What keeps your real estate investors engaged?
Throughout history, the obvious answer to that question has been the combination of the internal rate of return (IRR) we have been generating and the total equity multiple of our investments. However, within the past decade or so, social and environmental impact have risen the ranks to become priorities.
This realm is commonly known as “impact investing,” and according to Deloitte, it stands to become a $1 trillion industry by 2020.
Traditional investment managers are starting to embrace this trend, though measuring their impact has proven a difficult task. It’s vital for firms to define, quantify and communicate their true impact to investors, but many are struggling to do so effectively.
At my firm, we conduct a preliminary site visit, during which we identify a realistic impact thesis. Once we determine the goal, we choose specific metrics and data sources to benchmark our progress. Typically, they revolve around social and/or environmental impact.
This is a never-ending process. We constantly monitor the data during the lifecycle of the investment. We employ a Kaizen methodology of constant, continuous improvement in which we adjust and optimize our execution over time to ensure it consistently aligns with our thesis.
Here are three common categories we use to quantify our investment impact:
- How many families benefited? There is a real need for affordable housing in America. According to a 2014 study conducted by the Joint Center for Housing Studies of Harvard University, nearly 50% of renters (and more than 25% of homeowners) felt the burden of housing costs. More than 25% of those renters devoted more than half of their income to housing costs.To address this, we invested in apartment complexes in the Midwest through partnerships with government-sponsored entities to provide affordable, high-quality housing to refugees, veterans and the homeless. We collaborated with the U.S. Office of Refugee Resettlement (during the Obama administration), the Department of Military and Veterans Affairs (during the Trump administration) and a variety of U.S. Department of Housing and Urban Development- or Section 8-affiliated entities. To start quantifying our impact, we simply kept track of the sheer number of families we housed. But we also dug deeper into the numbers, comparing the income of the families we helped to the average median income (AMI) of that given ZIP code. Across our portfolio, we helped house more than 350 low-income families who were classified as below 60% AMI.Defining impact presents many challenges, but a way to alleviate these concerns is to strategically partner with community-based organizations that are aligned with your ultimate mission. Finding alignment means performing your due diligence to determine whether you can establish a mutually beneficial relationship that fulfills your overarching objectives.When vetting strategic partners, we looked for three non-negotiable attributes: local market influence, national-level presence and an understanding of our business model. We sought strategic partners that had a local market footprint that allowed us to leverage key relationships. Then, we determined how scalable each partner was not only locally, but also nationally, as our mission was to simultaneously effect change in communities nationwide. Lastly, partnering with an organization that understood our business model was imperative, as it had certain complexities that we were trying to balance.
- How much was crime cut? A tremendous byproduct of affordable housing is safer, healthier communities. In fact, while participating in a fellowship at Stanford University, researchers, a 2015 study proved that revitalizing low-income housing lowers crime rates. When investing in the Pacific Northwest, we entered a high-crime area with the intention of providing an affordable and safe environment for families. We deterred crime by working with lighting and casing manufacturers in southern China to import and assemble LED flood lights at our properties. In the process, we staved off gang and drug activity in our communities while reducing our electricity consumption. We measured our impact by tracking before-and-after crime statistics. Over the course of the first 12 months, crime was reduced by more than 60%, and three major drug dealers were eliminated from our communities.Besides reducing crime, there are a variety of ways we can impact these communities. Our methodology stemmed from wanting to consider Maslow’s hierarchy of needs by transcending physical safety and tackling the psychological aspect of community. For example, we noticed that when we reduced crime in our communities, we were able to build healthier, more productive neighborhoods.
Another area where we can make a difference is the environmental footprint of our operations. According to research from Sustainalytics, commercial real estate accounts for 40% of global energy consumption and 30% of CO2 emissions.
- How big is the footprint? The investing, economic and scientific communities are increasingly aware that the world’s financial health is dependent upon the environment. In fact, the World Economic Forum’s 2016 Global Risks Report deemed climate change the top threat to our global economy. In California, we partnered with the city we were in to reduce water consumption. We installed low-flow toilet bowls that cut water consumption in half (from 1.6 gallons per fill to 0.8 gallons per fill) and saved money on water bills. We also employed a xeriscape specialist, who installed a variety of eco-friendly plants that require little to no maintenance.The impact of these types of measures is easily quantified by monitoring utility bills over time, particularly for water, sewer and electricity.While key performance indicators are subjective to each organization’s mission, we found that as we extend the useful life of a given apartment community, we are mindful of how we retain cultural resources, reduce excess waste and reduce our environmental impact.