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How Real Estate Is Adjusting to Our Changing Moral Compass

In a sign of the changing times and an increased focus on tenant needs, large landlords are striving to attract and retain tenants by offering an array of perks inside their new and existing builds—such as cocktail bars and wine lockers.

At the same time, we seem to have reached a tipping point in ESG (environmental, social, and governance criteria) focused investing in the capital markets: the S&P has recently announced that it will launch a “socially-minded” index, an ESG version of its S&P 500 Index.

This begs the question: in a world with a changing moral compass, what does it means to be “tenant-focused?” How can ESG impact the value and prestige of a property or a company, as it pertains to tenant and capital attraction?

To get answers to these questions, I spoke to a few thought leaders to understand their strategies regarding ESG for 2019 and beyond, and also reflect on how those of us that serve the property community can help to create a better future by working with the real estate industry to advance ESG imperatives.

Arie Barendecht is the co-founder and CEO of WiredScore, a company whose mission it is to empower landlords to understand, improve, and promote their buildings’ digital infrastructure; WiredScore also just raised their Series A round at the end of 2018:

“There’s a lot of talk about connectivity as a human right. The digital divide means that not having access to high-quality, reliable connectivity in buildings impacts both the individual as well as businesses. Without connectivity we can’t leverage technology, access necessary services, and tap into the power of big data, which puts people at a disadvantage and adds unnecessary frustration and stress to their lives,” Arie told me when I asked him why digital infrastructure is so important for the ESG, specifically the “social” component, imperatives of landlords.

Indeed, in an age where we have all the information known to mankind in the palm of our hand as well as increasingly powerful AI and machine learning tools that are being released to the everyday consumer via digital interfaces and the internet, a difference in the connectivity ability of two individuals could lead to a huge difference in their respective quality of lives.

As Arie noted, governments are keenly aware of this digital divide, and WiredScore has partnered with large city governments, including New York, London, Boston, Dallas, and Chicago, to ensure that connectivity mandates become a key part of any new residential or commercial developments, even at the construction stage.

Although most of the onus on ESG within the real estate industry is landlord-driven, there is an increase in the number of initiatives where both the landlord and tenant are engaged in reaching environmental and sustainability goals by way of collaboration.

Shifting away from the world of startups, I spoke to prominent sustainability leaders of large property developers and owners. A recurring theme was that landlords are increasingly working with tenants to jointly achieve sustainability goals instead of going at it alone. Standard triple-net leases disincentivize landlords to work on sustainability and energy efficiency initiatives due to reductions in utility bills unevenly benefitting the tenants,” explained one Director of Sustainability at a large American property owner and developer that I talked to. “Nowadays, we are more often seeing green leases that help landlords to recover some of the costs of sustainability and energy efficiency investments by introducing cost-sharing initiatives with tenants.”

It seems that fundamentally, however, the focus on ESG in the real estate industry is being driven by end-users and consumers. Shawn Nelson, who is the founder and CEO of furniture manufacturer Lovesac, has modeled his entire company on the principles of ESG. Labeled “Designed For Life,” Shawn was inspired to design modular furniture that never needs to be discarded, based on feedback from his users: “We observed how our customers were using and enjoying our Sactionals product, and the theme that made it so unique was that it solved all these problems that people had in real life, and more specifically how people’s furniture needs needed to be adapted based on their life events: getting married, welcoming new members to the family, and so on.” Lovesac’s products, therefore, both delight end-users, while also aiming to limit the amount of furniture that ends up in our landfills. With Lovesac’s stock at an all-time high at the time of writing, it seems that investors also appreciate its unique position.

Castellum, one of the largest property developers in Sweden and Denmark, is working with my company, Spaceti, a smart building and smart workplace solution provider, to promote a well-being focused environment. We realized early on that they were committed to health and well-being in their properties. They were also interested in working with sensors and data analytics in order to learn more about how people use the premises. They have proactively advised customers about their usage which helped to manage properties with more efficient heating and ventilation.

Indeed, by measuring and improving indoor air quality, building owners and tenants can help their occupants and end-users avoid so-called sick building syndrome. The challenge though, another Sustainability Director told me, is in measuring the benefits: “Unless we can measure the hard benefits of well-being, which is somewhat of an intangible, it is hard for us to engage with tenants in promoting this aspect in their indoor environments”. The case studies and proof for indoor well-being promotion are increasing, however, most notably with a recent Harvard study on the impact of green buildings on cognitive function empirically showing that cognitive function can improve between 61-101% in green building conditions.

Will well-being initiatives also be included in the leases of the future, just as sustainability is included in the green leases of today? Who knows.

What we can be sure of is that there is an increasing focus on environmental, social, and governance objectives by landlords, tenants, startups, and even governments.

So forget cocktail bars and nap rooms: if you really want to future-proof your building and attract and retain the tenants and capital of tomorrow, ESG focused initiatives are your long-term answer.

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