PGIM’s Cathy Marcus on Winners and Losers in Office and ESG’s Durability

Marcus, as PGIM Real Estate’s global COO and head of its U.S. equity, is one of the company’s most important executives and was recently named one of Barron’s 100 most influential women in U.S. finance. Barron’s doesn’t rank them, thus not pitting its top 100 against one another, but the honor puts Marcus in the company of Abby Joseph Cohen, professor of business at Columbia; Lisa D. Cook, a member of the Federal Reserve’s Board of Governors; and Jane Fraser, CEO of Citigroup.

Marcus, in her 25th year with the company, manages $208 billion in real estate assets for PGIM, pronounced “P-Jim.” PGIM, which traces its roots back to the 19th century, is the investment management business of Prudential Financial, managing investments for both individual and institutional clients, with 46 offices across North America, Europe, Asia and Australia.

Marcus’s is a voice that people, especially people in commercial real estate, listen to, particularly in these days of uncertainty about the future and the role property will play in it. Marcus sat down with Commercial Observer for a few minutes in late May to go over some of her thoughts.

This interview has been edited for length and clarity.         

Commercial Observer: How does real estate fit into the overall strategy of Prudential?
Cathy Marcus: PGIM is a multi-asset-class boutique. And real estate is one of those boutiques. So we are part of a much larger asset management business at Prudential that offers public investments, private investments, mainstream alternatives. We have a lot of different offerings, and real estate is one of them.Prudential writ large has been investing in real estate for well over 100 years. PGIM real estate grew from what you might call the real estate investment department of an insurance company to a global real estate investment manager where the vast majority of what we are investing is on behalf of third-party clients. Whereas, in the beginning, we were investing on behalf of an insurance company.

So PGIM has more in common with a Blackstone or an Oak Tree?

Generally, the big names in investment management — like JPMorgan, Morgan Stanley, BlackRock, Blackstone. In certain markets, where we do more alpha product, KKR would be a competitor. But we don’t consider MetLife to be a competitor, we don’t consider Principal or Northwestern Mutual to be competitors of ours for our real estate equity business.

PGIM was an early advocate of ESG (grading companies on their environmental, social and corporate governance impacts). How does that fit in now? And how far and wide has that influence traveled?
Our influence has traveled, but the industry has traveled quite a bit. So, if you go back, what is now called ESG in real estate was just called “environmental” 20 years ago. And, really, what that meant was that we were trying to improve property operations by reducing water usage, electricity usage, by having more efficient systems, systems that are certified by organizations like Energy Star; that really was kind of the beginnings of what has turned into kind of a full-fledged ESG initiative across commercial real estate. We started, really, with lower energy usage and more efficient systems as a way to improve investment performance.

It started as a way to improve property operations and increase net operating income. And it was really truly about energy efficiency, also very much about making sure that real estate, that the built environment, was not further contributing to contamination of the groundwater and of the ground. It really started off as being very environmentally focused — like we don’t want to buy a property where the soil is contaminated; we don’t want to invest where the water is contaminated. We don’t want to do anything in terms of our systems and the way that we would build that would further contaminate the ground or the groundwater or even contaminate it for the first time. I’ve been in this business since the late 1980s, and that’s just part of your due diligence around buying and selling property. We didn’t wrap it in an ESG wrapper back then.

As you know, to some, ESG has kind of gotten a bad name, especially on the right. So I wonder what your thoughts are? And how would you answer the critics?

It’s actually very simple in real estate: Sustainability is just good real estate management. If we were sitting in a building that did not have efficient energy usage or water usage, that’s just bad for the bottom line.

So, from a real estate perspective, there’s no politicization of ESG. It’s neither good nor bad. We’re focused primarily on sustainability within our property. So what does that mean? That means that you want the most efficient systems so that you’re using the least amount of energy; you want to have technologies that are supporting your building operations, which ultimately lead to lower operating expenses. Things like smart thermostats. There’s technology out there now that can sense if someone is in their office, and therefore it turns the air conditioning on in that office. So, if you go into your office on a Saturday in July — in the olden days, I remember doing this many times — you’d have to call building management and say, “I’m going to be on the fourth floor on Saturday, can you turn the air conditioning on?” And they’d have to cool the entire floor, even if I was the only person there. Now there’s technology that turns the air on in the office that I’m sitting in. 

But a lot of what we do too is when we’re developing new assets, either apartments or retail, whatever it might be, we’re incorporating all of that technology so that you have an asset that uses far less energy, it’s more efficient. That means that that asset is worth more than an asset that doesn’t have that energy efficiency.

Another example: We will often put solar panels on top of our industrial buildings. The way the roofs are constructed are perfect for solar panels. And so we’ll use that energy to light our building and cool our building. But then we can also sell some of that energy back to the grid.

That’s just a good investment strategy. It has nothing to do with whether you’re red or blue, or right or left. Our job is not to be political. Our job is to deliver the best investment performance to our investors. And, in real estate, it’s very, very clear, it’s not controversial at all, that having more sustainable assets absolutely is linked to better investment performance. There’s no controversy there.

Of course there is also an S and a G part of ESG as well. So how do you guys look at social performance and corporate governance?

Actually, again, it’s very clear in real estate. So the S aspect is in the communities in which we invest, we are part of the community. And a lot of our properties are very involved with the local communities; we’re also creating a lot of jobs through development. 

But, actually, what has become a really big trend in real estate and is going to continue is an idea called tenant engagement. That’s part of the S, and so let’s use an apartment project as an example because we own a lot of them. We have resident events, so that our tenants can get to know one another. It’s good for the community for people to be neighborly; it’s also really good for us if you become best friends with your neighbor, and then you renew your lease, right? We have lots of tenant events in our buildings; we do community events, where we might do some sort of charity thing together, some sort of volunteer opportunity. If they need someone to go pick up their dry cleaning, or they need someone to help them make a doctor’s appointment. It’s all about helping your tenants have an easier life and a better life.

I imagine that somebody who has their laundry picked up or gets help making a doctor’s appointment is more likely to re-up at the end of their lease.
Exactly. So it’s good for everyone, right? People are very busy and stressed out these days. But it’s also good from a business perspective in that happy tenants are sticky tenants. And every time you have to find a new tenant, in any aspect of real estate, it costs you money.

As I’m sure you know, there’s a lot of hand-wringing in office right now. Is it going to be a good investment long term, are people going to want to come back, can you see profits there in the future? What are your views?

I do not believe office is dead. There is still a place in the institutional investing world for office investments. The reality is that if you look back the last 10 to 15 years, office returns have not been that strong. It’s not a COVID thing. This started before COVID.

COVID has potentially exacerbated the situation because of the ability of people to do hybrid work. It changed the balance of power a little bit. I think we would all agree that pre-COVID, no one would have ever said, “I’m not coming to the office and there’s nothing there that is appealing to me.” People are now looking at office through that lens. But, just to be clear, from an investment perspective, office was struggling pre-COVID.

I had been thinking for a while there’s going to be winners and losers in the office sector. But, just over the past couple of months, I’ve become even more extreme in my thinking. The  winners in the office market — they’re not just going to survive, they’re going to have significant pricing power. And the losers are going to have an existential crisis in terms of how many D buildings do we need in this world? Forget about just this country. 

CORRECTION: This article was updated with Marcus’s correct title.