With ESG, Commercial Real Estate Needs to Take a Much Broader View

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Commercial real estate has taken a turn toward pursuing a clearer conscience in recent years, as everyone from developers and owner-operators to private equity firms rush to publish and implement environmental, social and governance (ESG) plans. These road maps are increasingly a prerequisite for investors, who are now demanding not just profits, but business practices that also play a role in mitigating the climate crisis and other societal issues. 

As more firms divulge the details and early returns of their ESG plans, it’s becoming increasingly clear that their approach may be too narrowly focused to make a truly meaningful difference.

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The industry’s primary short-term focus appears to be on environmental impact, particularly the reduction of property-related carbon emissions to net zero. Again and again, however, the initiatives outlined to reach that goal focus on systems within the buildings themselves. This may placate some investors and other audiences for now, but as demand for real reporting and results from these initiatives grow, CRE players will increasingly need to consider their buildings’ effect on the entire neighborhood-based ecosystem. 

To begin that shift, the industry must look beyond specific ESG goals and data points, and take a broader view of the millions of small, yet incredibly meaningful decisions made every year about where and what to build. These choices have a massive influence not just on a given building’s success or failure, but on the course of entire neighborhoods and communities. Whether a building houses luxury apartments, office space or a grocery store, it sets the course for how its occupants will commute to and from the sites, move around for daily errands, get kids to school, and perform countless other functions.

 With ESG, Commercial Real Estate Needs to Take a Much Broader View
Vincent-Charles Hodder.

Predicting mobility patterns and engineering outcomes is difficult in any case — even with large-scale infrastructure projects that take decades. Naturally, it presents an even greater challenge for owners or developers making much smaller, faster decisions at the building level, given their limited access to data and on-the-ground research. The end result is that everyday real estate decisions tend to reinforce our already car-dependent, emissions-heavy city systems.

Examples abound. Suburban developments tend to offer space at the expense of nearby grocery stores, schools or transit stations. Large-scale retail locations are often in places that cannot be easily accessed by anything but a car. Employer decisions about office site selection generally neglect the importance of nearby amenities that would allow employees to run household errands from the office hub, displacing trips that might otherwise be done by vehicle.

Accounting for these factors can not only help reduce overall carbon emissions — transportation was the single largest contributor of U.S. greenhouse gas emissions in 2019 —  but can fuel the growth of broader, less car-dependent urban development. In addition to reducing carbon emissions and other environmental benefits, the design of truly walkable and bike-friendly neighborhoods have broader social impacts, such as eliminating food deserts and increasing proximity to gainful employment. 

Calls for adoption of this new concept have grown in recent years. These ideas, however, are still noticeably absent from ESG initiatives being rolled out across all corners of commercial real estate.

This is unsurprising, as most real estate developers researching a given property have no better access to data on nearby transportation and other amenities than what’s offered on Google Maps, let alone analytics that explore how well a site lives up to the standard of a “15-minute city.” The end result is that, even for developers who search for ways to create sustainable neighborhood and transportation outcomes, it’s hard to know where and what to build.

The demand for more responsible development in commercial real estate appears unlikely to recede. The industry is already experiencing massive demand for new tools that can capably track and analyze building-level energy use and other critical data, and investors — along with retailers, employers, tenants and home buyers — are likely to begin weighing even broader impacts that will need to be measured in kind.

This represents an enormous challenge for the thousands of individual developers, owner-operators and other CRE firms. However, it is one that they will need to rise to meet, and those that are quick to adopt the required technology can take heart that their efforts will not only please their partners and customers, but also help to create a better, more sustainable world.

Vincent-Charles Hodder is the co-founder and CEO of location intelligence platform Local Logic.