This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
This month:
- Sector: Real Estate
- Industry: Real Estate Investment Trusts (REITs)
- ESG Issue: Community Engagement
Risk: Underestimating community buy-in
It’s a story most are familiar with: In 2017, Amazon announced a contest to select the location for its second headquarters outside of Seattle – deemed “HQ2.” Cities around the country competed for the tech giant’s attention with ridiculous gimmicks and utopic design plans. Tucson sent a 21-ft cactus to the Seattle headquarters and the mayor of Kansas City wrote 1,000 5-star reviews on Amazon marketplace.1 While seemingly every city in North America sought to engage Amazon, offering up sweeteners like tax-breaks and other financial incentives, neither Amazon nor local elected officials seemed to engage with the residents and workers of those communities.
In mid-2018, when Amazon announced a list of top 10 finalists for HQ2, real estate investment trusts (REITs) across those cities started to see anticipatory bumps in their stock prices.2 But the end of 2018, when Amazon announced a split HQ2 across two locations – Long Island City, NY and Arlington, VA – the mistake Amazon had made by not conducting community engagement efforts in one of the winning locations became quickly apparent. Less than six months after the announcement, Amazon pulled out of New York because of swift and firm opposition from the community over the tax incentives for the company and gentrification that the development would likely incite. In fact, even city and state officials failed to engage with the community until after the announcement.3
While REITs like Vornado Realty Trust, TF Cornerstone, and Plaxall Inc. with significant stakes in the Amazon development in Long Island City – as one of the strongest real estate markets in the world – weren’t hit hard by the pullout, Amazon’s failure in New York offered a lesson to REITs in less booming markets. Failing to engage the community in which you intend to develop carries risks of potential delays and in some cases failure to materialize altogether.
Did you know?
According to the National Association of Home Builders (NAHB), community in opposition to multi-family housing development projects increases development costs 5.6% and delays the projects by 7.4 months, on average.
Opportunity: Double down on local
Perhaps the opposite of the HQ2 debacle in New York is the Kimco Realty Corporation. A New York-based REIT and one of the largest owners and operators of open-air shopping centers in the U.S., Kimco’s business model focuses on engaging with and supporting the local communities in which it develops, prioritizing local small businesses for their retail space, and investing in programs throughout the surrounding community.
By prioritizing locally owned businesses, they create unique, localized shopping experiences that differentiate their centers from national chains and big box stores, giving them an edge that could attract new customer bases. Ensuring that the economic success of the shopping centers remains in the community also creates a more loyal customer base among those in the community.
Both the uniqueness of their centers and this loyal consumer base have the potential to drive greater foot traffic to their centers, which boosts sales for their tenants and ultimately generates greater income for shareholders.
Impact: Place-making
Beyond ensuring that economic success from their developments remains in the local communities, Kimco helps promote more resilient and economically sound communities by making cash and in-kind donations to local organizations. Last year, they donated over $1.4 million to small businesses and organizations throughout its communities.4
They also focus on place-making in their developments, creating activated public space for community gatherings and events. Last year, they hosted events that ranged from Lunar New Year celebrations to weekly themed programming like “Wellness Wednesday” across their residential developments.
Did you know?
REITs across the U.S. supported the communities in which they operate during the pandemic through support to front-line workers and local foodbanks, as well as supporting authorities with COVID-related safety messaging and on-site COVID-19 testing and vaccine distribution centers. According to a survey by the National Association of Real Estate Investment Trusts, 89% of REITs in the US provided financial support to non-profits in the communities where they operate in 2021.
These commitments strengthen the local economies, ensuring stable, high occupancy rates and satisfied tenants across their retail space and a more economically thriving consumer base, all of which ultimately results in higher income for shareholders.
Questions an analyst might ask
- What is the stakeholder engagement approach before, during, and after development?
- How are they tracking and disclosing the frequency of their engagements, the groups engaged with, and outcomes of their engagements?
- Did they provide any community relief programs during the height of the COVID pandemic?
- How do stakeholder engagement outcomes inform business strategy?
- Is there a formal process for stakeholders beyond tenants to express grievances?
The bottom line
Whether the proposed development is residential or commercial, failing to engage with community stakeholders throughout the development process can leave REITs exposed to costly delays and missed opportunities. Conversely, remaining actively engaged with the communities in which they develop not only stands to benefit those communities, but can present income-generating opportunities for the REITs. Strengthening the local economies and building a loyal consumer base creates a cycle of success for REIT shareholders.
Learn more
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable.
1 https://www.theverge.com/2017/10/19/16504042/amazon-hq2-second-headquarters-most-funny-crazy-pitches-proposals-stonecrest-new-york
2 https://www.bizjournals.com/newyork/news/2018/11/06/nyc-real-estate-trust-shares-pop-on-amazon-reports.html
3 https://ny.curbed.com/2018/12/11/18136323/amazon-hq2-long-island-city-community-advisory-committee
4 https://s1.q4cdn.com/944058265/files/doc_presentations/2023/06/kimco-2023-1q-esg-presentation.pdf
