Use This Finance Theory to Understand Diversity’s Benefits in CRE

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Capital is long acknowledged as essential to the commercial real estate industry. If you’re a developer, a REIT or an asset manager, you had better find a way to attract it, even in current market conditions. And the likely assumption here is that I’m referring to financial capital — i.e., different forms of debt or equity. I am not.

Instead, my immediate concern is human capital: the professionals that CRE operations employ to undertake the tasks for firm viability, resilience and growth. So, in an era when we are bombarded with three-letter acronyms such as KPIs, ROI, ESG and — wait for it — DEI, we should add another for how to manage professional talent: MPT.

SEE ALSO: Public Private Collaboration Is Key to San Francisco’s Affordable Housing Growth

MPT refers to modern portfolio theory, the model spearheaded some 70 years ago by the financial economist Harry Markowitz. Imported here from the discipline of finance, this theory is understood as suggesting financial assets, such as stocks and bonds, shouldn’t be picked solely based on their returns or risks. Rather, to optimize returns for financial capital, it is necessary to think of how a single stock performs in concert with other portfolio assets.  

G. Lamont Blackstone 1 Use This Finance Theory to Understand Diversity’s Benefits in CRE
G. Lamont Blackstone. Courtesy: Project REAP

Thus, one specific MPT insight has relevance in the seemingly unrelated market for human capital. Diversification is to financial portfolios what diversity is to organizations. Diversification tells Wall Street asset managers that different performance characteristics of stocks are valuable for the whole portfolio. Likewise, diversity is a recognition of the value of having a variety of talent with different perspectives, professionals bringing different strengths in different market situations. We should note the two terms share a root word: diverse.

Hence, just as heterogeneous stocks are integral to portfolio construction, so are heterogeneous perspectives for project and management teams. They can catalyze the optimal performance of organizations. 

Consider this: How optimal was the American economy during the earlier decades of the 20th century, back when corporate workplaces had imposed embargoes on female professional talent? Or did the nation generate as much wealth as it could have when people of color faced barriers to admission to many professions — including commercial real estate — because of discrimination or other structural impediments?

Of course, the American economy did lead the world in the post-World War II global order. But how much stronger would the economy have been if those de facto embargoes had not happened? So, just as MPT seeks to optimize portfolio returns, DEI — when properly implemented — seeks to optimize a firm’s long-term performance. And a corporation, especially a service organization, is essentially a portfolio of human capital.

To extend this thought experiment: When hearing the term “DEI,” what if we centered on the notion of “portfolio management” and not “political correctness”? Both terms have an equal number of syllables and are equally easy to verbalize. What if we made a conscious decision to counter the critiques now circulating that suggest hiring or promoting diverse candidates is inherently suboptimal or unjust? What if we decided that MPT also meant “managing professional talent”?  

The CRE sector will face a variety of challenges in coming years: the adaptive reuse of obsolete warehouses and offices in urban locations, the evolution of malls with alternative uses and tenants, negotiating public-private partnerships in diverse municipalities, and perennially pressing needs for affordable housing. Accordingly, heterogeneous perspectives and backgrounds (i.e., diversity) can make management teams more robust in adapting to external pressures, just as diversified stock portfolios are more robust in reacting to financial market shocks. Should not the staff of the nation’s REITs and brokerages include “growth stocks” of the future — talent, with diverse capabilities and relationships, that reaps future dividends in postmillennial markets?   

Markowitz’s Nobel-winning theory lived in obscurity for nearly a decade before Wall Street embraced it. It still shapes much thinking regarding the management of financial assets, notwithstanding some prominent criticisms.

Ironically, DEI was lauded at the beginning of this decade — only to face a reversal of acceptance in many corners. Nonetheless, just like modern portfolio theory, that does not mean the model is useless. It instead only means that some particular asset manager (i.e., of human capital) can err and may have misapplied it in the past.

So, viewing human capital as we would financial capital is simply an example of cross-disciplinary thinking. When we think of DEI, we should think of human capital; when we think of human capital, we should think of MPT. History suggests the economy benefits from undiscovered growth stocks of human talent from underrepresented demographics.

Lamont Blackstone is a commercial real estate consultant and urban redevelopment specialist who is also the acting executive director of Project REAP, a national organization that aims to diversify CRE’s talent pool.