A derelict medical center for veterans in Salem, Va., that was transformed into an energy efficient place to live and work — thanks to a mélange of private and public funds — proves that investors can make money and support social change at the same time.
That was the message of a panel discussion at the recent Wharton Social Impact Conference focused on innovative approaches to financing socially responsible projects in the real estate sector. How much money is potentially available for building while also serving social and environmental benefits is anybody’s guess. One expert, who manages a large, San Francisco-based investment fund dedicated to creating quality jobs in low-income areas of California, estimated $20 trillion. Figures from JPMorgan, however, came in substantially lower — $400 billion to $1 trillion within the next eight years.
Douglas P. Lawrence, managing principal for 5 Stone Green Capital, a small investment fund that is focused on green technologies, called the veterans’ medical complex in Virginia, a “win-win” because “investors get an 8% return, and homeless veterans get a modern, light-filled place to live, stellar medical care and a chance to make some money in a year-round greenhouse. For the environment, we reduced energy consumption by 30%. For the military, this project has impact because it cares deeply about veterans,” said Lawrence, a former co-portfolio manager for JPMorgan’s urban green property fund.
In addition, the Virginia veterans’ project was a rock-solid investment because construction loans and rents were government guaranteed, Lawrence noted, adding that he “wouldn’t even look at a building project today that does not incorporate green technologies.”
Socially responsible or sustainable real estate development does more than turn a profit. While investors expect gains, there is a growing number who also want to do something for the greater good, whether it is in urban housing, green technology, job creation, preserving historic treasures, providing access to health care, education, clean water, healthy food or numerous other areas around the world in need of capital for change.
“Building green does not cost more. It costs different because the savings are over the long haul,” said Lawrence. “With the population expected to grow to seven billion by 2050 and the depletion of our fossil fuels, it only makes sense that we employ the best technologies to keep operating costs as low as possible.”
Forget Bamboo Floors and Bike Racks
Lawrence’s fund is targeted to three types of real estate: multi-family housing in cities, old industrial buildings suitable for rehabilitation because they are likely to spawn new companies and jobs, and construction of grocery stores and pharmacies because they will “always be essential.” He derided what he called “merchant builders who build as cheaply as possible, then move out and leave the problems for the next guy.”
On the contrary, he noted, “building green is not about bamboo floors and bicycle racks. It is about improving the bottom line by driving down expenses. It’s also about learning how to be a better steward of the resources we have on the planet and how to build better in the first place. This is nothing more than old-fashioned asset management, instead of financial engineering, as a way to increase profits.”
While impact investing is gaining momentum in these post-recessionary times, it is far from mainstream, said panel moderator Benjamin Blakney, an investment consultant and former treasurer of the city of Philadelphia. He credited a subtle shift in language for an uptick in interest.
“There is movement away from the term ‘socially responsible’ investing because it sounds a bit inferior, like maybe the investor should expect a compromise in returns,” he noted. “The term ‘impact investing’ shifts the emphasis to the target. It acknowledges that cash is king and that investment conversations are mercenary. Show me the money. Don’t forget money managers have a fiduciary responsibility to seek out market-rate or above market-rate returns.”
Other buzz words for the practice that are growing in popularity are “venture philanthropy” or “responsible capitalism.” Bill Gates’ name surfaced repeatedly during the conference to illustrate the need to make money first before having enough to give away.
Better Analytics Align Money with Passion
Real estate development is inherently complex. Sometimes the desire to add impact investing can make a tentative deal collapse, warned Blakney. A major obstacle, according to The Gallin Group, a market research firm that surveyed 51 leading impact investors last year, is the dearth of high-quality investments along with too few investment managers, consultants and entrepreneurs who can construct and promote measurable investments.
“Asset owners say they would put more capital to work if they were able to find high-quality investments,” the study said. “They recognize that their investments serve as demonstration projects, and success may be able to catalyze the flow of additional capital. Therefore, the management teams of the investments must be solid.”
Industry pioneers, such as the $3 billion Rockefeller Foundation in New York, view impact investing as a way to reduce poverty and other social problems, but more importantly as a carrot to attract wealth from the largest private capital markets.
More investors are beginning to poke around for social benefit investments because “traditional investments in the last few years have left them dry,” noted panelist Joseph J. Haslip, managing director of Blue Harbour Group, a hedge fund. Previously, he was the city of New York’s representative to four pension funds with assets in excess of $100 billion. “The atmosphere is definitely getting better. Increased availability of analytics is also helping investors align their money with their passions, he said. “For example, data has shown that corporations with minorities and women on their boards actually outperform those that have none.”
While some observers consider green construction to be the “new normal,” panelist Stuart Brodsky, a professor at New York University’s Schack Institute of Real Estate, predicted that U.S. commercial markets are still 15 years away from “building totally green.” The market has made progress, “but there is still a lot of wasted money in construction. The industry would benefit from greater standardization of requirements and government leadership,” said Brodsky, who served as the national manager for ENERGY STAR, a program that resulted in a 24 million metric ton reduction in greenhouse gas emissions and a savings of $7.5 billion in energy operating costs.
Tax credits and other government-sponsored redevelopment strategies incentivize private investors to put their money into public projects. Approximately 20 states already mandate or encourage public pension funds to invest in initiatives with a social benefit and, in particular, to support local economies.
A ‘Second Downtown’ for D.C.
Panelist Elinor R. Bacon, president of a real estate development company in Washington, D.C., and a former deputy assistant secretary for the U.S. Department of Housing and Urban Development’s office of public housing investments, noted that the amount of private capital invested in public housing in the last decade has increased four-fold. Her latest project is a 23-acre waterfront site in southwest Washington that is a private-public partnership between the District of Columbia and a team of six development companies, including Bacon’s.
Construction on The Wharf is expected to begin early next year and be completed in 2020. It is a poster child for socially responsible real estate development, Bacon added, because it will transform a swath of blighted and isolated waterfront land, owned by the District, into a vibrant place to live, work, shop, study and play. By creating what some are calling a “second downtown” for D.C., as opposed to pushing into the suburbs where building costs are lower, the project exemplifies smart growth, she noted.
There are several measureable ways in which the developer and the city are trying to ensure that The Wharf is not just another urban renewal project that gentrifies an area to the point that long-term residents can no longer afford to live there. While the project includes a yacht club, an Intercontinental Hotel, bike paths, a college campus and about 900 residential units, a substantial number of low and moderate-income families will be blended into those units, according to Bacon.
The plan also stipulates that 51% of the jobs created by the project will be reserved for D.C. residents. Locals also will get preference for 30% of the highly competitive construction apprenticeships attached to the project. Recognizing that the city’s waterfront — along the Potomac and Anacostia rivers and the Washington Channel — is its most abused resource, the project includes a massive reuse cistern designed to reduce or eliminate storm water run-off, Bacon noted, adding that the project will produce a triple bottom line because it will create profit for shareholders, protect the environment and improve the lives of those who live, work and pass through the space. “In the end, it will substantially improve the quality of life there.”