Fort Worth has met the changes in both population and environment with the Open Space Conservation Program, which incentivizes businesses that move to or expand within Fort Worth with the opportunity to also conserve land. The program essentially allows Fort Worth companies to purchase parcels of open space equal to their building’s footprint.
The resilience program is designed to benefit the environment from a biodiversity standpoint, while simultaneously improving the quality of life for Fort Worth residents.
In light of the city’s commitment to conservation, Commercial Observer spoke with Fort Worth Mayor Mattie Parker on Sept. 12 about expansion, land and, of course, heat.
This interview has been edited for length and clarity.
Commercial Observer: What makes Fort Worth so well equipped for an initiative like the Open Space Conservation Program?
Mattie Parker: Just to give you an idea, the data supports the fact that we’re the fastest-growing city in the country — but we’re growing at a speed four times the speed of Austin. And we think if that trend holds, then we’ll surpass them in population by the end of this year. And we also know that we’re fortunate that we are a large-sprawl city, 350 square miles, and we still have just shy of 75,000 acres to be developed in the city.
Because we are rapidly growing, it takes a moment to just say: What do we want to be? What do we want to do with that 75,000 acres? And how do we preserve our open space and green space for future generations? And I think all those reasons really equipped us for this initiative to not only be the right thing to do, but also to get the attention of our partners across the community to make it happen.
How can this program have both an environmental and a social impact on the city?
Well, I hope, for most people, they recognize they’re absolutely intertwined, and that we have to preserve these areas of our community so we can enjoy the city together as friends and family spending quality time outdoors and protecting our ecosystems, our wildlife and everything that makes Fort Worth so special.
When I talk about these issues, you just break it down to simplicity. Like, do you enjoy going to the park with your kids or grandchildren? Absolutely. Do you want a tree canopy in your neighborhood? Yes, I do. And those are just the basics. And then you can connect the dots for all these other reasons why, environmentally, it’s incredibly important to focus on sustainability in the city.
Given that so much of this program is about land, how have businesses — particularly the commercial real estate industry and developers — reacted?
So far, really positively. We have some major developers, landowners and longtime families in Fort Worth that are a great example. You’ve got the Alliance Development led by Hillwood and Ross Perot Jr. They have always been excellent stewards of land and have been for the last 30 years. You have the Clearfork and Edwards Ranch property. Preservation of green space has been included in their long-term development plan. You also have the Walsh Ranch and the Walsh family as they develop Walsh Ranch to the west of Fort Worth. And so we had a good baseline to start with.
And, then, in addition, we needed to look at what open space incentives for businesses we needed to create. We have in Fort Worth a one-to-one incentive that gives companies the opportunity to help preserve the land, even outside of their own property, that has been identified by the city of Fort Worth as high-priority areas for conservation.
Candidly, that allows a company to preserve a large amount of land that looks like their footprint, which is exciting to them. But, additionally, urban campuses across the country are now looking a lot different. No longer are companies really interested in a high-rise solution; they also want a campus where the concept of live, work, play is included. I think the best example I can give you is the Crandall Campus American Airlines headquarters in the city of Fort Worth.
Like most of the world, the Dallas-Fort Worth area saw record high temperatures this year. How does the heat factor into what you’re doing and your climate-related priorities?
It goes without saying that if you’re focused on greening your urban space, that is positive for the environment. And we’ve been doing that in everything from our tree planting programs, our partnership with the Trust Republic Land and Urban Open Space, ensuring that we are not — I always say this to be simple — paving paradise. And that absolutely contributes to extreme weather, especially our heat wave that we’ve seen over the summer. That’s why you’ve seen these heat domes in urban areas across the United States.
Our environmental master plan, our open space plan, our urban forestry master plan all work together to consider how heat impacts development as a city. Dallas-Fort Worth is a very large, rapidly growing region, and we work together with other cities, but also with organizations like the North Central Texas Council of Governments, as we consider how development and growth and transportation infrastructure could impact our climate as well. And those partnerships are incredibly important because even if Fort Worth does all the right things, we have to make sure that other cities, including Dallas, Arlington and beyond, are doing that as well.
Given that so much of your expansion hinges on development, has your approach to development changed with the heat?
No, I wouldn’t say it has. I know there’s been an immense focus on the heat in Texas, and understandably so. I think most articles say that Forth Worth is about two degrees warmer over the summer than it has been in the past in totality. But Texans are used to hot summers, and that just goes with the territory in the southern United States.
I think, moving forward, you can’t change what is here, but we can be really intentional about the type of development that we permit and the type of companies that we’re bringing here.
Anna Staropoli can be reached at astaropoli@commercialobserver.com.
While real estate companies worldwide spend their days making investments, few attempt to create a whole new asset class in the process.
This is exactly what Noyack is currently doing with its newest properties, which it calls “mobility hubs.”
For the latest installment of “Coffee with Citrin Cooperman,” a video series hosted by Citrin Cooperman Advisors and produced with Commercial Observer, Meyer Mintz,
a partner and regional real estate practice leader for New York Metro and South Florida at Citrin Cooperman, sat down with CJ Follini, founder and managing principal of Noyack.
Noyack is, in part, an online education company where people ages 21 to 39 can learn about the private markets.
“We’re trying to prepare two generations for the great wealth transfer, which will transform our society,” Follini said. Noyack also runs a real estate investment trust (REIT) so people can take the next step when they are ready.
“One of the offerings of Noyack is a REIT, and there will be an entire suite,” said Follini. “It’s a diversified logistics REIT. I always wondered, why are we single-asset? Why are REITs one-trick ponies? Imagine being a limited-service hotel during COVID. Not good. But if you are diversified, then you can find the white space, and that’s what we are. We’re constantly looking for commercial real estate white space.”
To that end, Noyack has begun to build its mobility hubs.
“That’s our branded term,” said Follini, “but it’s simply a repurposing of parking garages into diversified logistics hubs — central hubs where you can have a layer cake of supply chain purposes.”
Follini said that commercial real estate investors can acquire parking garages, which he notes are “excellent cash-flowing properties,” and inexpensively reposition their category into infrastructure, which could include supply chain, delivery, and electric vehicle (EV) charging.
“You are not only creating a momentum for environmental, social and governance (ESG) initiatives,” said Follini, “but you’re also putting it into a new category and, of course, a new price point.”
Mintz and Follini discussed several ways that hubs of this sort could provide real value.
“Say you’re adjacent to an office building or at a hotel,” said Follini. “You can charge your EV, pick up your Amazon or Walmart packages, and maybe pick up some artisanal food, because there’s a cold-storage pod on the roof. And if you live there, you can have a co-warehousing floor, just like self-storage, with your own lockers. This would all be in that one space instead of Amazon delivering a toothbrush 45 miles to your house.”
Mintz asked Follini about the business model, and whether these hubs were primarily being viewed as investments, ESG initiatives or something else.
“Everyone has their own point of view on it,” said Follini. “We are an investment entity, and this is one of our asset classes — one we’re pioneering along with a partner, SP Plus, formerly known as Standard Parking. They’re the largest parking manager and a publicly traded company. They manage 4,000 garages. For them, this is an ESG movement. For Shell Corporation, also a partner in this, it’s an ESG movement. For us, it’s an investment, and we believe it’s a pretty good one.”
*”Berdon” is the brand name under which Berdon LLP, a licensed independent CPA firm, and Berdon Advisors LLC serve clients’ business needs. Berdon Advisors LLC is a subsidiary of Citrin Cooperman Advisors LLC. Berdon Advisors LLC and Citrin Cooperman Advisors LLC are not licensed CPA firms.
*”Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL).
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Citizens Financial Group committed Tuesday to reaching carbon neutrality by 2035, while also pledging to engage with its high-emitting clients on climate-related topics in the coming years.
The Providence, Rhode Island-based bank did not commit to ending the financing of companies in sectors that have high emissions. But Citizens said it will train its commercial bankers to work with clients to develop decarbonization transition plans.
“This announcement is about leaning into Citizens’ role as a trusted advisor to look for ways that our clients can seize on the business opportunity related to the transition to a lower-carbon future,” said Rachel Greenberg, the bank’s head of sustainability.
Citizens plans to engage with its entire portfolio of clients in the oil-and-gas sector by the end of next year, according to Beth Johnson, the bank’s head of ESG, or environmental, social and governance initiatives. The $223 billion-asset bank will then prioritize other industries.
“The way we’ve thought about this is not to exclude any of our clients or any specific industries, but to really support them in that transition,” Johnson said in an interview.
Citizens plans to encourage clients to use sustainability-linked products that the bank has unveiled in recent years. For commercial clients, those options include allocating deposits toward projects related to green initiatives, as well as carbon offset tax credits.
The bank also said Tuesday that it is targeting $50 billion in what it characterized as sustainable finance — or loans and investments to support the environment and community development — by 2030.
Ten percent of that target, or $5 billion, will finance renewable energy projects and technologies that support a transition to a lower-carbon economy, according to the bank.
The bank’s sustainability pledge will be “supported by detailed disclosures, which we think is important to ensure that we’re held accountable,” Greenberg said.
Citizens’ commitment to reach carbon neutrality by 2035 differs from pledges made by large banks such as JPMorgan Chase and Bank of America, which have made so-called “net-zero” commitments in recent years, pledging to decarbonize their portfolios by 2050.
Citizens timed its pledge with the release of its inaugural environmental, social and governance report, as well as its second emissions report based on recommendations from the Task Force on Climate-related Financial Disclosures.
This week is also Climate Week NYC, during which business leaders, top government officials and activists are calling attention to climate change.
Banks are facing increasing pressure from activists to take stronger actions to support the environment, as well as pushback from politicians and regulators in conservative-leaning states.
James Vaccaro, executive director of Climate Safe Lending Network, a nonprofit organization that focuses on decarbonizing the banking sector, said that commitments like the one made by Citizens can be “quite significant,” or they can be “performative.”
The significance of such an announcement depends on the details, and on how the bank follows through to meet the pledge, Vaccaro said.
One factor in assessing the noteworthiness of a bank’s commitment is how it compares with the size of the bank’s balance sheet, as well as the forecasted growth of its balance sheet, Vaccaro said.
Allianz Commercial is the center of expertise and global line of Allianz Group for insuring mid-sized businesses, large enterprises and specialist risks. Among our customers are the world’s largest consumer brands, financial institutions and industry players, the global aviation and shipping industry as well as family-owned and medium enterprises which are the backbone of the economy. We also cover unique risks such as offshore wind parks, infrastructure projects or Hollywood film productions.
Powered by the employees, financial strength, and network of the world’s #1 insurance brand Allianz, we work together to help our customers prepare for what’s ahead: They trust on us for providing a wide range of traditional and alternative risk transfer solutions, outstanding risk consulting and multinational services as well as seamless claims handling.
Allianz Commercial brings together the large corporate insurance business of Allianz Global Corporate & Specialty (AGCS) and the commercial insurance business of national Allianz Property & Casualty entities serving mid-sized companies. We are present in over 200 countries and territories either though our own teams or the Allianz Group network and partners. In 2022, the integrated business of Allianz Commercial generated more than €19 billion gross premium globally.
Former KPMG UK chair Bill Michael has joined ESG consultancy Novatus Global as head of strategy and a member of its board.
Michael led KPMG UK from 2017 until February 2021, when he resigned after a backlash to comments he made in a staff town hall meeting.
Michael told staff off for complaining about working conditions during the Covid-19 pandemic, and blasted unconscious bias, which he called “complete and utter crap”.
READVideo of rant by ex-KPMG UK chair Bill Michael: ‘Unconscious bias is complete crap’
“You can’t play the role of victim unless you’re sick. I hope you’re not sick and you’re not ill and if you’re not, take control of your life. Don’t sit there and moan about it, quite frankly,” he told staff in the 8 February 2021 meeting, according to a leaked recording.
Michael resigned from KPMG following criticism after his comments became public.
Michael last year took up a role as a strategic adviser to Aim-listed consultancy Elixirr.
Novatus Global is a London-based risk, regulation and ESG consultancy and technology company. It received £4m in funding last year from venture capital firm Maven Capital.
READ Ex-KPMG boss Bill Michael resurfaces in new consultancy job
“I’m very much looking forward to bringing my consulting experience to the team and being part of such an innovative and dynamic organisation as the business continues to extend its global reach,” Michael said in a statement.
“[Michael’s] unparalleled consulting experience in the global financial services sector combined with his entrepreneurial mindset will be invaluable as we enter our next phase of growth,” said co-founder of Novatus Global Andrew Hedley.
Michael qualified as a chartered accountant in Australia before moving to the UK.
His roles at KPMG included UK head of financial services, global head of banking and capital markets, and finally chair and senior partner of the 16,000-strong UK firm.
To contact the author of this story with feedback or news, email James Booth
In the Aegean Sea is the island of Delos, the rocky mythological birthplace of Apollo, the god who toted the sun across Greek skies.
First settled in the third millennium BC, the entire 875-acre island is an archeological site and considered a center of Hellenistic civilization. According to the United Nations, it was the “maximum emporium, totius orbis terrarum,” the greatest commercial center of the world.
Delos is also the name of a company whose stock in trade is helping both landlords and tenants optimize the indoor work environment. In the post-pandemic world, this distinction is more important than ever. Workers, it is believed, have to be persuaded to come back to the office, and therefore making it the healthiest place you can is considered more important than ever.
The company, based in the Meatpacking District of Manhattan, is bifurcated. First, it is a consultant for tenants and landlords who want to maximize the health and well-being of workers who spend their days working in their buildings. Second, it runs what is called the International Well Building Institute, which measures the success of a building in creating a healthy indoor environment the same way the U.S. Green Building Council’s LEED program measures a building’s success in its external impact on the environment.
Paul Scialla, founder and CEO of Delos, picked up the phone in late August to talk about his company and what it’s trying to do.
This interview has been edited for length and clarity.
Commercial Observer: Somebody today asked me what Delos was. And I said Delos is a consultant that helps both tenants and landlords achieve environmental perfection. To what extent did I get it right?
Paul Scialla: Well, you got a small part of it right.
I wear two hats. One is as founder and CEO of Delos, and the other as founder of our subsidiary, the International Well Building Institute, which is the world’s largest certification, rating and accreditation body for healthy buildings.The International Well Building Institute is a wholly owned subsidiary of Delos. It is separately governed, and it is the creator and implementer of what’s called the Well Building Standard and the Well Certification Program around the world
As an enterprise, we’ve got two sides. One is the International Well Building Institute, and the Delos platform, which can get into very specific products, solutions and technology that are good health interventions for any type of real estate space. And that’s where we get into the consulting and deployment of technology such as air filtration technology, water filtration technology, circadian lighting, active greenwall technology, what have you.
So one side of the business is the certification ratings and accreditation. The other side is the product solutions and technology.
Importantly, by the way, if we recommend a product or a solution, that is not a requirement to achieve certification — there would be no integrity in that, obviously. The International Well Building Institute is a separately governed, product-agnostic rating system that is an open ecosystem for any types of products or interventions to help achieve the required outcomes.
We have been merging the health sciences with the building sciences for the better part of 10 years. The initial several years of our journey was all research. We put over $100 million behind a global research effort to best understand our indoor environment and its impact on the human condition. We pulled in world-renowned institutions such as the Mayo Clinic, the Cleveland Clinic, and over 300 doctors of different disciplines from around the world.
We got them together with real estate professionals of all types — owners, operators, developers, architects, engineers, facilities managers, HR professionals — to best identify all of the inputs indoors that surround us that have an impact on our health outcomes. And we map those inputs directly to our respiratory, cardiovascular, immune, cognitive, digestive and sleep health outcomes. Inputs such as air quality, water quality, lighting, thermal elements, acoustics, biophilic programming, surface-cleaning protocols, HR policies, operational guidance — mapping them to our health domains.
That’s the blueprint for the introduction of our well building standard.
Do you find there is a market that is willing and receptive to all this? Do users and providers of space want to be as environmentally forward and progressive as they need to be?
Absolutely. To give you some metrics: In the certifications and ratings side of the business, we now cover over 5 billion square feet of clients in 130 countries. We’ve got over 25 percent of the Fortune 500 as clients of our Well Certifications and ratings.
And we’ve seen tremendous adoption of the well building movement as an important complement — not competitor, complement — to the green building movement. When you consider the green building efforts over the last 20 years — the focus on the environment, the environmental impact of our buildings, planetary health and the energy complex — we felt with the green building movement half the story was missing. There was a lot of focus on the planet but not enough focus on the occupants of all our buildings.
We spend over 90 percent of our lives indoors — our homes, our offices, our schools, our hotels. We felt an evidence-based approach to connect the indoor environment with the human condition was needed to really complete the understanding of sustainability in real estate. There’s the planet; but there’s also people, or human or biological sustainability, if you will. And that’s what our efforts have been all about.
Is this some kind of tale of two cities? I can see this being popular in New York or L.A. or Frankfurt or London, but what about in Nairobi or Mumbai or Beijing, cities that are trying to compete but aren’t quite there yet?
Our projects and programs are in 130 countries, including mainland China, over 1,000 different buildings in China, Well-certified. We’ve got projects throughout Europe, we’ve got projects in Australia, in Southeast Asia, in the Middle East; tremendous adoption In Latin America. This is something that we’ve seen adopted globally, regardless of location.
Obviously, office has been a market, but I’m curious how much of a market you have seen in multifamily — buildings that people actually live in, not just work in?
We’ve seen great adoption across the residential spectrum, both in single-family and multifamily housing, from affordable housing all the way up to high-end luxury, and everything in between.
Clearly, people are focused on air quality and water quality and lighting and things that enhance the way people sleep, their energy levels, their respiratory outcomes, their cardiovascular outcomes. And so this is applied to both residential and commercial real estate.
Since you mentioned it first, what products are out there which actually enhance sleep?
Lightning has a huge impact on sleep. But air quality is an important consideration for sleep as well.
For the better part of human history, we were outside entirely. Waking up with the sunrise, being active and energized and productive throughout the day under a very bright sky, high temperature type of light, and then we slept in complete darkness. And there’s a nerve in your eye called your circadian optic nerve. That’s nothing to do with vision. It takes this peripheral light or darkness, and, really, it’s the only thing that’s telling your body what time of day it is.
So, bright, high-temperature light that mimics an afternoon sky enters your eye and induces hormones for productivity, energy, mental acuity movement, what have you. Later in the evening, if you’re getting exposure to artificial light indoors, that still is the type of light that an afternoon sky would be giving you, tricking your body into thinking it’s still afternoon. And, thus, you’re not creating the necessary hormones for sleep, such as melatonin. So light has a very, very big impact on our 24-hour, sleep-wake cycle.
Let’s talk about ESG. I would think that ESG would be great for your kind of business. Making companies be aware of the impacts of things they are doing, the environmental or social factors that they might not have thought of.
We have become a material component of the S in ESG reporting. When you consider E is environmental, and that really kind of speaks to the green building side of things.
But the S bucket — particularly human and social capital management in the S bucket — are the Well certification and ratings programs. We’ve become a global benchmark and significant resource and reporting mechanism for ESG reporting for companies, again primarily in the S bucket of ESG.
How do you make money? I presume you are not a nonprofit.
There are certification fees for Well Certification. They’re not high. On the other side of the business, we will earn income on product sales.
So when somebody pays X for, say, an air filter, you guys get a cut of that. Can you talk about what level of market penetration you have achieved?
Five billion square feet of certified and rated projects in 130 countries, so we’re seeing pretty considerable market adoption. But, as you well know, the real estate market globally is enormous. So we feel we’re still in the early days here in terms of a lot of forward adoption ahead of us.
I think it’s a $300 trillion industry. But 25 percent of the Fortune 500 as users, that’s a pretty good indicator of meaningful adoption.
One thing I noticed is that Delos is actually the name of a Greek island. I was curious about the origin of the name and what it has to do with the historical meaning of the word Delos.
It did inspire us. The island of Delos, in Greek mythology, was an island of healing and, in mythological terms, once you stepped foot on the island, you don’t get sick and you don’t die. So this is our subtle nod to well-being and longevity.
A share of your business comes from hotels. I’ve almost never seen a hotel that didn’t have a fitness center and a pool. But I suppose you guys say it has to go well beyond that.
Exactly. It’s one thing to have a fitness center, but what we wanted to do was look at the actual room itself and see what types of health and wellness features we can implement in the actual guest room as opposed to just a gym or a fitness center.
This is less about putting gym equipment in the room and more about looking at the lighting and the air quality and the spatial conditions of the room — what can we do through four walls and a roof to passively enhance the room as it pertains to health and well-being.
We’re really about the architecture and design, the air quality, water quality, the lighting, and things that are more of a passive delivery of health and well-being.
The real estate sector has a significant role to play in responding to the challenge of making life on earth sustainable. Worldwide, buildings are responsible for 37 per cent of global carbon emissions and 34 per cent of energy demand. Other environmental impacts of buildings include water and land pollution, and biodiversity loss.
The need for landlords and occupiers to respond to this challenge is high on the agenda of capital providers and corporate entities. It is becoming more difficult to fund, sell or occupy a building if its construction and operations do not comply with best sustainability practices. Moreover, a building’s quality is judged not just on its physical impact on the environment, but also the societal impact of its development.
Larry Fink is chief executive of the largest aggregated asset manager, Blackrock, with $9 trillion (€8.29 trillion) of assets under management. In 2020 he made the declaration that climate risk is investment risk, so it makes financial sense to ensure your business is resilient to the effects of climate change – and this is as true of real estate as of any other sector.
[ Up to 50,000 Dublin homes could be heated with energy from Poolbeg incinerator, Ryan says ]
That is why Blackrock now limits its investment approvals to projects that commit to carbon reduction and do so transparently by subscribing to reporting standards such as those set down by the Task Force on Climate-related Financial Disclosures. At CBRE, we will reach net zero by 2030 and are focused on advising clients on how to design and achieve their own sustainability goals.
The mantra of sustainable business is becoming increasingly codified by regulators and industry bodies. The EU has transposed into law the Corporate Sustainability Reporting Directive (CSRD) which will take full effect by June 2024. This directive requires companies of a certain size to disclose information on the risks they face in relation to sustainability. The CSRD is among a number of stringent requirements issued by global regulators which compel businesses to report on their environmental footprint.
Developing new assets means addressing not just the environmental impact of a building, but ensuring also that thought is given to its impact on society
For real estate businesses, the challenge of sustainability also offers opportunity. Approximately 75 per cent of buildings emissions can be attributed to heating, cooling and lighting. Easy savings can be made by installing LED lighting, replacing legacy heating systems with heat pumps and installing digital smart monitoring systems that optimise a building’s energy usage.
[ Building for the future: no more suburban sprawl, no more loss of green space ]
To ensure your sustainability strategy is coherent, it is critical that your asset’s performance data are available and up-to-date. This is a common hurdle we face when assessing potential asset upgrades: we recommend landlords invest in making building data regularly accessible to guide better performance. These improvements can be captured by global standards such as LEED and BREAM, which give occupiers comfort that they are inhabiting a building with strong sustainability credentials.
‘We are in unchartered waters on health insurance pricing’
In the construction phase, developers are increasingly choosing new building materials such as cross-laminated timber instead of steel, which deliver less embodied carbon at the outset of a building’s life cycle. Stockholm, the Swedish capital, is planning to deliver a new neighbourhood of 2,000 homes made entirely of wood which will reduce its carbon footprint by 40 per cent compared with building in concrete and steel. In Ireland it is great to see the first net zero carbon commercial real estate buildings being delivered.
Developing new assets means addressing not just the environmental impact of a building, but ensuring also that thought is given to its impact on society. Our built environment must engage with and not ostracise local communities by enhancing neighbourhoods with thoughtful placemaking, and it must support efforts to address the needs of local communities. The new Bridgefoot Street Park in the Liberties is an example of best-practice placemaking and is already the recipient of the Landezine International Landscape Award in recognition of its interesting and progressive approach.
The challenge of reaching a low-carbon future in the hope of arresting the effects of climate change is one we must rise to and overcome
It is worth noting that before we consider new developments, 80 per cent of the contributing built environment in 2050 already exists. Retrofitting extant buildings to deliver new sustainability standards is an immense challenge for our sector and will need great focus in the years ahead to avoid a scenario where assets quickly become obsolete or “stranded”.
[ Protecting our built heritage from impact of climate change ]
Sustainability is a vast and ever-evolving topic that clients struggle to keep up with and navigate. For our part at CBRE in Ireland, we have put our most senior people through Cambridge University’s Sustainability Leadership course – an intense eight-week programme that better equips us to understand the challenge at hand and how we can advise clients on how to achieve their own sustainability goals. While we are fortunate at CBRE to have a full team of highly qualified sustainability consultants, it is incumbent on us all to be able to converse with and support clients on these issues.
The challenge of reaching a low-carbon future in the hope of arresting the effects of climate change is one we must rise to and overcome. By equipping ourselves with the knowledge and harnessing targeted efforts, we can deliver buildings that perform better for landlords, occupiers, local neighbourhoods and investors alike.
Myles Clarke is managing director, CBRE
Indian billionaire Gautam Adani speaks during an inauguration ceremony after the Adani Group completed the purchase of Haifa Port earlier in January 2023, in Haifa port, Israel January 31, 2023. REUTERS/Amir Cohen/File Photo Acquire Licensing Rights
Sept 2 (Reuters) – India’s Adani Group on Saturday said its stocks and financials were unaffected days after the Organized Crime and Corruption Reporting Project (OCCRP) said business partners of the family used ‘opaque’ funds to invest in stocks.
Adani Group said the ‘misleading reports’ had no substantial impact on the group’s business performance, and said the group remained in compliance with the law.
The conglomerate highlighted investments by entities, including Qatar Investment Authority and GQG Partners, adding that it was committed to attracting investors as part of its 10-year capital program initiated in 2016.
Nonprofit media organisation OCCRP reported on Thursday that millions of dollars were invested in publicly traded Adani Group stocks through funds in Mauritius, obscuring the involvement of alleged business partners of India’s Adani family.
The Adani Group, which is controlled by billionaire Gautam Adani, said it categorically rejected what it called recycled allegations in the OCCRP report “in their entirety”.
Shares in Adani Group companies dipped on Thursday amid renewed corporate governance concerns. However, leading group stocks closed in the green on Friday, the statement added.
The Adani group’s listed companies lost more than $100 billion in market value earlier this year after U.S.-based Hindenburg Research raised several governance concerns in January and suggested the group had made improper use of tax havens.
Reporting by Jyoti Narayan in Bengaluru, Editing by Louise Heavens
Our Standards: The Thomson Reuters Trust Principles.
There is good PE and bad PE. The opacity of current disclosures makes it difficult to tell which is which.
Public pension funds have been under pressure to seek greater returns on their investments for a long time now. Many of them have taken to allocating more of their portfolios to so-called, “alternative” assets, that have reported higher returns compared to what the pension fund can earn by investing in public equity and public debt markets. Most of these alternative assets usually involve investing in private equity funds. Bloomberg reports that public pensions make up 31.3% of all investors to private equity funds and contribute 67% of their capital as LPs (limited partners). In that sense, “private” equity is not merely a private contract between the manager and investor given that so much of the capital that funds that industry is from citizens’ pension money. On top of that, private equity is economically important in many ways: as of June 30, 2022, as per McKinsey, PE’s global AUM (assets under management) was approximately $11.2 trillion. The number of portfolio firms under PE management is reported to be double that of publicly listed firms.
Public pensions funds have also been vocal about ESG concerns in the public equity industry. Some, including me, have argued that this dynamic ironically creates a market for reporting arbitrage. Public companies, who hold assets with dubious ESG characteristics (greater carbon emissions or labor hidden in private entities with no public audit trails), have incentives to sell these assets to private equity to escape reporting pressures. On top of that, concerns have been raised by Brendan Ballou, Eileen Appelbaum and Rosemary Batt and Ludovic Phalippou questioning whether the returns claimed to be delivered by private equity are real and even if they are real, are these excess returns in private equity earned by one or more of the following dubious techniques: (i) excess leverage; (ii) sale-leasebacks; (iii) dividend recapitalizations; (iv) onerous management fees; (v) related party transactions; (vi) socializing costs by exploiting bankruptcy law or by tax avoidance; and (vii) poor customer outcomes in industries with large social footprint.
Before we go to the details of these shenanigans, it is worth mentioning that some of the concerns seem distinctly bipartisan. For instance, conservative think tanks such as American Compass are also concerned about these issues relating to financialization of the real economy and PE.
Next, I will elaborate on these techniques in plain English. These activities involve complex legal maneuvers and investment terms that can be hard to explain. Consider these as the essence, not the exact legal description, of what reportedly happens.
(i) The IRR problem:
PE portfolio companies are not traded on the stock market. The pension fund invests say $100 into a portfolio company and realizes say $150 when the portfolio company is sold or otherwise liquidated say five years later. Roughly speaking, the return on investment was 50% over a five-year period. But investors need more timely information about the company’s performance. To satisfy that need, PE sponsors report the so-called “IRR” or the internal rate of return, which, the ILPA (Institutional Limited Partners Association), an interest group representing LPs, defines as “when the net present value of the cash outflows (the cost of the investment) and the cash inflows (returns on the investment) equal zero, …the discount rate is equal to the IRR.” In effect, the PE sponsor comes up with a fair value of the portfolio company and reports an IRR. Fair values, especially in relatively illiquid markets, are unreliable and there is always an incentive for the sponsor to goose up the IRR, given that the valuations are not necessarily audited in all cases. IRRs reported by PE firms are subject to numerous other biases that are beyond the scope of this article. PE advocates have argued that these objections are baseless.
The inflated IRR hypothesis is somewhat hard to systematically verify because transparent data on an unbiased sample of PE portfolio firms’ performance, leverage, and fees are not widely available. The pension fund investing in PE funds hopefully knows whether the IRRs reported to them truly reflect their return on the fund that pension constituents could access and the alpha relative to the next best alternative. If not, they would do well to invest time and resources to verify the returns reported to them.
Even if the IRR numbers were fully accurate, we must grapple with an inherent contradiction underlying IRRs. IRRs will be higher when the portfolio company is sold or liquidated earlier, all else constant. Paying out early, by definition, encourages a short investment horizon, which is arguably the root cause for so many of the other problems listed next.
(ii) Excess leverage:
The claim is that the PE firm buys out the market value of the equity of a company from existing shareholders. Most of the PE firm’s investment is financed by debt that it has borrowed, perhaps from public pension funds. An important point is that debt is structured to stay on the company’s balance sheet. Hence, public pension funds could become the “residual” claimants if the company were to go under and does not have assets or profits to pay off its obligations.
The annual interest payment on the newly borrowed debt pressures the annual operating profits of the company. Companies sometimes may have such high debt burdens that they can’t afford to offer quality jobs and affordable goods and services. Some must restructure under the burden of debt if interest rates rise unexpectedly. This burden can lead to cost-cutting and hence loss of quality jobs, environmental investments, or compromised quality of goods and services offered, especially if the customer base is reasonably captive as in prisons and nursing homes. These considerations become more complicated if pension funds invest in PE as GPs but also hold debt issued by the PE or the PE sponsored company as pension funds benefit and lose from being on both sides of the transaction – owning the equity via its PE portfolio, but the debt through its fixed income portfolio.
(iii) Sale leasebacks and dividend recapitalizations:
The claim is that certain PE strategies are especially attracted to businesses that have large real estate footprints. The PE firm then arranges for a sale-leaseback of such real estate. In simple terms, this means that the real estate is sold to a buyer or special purpose vehicle (which can also be owned by the PE firm) who pays the company an upfront sum for the purchase and simultaneously makes the company a tenant on the hook for annual rent, which, in turn, places pressure on the company’s net income.
On the surface, this sounds like a good deal for the company, but the devil lies in the detail, of course. First, on the company’s balance sheet, mostly undervalued real estate is substituted by a cash inflow. In case a reader wonders why real estate is under-valued in the books, note that land and buildings cannot be written up in the financial statements, in general, in US companies. Second, the PE firm takes that cash and pays itself as a “dividend recapitalization” or the present value of future dividends from the company. In essence, the PE firm has recouped its equity investment in the company but continues to retain decision rights on how the firm is run. Finally, the math that equates the lumpsum “sale” proceeds to the “lease rent” and over what period needs to be scrutinized to assess the true economic return made by the buyer and the company. One would assume that the company gets a raw deal from the trade.
This is not to say that all sale-leasebacks are extractive. Some may be the right decision for the health of the company. Moreover, all dividend recaps need not occur via sale leasebacks. Some are driven by debt financing. The variety of transactions and questions about whether they are extractive or not depends on the context surrounding the firm. Absent disclosures, it is very hard to judge whether a set of transactions for a specific firm is extractive or not.
(iv) Onerous management fees:
The claim is that the company must pay the PE firm a management fee. This annual fee, on top of leverage, sale lease backs, places further pressure on the profits of the company. Industry insiders tell me that can be lots of different kinds of fees. Not all are annual. In particular, the PE firms charge the LPs onerous fees, as well, especially as AUM grows. Such pressures on the profits of the portfolio companies inevitably lead to layoffs and cost cuts. Cutting fat is efficient but cutting essential slack in systems designed to serve customers in sensitive industries such as health care, nursing, and prisons, as detailed below, leads to socialized costs that cause harm to patients, citizens, and society in general.
(v) Related party transactions:
Any company, in the ordinary course of business, must buy materials and or services from suppliers. The claim is that the PE firm forces the company to buy such materials and services not from “arm’s length” parties but from suppliers, either owned or affiliated with the PE firm. These transactions may or may not occur at “arm’s length” prices and the quality of the products and services bought may be inferior, considering the prices paid.
There is also the issue of PE firms selling portfolio companies to one another, with the same LPs in each fund, so the LPs potentially pay higher valuations in one fund for an asset they owned in another. Then there is the issue of continuation funds, where a single PE firm has multiple funds that buy and sell assets between one another.
(vi) Socializing costs via bankruptcy law or tax avoidance:
The claim is that all the newly imposed annual charges on operating profits of the company, via interest, rent on the sale leaseback transactions, PE management fees, and overpayment for purchased materials and services from related parties pushes companies to the edge of bankruptcy. The books allege that PE tends to get taxpayer funded entities such as Pension Benefit Guaranty Corporation (PBGC) to pay out unfunded pension plans of such bankrupt firms. And, have pension funds pick up the residual loss on the bankruptcy of the enterprise as the PE has already taken out its equity contribution via the dividend recapitalization. Industry insiders tell me that losses have been socialized in bailouts of over levered firms, including interventions undertaken during the pandemic. The tax avoidance claim refers to the oft-discussed carried interest loophole, whereby PE partners’ compensation is taxed as “long term capital gain” with lower tax rates.
(vii) Poor customer outcomes:
The claim is that PE is especially attracted to industries that have real estate or infrastructure assets on their books and whose revenues ideally fetch a steady cash flow with a growth rate that is above the rate of standard inflation. It helps if the state or the government is the customer as default risk is minimal. The ultimate customer is usually captive in that she is unlikely to go seek alternate sellers of the product or the service. These industries often also tend to be ones with a high social footprint including prisons, nursing homes, for-profit colleges, medical practices and the like. The books I referenced list horror stories in PE run companies that are too vivid and scary to even recount here (charging prisoners $25 for a phone call home, supplying prisoners with rotten food, patients dying in nursing firms on account of staff negligence, unemployable graduates of for-profit colleges saddled with debt, dentist and dermatology practices where patients suffer on account of unreasonable cost cutting and payday loan businesses where borrowers are trapped in a long cycle of indebtedness).
I would be remiss if I did not register my shock at the claims in these four books. For a long time, I had completely bought the “rational allocator” model of private equity, often taught in business schools, including by me, that private equity is Capitalism 2.0. It makes America a relentless engine of rational capital allocation by squeezing out inefficiencies in resource usage at poorly managed companies usually via the single-minded focus on efficiency that debt can induce in a manager. My class on managing a firm’s fundamentals emphasizes this “good” aspect of private equity. Indeed, private equity is a popular employer of choice for our MBA students. My belief in that paradigm has been shaken to core.
I am still willing to believe there is “good” private equity and “bad” private equity. I want to believe that the shocking stories in these books are outliers, and not a representative average of how PE works. So, I set out to look for disclosures on how to tell one apart from the other. Part 2 covers that investigation and a list of potential policy fixes.
The real estate and construction industries stand at the intersection of finance, politics, celebrity and government. But one thing that inexorably ties together this interplay of labor, land and money is the management of risk.
And, with the cost of that risk rising sharply, commercial real estate nationwide has been clobbered by the price of insurance.
“This is a house on fire, and insurance is one of the first things my members talk about,” said Sharon Wilson Géno, president of the National Multifamily Housing Council (NMHC). Her members revealed in a recent poll that insurance for multifamily projects had soared 26 percent in the past year. “It’s impacting existing properties and new starts. It’s turning projects that were once viable upside down.”
A vicious cycle of revaluations of replacement costs, inflation, growing climate change risk, and rising material costs has made soaring insurance rates an unfortunate cost of doing business. Replacement costs for new construction projects lept 40 percent over the last four years, according to the Insurance Information Institute (III), and the ability to pay construction insurance premiums determines which projects get built.
“The environment that we are now in is such that Section 8 housing is gonna get hurt, hospitals are going to get hurt, everyone is going to have a further increase in cost,” said Phil Corrigan, president of A.L. Carr Insurance Agency. “Typically, what you’d see in the industry is peaks and valleys, where you’d have a hard market where the prices are expensive, then a soft market where people can catch a little bit of a break. Today, the soft market really doesn’t exist.”
HUB International, an insurance broker for real estate, called today’s environment the “hardest insurance market in decades.” Rising operations and insurance premiums drive up rents on existing buildings, exacerbating our affordable housing crisis. Climate risk increasingly shapes where projects take root; the ripples of past disasters and the “everything, everywhere, all at once” sense of multiple storms and fires hitting the nation at once have driven up insurance payouts.
David Lynd, president of San Antonio-based developer and investors the Lynd Group, told the Wall Street Journal late last year that insurance costs were inhibiting his plans to build more in Florida. So have so-called “nuclear verdicts” and huge liability payouts, which pushed insurers to be more conservative, said Chip Stuart, HUB International’s chief sales officer and North American real estate practice leader. State Farm famously abandoned writing new policies in California earlier this year, and Farmers Insurance pulled out of Florida in mid-July.
“The underwriting community has not yet wrapped their hands around the volatility in weather events, especially in places that historically haven’t had those types of weather events,” said Danielle Lombardo, chair of the global real estate practice at Lockton, the world’s largest privately held insurance brokerage.
Every building and policy is unique, said Géno, so it’s hard to provide a fixed, uniform percentage increase impacting the industry. But the rising cost in commercial insurance, which leapt 9.4 percent in 2022, per the III, has hammered high-risk, high-growth states like Texas, California and Florida, where it’s not unusual for the cost of policies to have increased 30 to 50 percent in some cases. Rising costs in general liability and criminal liability insurance are especially hard for the affordable space to afford, said Géno, since federal financing often requires specific amounts of insurance coverage.
“A lot of the cost of developing housing is just time; time costs you money,” she added. “If you have to pull back and rethink insurance, and maybe restructure the whole thing, potentially at a higher rate, then that extra time itself could kill a deal.”
Every sector in commercial real estate is hurting. Numerous factors, particularly rising prices, have contributed to the current burden on builders and owners. But in talks with insurance brokers, analysts and developers, it’s clear a series of shifts over the last five years, parallel to the rise in billion-dollar natural disasters, has left the real estate industry with a higher price tag.
After a number of serious and very expensive storms and fires in 2017 and 2018, including hurricanes Harvey, Irma and Maria, the insurance industry determined that it was time to re-evaluate premiums. Stuart estimates that during the period from roughly 2015 to 2017, the industry was taking in just $1 in premiums for every $1.10 it paid out.
Up until that time, insurance carriers took a more relaxed approach to client-reported replacement cost values. Carriers evaluate their exposure based on the cost to rebuild, so these values have a direct correlation to premiums.
That changed after 2017, when losses from the historic run of megastorms showed insurers they were not getting enough premiums for their exposure. The scrutiny on replacement cost values has increasingly become a point of focus for underwriters, adding to an already difficult property insurance market. Lombardo estimated the replacement cost values have jumped as much as 60 percent just to correct the rampant underestimation of replacement costs.
The inflationary impact of increased material and labor costs combined with supply chain issues has increased claim payouts beyond what underwriters expected or collected premiums for, in addition to rises in general property rates. Hurricane Ian, which the III estimated cost $60 billion when it hit Florida in late 2022 due to more building and more people in the affected areas, would have been a $40 billion storm a decade ago.
At the same time, the insurance industry has functioned with reduced capacity due to ballooning payouts. Losing companies to specific high-risk markets puts more strain on those willing to participate in the exposure, which eventually causes prices to go up, and leads to further scrutiny on asset valuation. Increasing costs, associated with more costly storms, have meant higher rates and even firms pulling out of more exposed markets.
Hurricane forecasts expect sizable storm events and payouts, but increased incidences of more unexpected damages — everything from ice storms in Texas to Midwest and interior New England flooding to smoke damage from Canadian wildfires — means larger than expected insurer payouts, less capacity for new policies, and a scramble for building owners to find affordable rates. After Hurricane Ian hit Florida, the reinsurers — who provide insurance to insurance, and saw 40 percent increases in their costs last year, per the III — began pulling back, meaning less overall coverage.
“More insurance is needed, and fewer insurers are offering it,” said Lockton’s Lombardo. “Insurance companies that are offering it tend to operate in all states, and around the globe, so they look at their book of business and think, ‘Why would I want to write this policy in Texas or Florida?’ ”
The rising cost of risk, in fact, may be encouraging more risk taking. Existing buildings and venues may opt to take out more minimal policies — meaning higher costs in the event of a disaster. And, in today’s shaky loan market, lenders are demanding insurance that covers all the replacement costs of a project, a massive hurdle for projects seeking to break ground, especially for pricy coastal real estate. Some projects and buildings will be forced to go to non-admitted carriers, who don’t make their rates public, and pay exorbitant fees, even paying numerous brokers to cobble together a comprehensive policy.
“Insurance is integral to the banking industry, it’s essential to make anything move, to make anything get closed, to make buildings get sold,” said A.L. Carr’s Corrigan. “Insurance has been around since the first ship sank, when Lloyd’s of London started going to work. You have to have it, but it comes at a cost.”
Lombardo, Stuart and others have floated solutions, including detaching specific catastrophe insurance coverage from standard insurance policies. Lombardo believes this can lower some of the extraordinary premiums placed on, say, Florida coastal real estate and provide coverage at a price that doesn’t prevent a property from generating income. For instance, in California, buildings have separate earthquake and general insurance, lowering the cost of the latter. Doing the same with wildfire insurance might further reduce overall costs, says HUB’s Stuart. Insurers would “come running back” to the state.
Others have hoped for more federal help. After 9/11 there was federal intervention around terrorism insurance, and the federal government is intimately involved in flood insurance. More government engagement will help keep dealmaking from grinding to a halt. Insurance has increasingly become a social issue, said Lombardo, as rising costs will hamper the ability of high-growth areas to build and keep up with population growth. There’s an argument to be made that government backing of multifamily insurance is a social good.
Mark Friedlander, director of corporate communications for the III, insists the insurance industry is well capitalized and prepared for future risks. Getting property and projects protected by the industry’s umbrella, however, has become a limiting factor, and few industry executives expect the storm to pass anytime soon.
“While we used to just kind of wait for that correction to happen in the insurance markets,” NMHC’s Géno said, “I think this situation is here to stay.”