How to find opportunities for long-term value in the real estate sector

When companies think of real estate both now and for the foreseeable future, they’re going to place a high priority on safety, health and wellness. Is my building safe? Does it have a good ventilation system? Can our office be modular and flexible in design to account for social distancing protocols now and adapt for other needs later? Can we adapt our retail locations or our restaurants for the same purposes?  Should we increase our focus on outdoor amenities? What is the cost-benefit ratio for doing so?

One thing that can’t be argued is that a building viewed as safe, with flexible space and constructed to the highest standards, is going to be more desirable in a post-COVID-19 world than a facility which is perceived to have more risk and be less adaptable to changing needs. It’s also true that these are worthy standards to aspire to in real estate or in any business, even without the risk of COVID-19.

It’s not just about being a virtuous company. Studies show that businesses which incorporate ESG into their operating strategy, no matter the industry, tend to do well over the long-term and create long-term value because they are simply better-run companies. They enjoy a lower cost of capital and numerous benefits which flow through to the investor, usually in the form of lower risk, but often in higher returns as well.  Those companies that are forward-thinking will have the added benefit of being able to control their ESG narrative by providing decision-useful information to all their stakeholders, including investors, employees, communities, occupants, etc.   

ESG matters rise to the top in decision-making processes

During a recent EY webcast, ESG in real estate: opportunities to create long-term value in a time of uncertainty, a polling question to the audience asked about the rank of leaders actively involved in ESG governance at their companies. Respondents could select more than one answer and nearly 57% indicated CEOs, CFOs, COOs and other named executive officers, while 49.9% picked senior management leaders such as in-house general counsel, HR, asset management and others; 45.5% indicated boards of directors and board committees. Companies are taking ESG initiatives seriously rather than offering lip service and passing them off to the lower levels of the organization.

Investors are also adjusting to this market shift. For example, BlackRock has placed sustainability at the center of its investment approach and is exiting investments that present a high sustainability risk. And State Street has released an ESG oversight framework for directors and will vote against board members whose companies are ESG laggards based on their R-Factor™ scores or who cannot articulate a plan to improve. 

Companies need to track what they’re doing as it relates to these causes and find ways to clearly articulate their efforts to investors, who are paying attention. This is true for both progressive real estate companies and those businesses that have a significant number of ESG measures to improve upon. There is a great deal of value in letting your stakeholders know that your organization is making an effort. Disclosing and being out in front of issues will put companies in a position of strength, enable them to shape their own narrative and have a clear starting point from which to improve.