homes England, a government-sponsored housing and affordability accelerator, addressed the problem of getting the private and public sectors to cooperate on affordable housing and sustainability issues. He outlined stumbling blocks to cooperation, noting that language is one of the biggest problems. For example, the private sector refers to sustainability standards as ESG, and the U.K. Treasury calls it The Green Book, which is actually a guide for investing capital based on social values, social equity, or the best case for the citizens, Denton says.
“Secondly, the public sector realizes that the private sector needs to make money—that’s a battle long won,” he noted. “Interestingly, the private sector still needs to understand that the public sector is willing to allow them to make money.“
Homes England, the nation’s housing, land and regeneration agency looks at housing in the context of the place it’s in. “Cities are under a lot of pressure to fundamentally change,” Denton continued. ”One of our jobs is to help place, and that public sector partnership is crucial when interests are aligned. “
He noted that England deploys about €5 billion a year to fund gaps in public-private projects. “We only deploy into things that don’t work. We’re not meant to be there for a functioning economy; we’re meant to be there when things are not working. Our role is to help make those partnerships function, profitable and exciting by recognizing when things aren’t working,” Denton added, noting a variety of financial resources are available for this purpose.
The English Cities Fund (ECF), which is a collaboration between developers and cities, has been transforming blighted neighborhoods and re-energizing urban centers with a mix of uses for 20 years, he said, noting that due to current disparities and the need to create job opportunities, 10-15 ECFs will be created this year.
View of ESG Goals Is Regional
Ballon summarized regional ESG positions globally. He said that climate change and ESG pervade all real estate conversations in United States and Europe, but that’s not the case elsewhere. Ballon noted that the importance of the S in ESG is accelerating at an incredible rate in the United States and is likely to grow to an even greater extent in Europe. In Asia, however, the emphasis is mostly on the E, he said.
For example, Ballon noted that U.S. corporations can no longer stay silent on any social issues. CEOs are thinking much more about social matters because their employees are demanding it, and their shareholders are demanding it,” he added, noting that they may uncomfortable when forced to make statements on social issues.
“I don’t think, for example, that 10 years ago you would have seen every corporation in America make a statement about their opposition to Russia’s invasion of the Ukraine,” Ballon said. “And you wouldn’t have seen Disney being forced by employees to make a statement about the Florida government’s anti-LGBTQ position,” he continued, noting that this statement cost Disney a staggering amount of money because state lawmakers rescinded its status as an “independent special district,” which allowed Disney to collect taxes and issue bonds, and eliminated a social media carve-out for theme parks.
“The whole universe of stakeholders is involved: employees, shareholders, suppliers,” Ballon added, contending that companies that fail to realize the importance of the S will be left behind.
The ‘S’ in ESG is Critical to Managing Affordable Housing
Coming from an affordable housing background, Denton has been immersed in the social for many years and emphasized both the societal and individual benefits of proper housing. “I look at the benefits proper housing has on the social provision aspects,” he said, citing the case of a woman with multiple sclerosis who lived in a first-floor flat before intervention. “She fell on average once a month, which meant one to two days in accident emergency and in physio,” he said, noting there also was mental health degradation and incapacity to hold down a job. ‘We put her into a ground-floor, modified flat and after three and half years, she had only had fallen once.”
For the individual, this is life enriching, but it also had an £15,000 ($18,110) per year financial impact for society, he added, as well as saved hospital and mental health services an estimated £260,000 ($313,916) annually.
Real Estate Industry Must Fully Embrace Technology to Stay Relevant
Baron addressed the real estate industry’s failure to fully embrace technology and its advantages. “Real estate companies are still making choices around bricks and mortar when every other industry has technology at its core, not on the side,” Baron said. “I’m still surprised at that perspective!”
Both Baron and Denton extolled the potential of data analytics for bringing real estate into the 21st century. “Data is the new God and the analysts are the chief priests,” Denton commented, noting the impact it has had on his job.
In his current role, Denton manages safety funding for building remediation for the entire country and needed to compile a list of U.K. buildings and their characteristics, such a size and height. By crushing data sets from operations and planning, which combined had all the information needed, “we had a total picture of all 46,000 publicly owned buildings in the entire country in less than 48 hours,” Denton said, noting that this saved hundreds of hours of labor.
“When you look at urban planning and demographic data on how societies and cities will change in the coming years, we can now overlay that with building data to determine which housing areas we need to change in that city to meet the demographic needs in 30 years,” he continued.
“Knowledge is the differentiator,” added Ballon. “If you have better information you can better navigate the confusion ahead.”
He contended, for example, that working from home is the biggest disruption and currently the biggest problem for real estate—“the implications are overwhelming.”
Noting that the technology that is enabling remote work has been around for years, Ballon recalled a round-table he hosted 10 years ago for real estate partners in Barcelona to discuss the future of real estate. “A consultant from our consulting firm predicted that within 20 years people would be able to work from anywhere—an island or top of a mountain, and drones could deliver their meds or other necessities,” he said. “All of those old- fashioned real estate executives laughed him out of the room.”
To the point, Ballon added that to remain relevant, the real estate industry needs to challenge our social norms and adapt to disruptive technology.
Trends Shaping the Future of Real Estate
In conclusion, the three panelists offered their takes on the most important trends that will shape real estate in 2050.
Denton said that by 2050 there will be a greater recognition of people’s lifecycles from childhood to later living, and how we engage across lifecycles will be better addressed.
The real estate industry also will be using the language of consumers. “I would go a step farther to say that it will use the word customer,” he added. Denton emphasized that a customer focus is a welcome thing, because “when you put yourself in the eyes of customers, you stand a better chance of doing the right thing.”
One big worry is about the balance between de-carbonization and replacement of existing buildings at the end of their life cycle, he continued. ‘You get into this get to this Gordian knot of a need to replace buildings, especially housing, but it is at complete odds with the goal because of the carbon embedded in the demolition, construction and dislocation,” Denton explained. “`Juggling those contrasting things, in our view, is a substantial problem.”
Baron noted that investors are buying half of the houses sold in smaller cities today. This means that global markets are defining housing prices for cities like Amsterdam, which is a big issue for smaller cities going forward, he said.
Baron also predicted that the communication platform people are using to work remotely will evolve and be overlaid with a social platform that can identify the most popular gathering places, events and so forth. He noted that technology overlays provide a tremendous opportunity, as long as platforms remain open and transparent, but it also has the potential for creating monopolies.
‘So we need to think about technology development goals (TDGs), Baron continued. ”Otherwise, one company will decide where you live, the type of service you get, who and what you pay for services.” Baron has been tapped by the United Nations to work on TDGs that prevent this from happening.
Ballon noted the evolving role of the private sector, with companies forced to take on social responsibilities formerly shouldered entirely by governments. “They have no choice, but this is not incongruent with profits,” he adds, explaining that just a few years ago, the companies viewed the E in ESG as a cost with no return but something they had to do.
“Now people are seeing it as an economic model: ‘If I can make my building more efficient and get to net zero faster, more tenants will want to be in my building,” Ballon said. So this has become competitive strategy that combines what businesses do well, which is make money, with what’s best society, he explained. “Once that is opened up the priorities change and won’t be pushed back. I think we’re on that path.”
