The Specter of Wildfires Looms Large

(Originally published as the preface to Firebreak, Urban Land Institute Fall 2020. Sadly, the continuing drought in the West has made the 2021 wildfire season even worse.)

Wildfires have always been a part of the U.S. landscape, particularly in the drier West. But this year stands out because massive, destructive wildfires—fueled in part by extreme weather and changing climate conditions—have broken records across the region and raised important questions regarding how the real estate industry can help communities thrive despite repeated fires.

The toll on human lives, the landscape, and economies is personal. The specter of wildfires looms large here in Montana, where I live. We’re always on edge as we move toward the start of wildfire season.

When the wildfire smoke blew in this fall, we shut the windows and doors in our non-air-conditioned home and turned on three HEPA filters that ran 24/7. Our air quality index registered at an unhealthy 169. My sister in California readied horse trailers to help whomever needed help evacuating. My 80-year-old parents in Oregon identified an evacuation footpath in the event their one road out is blocked by fire. And, one of the places we spent summers on the McKenzie River near Vida, Oregon, is completely gone, burned by the Holiday Farm fire.

Wildfires became a national concern this season, with smoke reaching friends and colleagues all the way in Virginia. We also saw the compounding effects of wildfires with other conditions, especially the coronavirus pandemic. First responders and evacuees risked contracting the virus as they worked and sheltered in close proximity. Temporary housing for those who needed it was difficult to find amid social distancing recom- mendations, simultaneous multiple large evacuations, and the country’s ongoing housing affordability crisis and housing shortage. In addition, the communities affected by wildfires must recover during a significant economic depression.

And what of economies and real estate? Wildfires cause massive destruction and affect our ability to insure assets, endangering the real estate industry’s ability to secure financing. In the long run, the interruption risk has major impacts on residents and tenants and their willingness to be in wildfire-prone locations. This gets to the heart of the dilemma—whether we have fiscally stable, healthy, thriving, and sustainable communities because municipalities rely on tax revenues. And that leaves those of us living in fire-prone areas with one existential question: Where do we go from here?

In the short term, we hope for a break in the weather and relief for the millions who have been affected by the fires. We also need to make sure that wildland firefighters have the resources to do their jobs safely and effectively. Then, once the worst of the 2020 fire season is behind us, we must take a long, hard look at how we can make our communities safer from and more resilient to future wildfires.

This is where the best practices detailed in the Urban Land Institute Firebreak report and the expertise provided by ULI members are so crucial. Wildfire-resilient development and design choices made at the asset level protect structures and inhabitants, reduce fire spread through communities, and protect value for owners and investors. ULI members are uniquely situated to share lessons learned from their experience implementing wildfire resilience tactics and to build support for wider implementation.

In addition to preparing their own developments, ULI members can partner with their communities to make planning and development decisions—before the fires start—to give communities the best chance to thrive. These discussions may include advocating for best practices related to policy or for design addressing the community scale, but also they are likely to include difficult decisions related to how and where to build, and how to best support housing affordability and access in the face of wildfire vulnerability.

Wildfire resilience, accessibility, community design, and fiscal responsibility should function as windows through which we can see and make future planning, physical design, and ongoing operations decisions. Resilience requires a collaborative process, constantly refined and ever evolving. The time to act is now.

Responsible Investing and ESG as a Growth Strategy

Well before ESG, Net-Zero and Diversity became the concepts they are today –  we viewed “responsible investing” and ESG not merely as good governance, but strategic business practice.  For years I heard the quip -   " what did you say? 'responsible' investing'?   - if you’re investing 'responsibly', does that mean I'm investing irresponsibly'?!"   (perhaps…)  

 Today I still field concerns that actively integrating sustainability, climate solutions and even diversity, into the equation are at best, “nice to haves,” and at worst, impediments to profitability. 

 These comments make me smile because it means there’s still upside.   I know we are simply being thoughtful and strategic in the way we invest.  We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns. 

“Triple bottom line" or "people, planet, profit"  is about being smart and intentional about our strategic decisions and investments. The first hurdle to overcome is the notion that investing with an environmental or social lens will naturally result in lower returns or performance. Data shows it is just the opposite.   It’s imperative for growth, durability and longevity.  To put in an economic context, it is not a zero sum game - “you give up economic profitability or returns if you integrate ESG factors.”  In fact, this holistic lens is actually central to business strategy and driving growth.  

This is how firm’s will scale,  how they will gain new market opportunities, attract and retain the best quality human capital/talent.   It weaves through everything, encompassing each facet of business operations and critical to every investment decision.

 ESG and Diversity

As you build a diverse team, the data shows that not only do you open up new markets, you make better decisions.   McKinsey’s most recent research from 15 countries and more than 1,000 large companies show there is positive correlation between diversity of the executive teams and likelihood of financial outperformance.  Their 2019 analysis showed companies in the top quartile for gender diversity were 25% more likely to have above-average profitability than those in the fourth quartile, and 36% more likely with ethnic diversity.

However, progress on diversity in corporate board rooms continues to lag.  Since 2016, the number of women on Russell 3000 boards has risen by by only 4.2%, rising to 22.6 percent  as of September 2020.  On the S&P 500, it’s still shy of 25%.   And, almost 80% of the S&P 500 board members, where race is identified, are white.  

Board and executive staff diversity are imperative.   Why?  Gender, race and ethnicity and age diversity improves board performance and overall governance.  Diverse teams see new opportunities and understand risks from completely different perspectives.  As companies face new strategic challenges, climate change risk, generational wealth transfer, digital transformation, pandemic response, cybersecurity exposure – it’s important to have a wide range of voices at the table.

Two years ago California mandated that any public company having its principal office in the state have at least one female board member.  The state recently passed similar legislation for those considered “underrepresented”  minorities.   If approved by the SEC, which is expected to rule on this by August 2021, NASDAQ’s diversity rule proposal would require listed companies to publicly disclose board-level diversity data and require a diverse slate of directors  - at least one who identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.  

Triple Bottom Line Investing

We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a company, a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we putting firms on a trajectory for success and creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values. 

Climate Change and Environmental Equity

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

Investing for Impact and Long Term Growth

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, business leaders,  and capital providers to take these concepts into account?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are stronger companies, building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future?

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

10 Years Later - Have the Fundamentals Changed?

In 2010 I published a book on Sustainable Investment entitled “Practical Greening”. In the preface I wrote:

“We are living in a unique time, facing unimagined challenges: global economic crisis, peak oil, climate change, social and geopolitical shifts. And these are the high-level concerns. At the ground level we are dealing with aging infrastructure, an inadequate energy grid, primary fuel sources in foreign hands, diminishing croplands, a newly regulated playing field and unemployment reaching double digits in some cities. Like a ‘perfect storm’, few could have imagined these events arising in concert. But they have - complexity is increasing, changing the world as we’ve known it.

We need the capacity to evolve, to innovate, be agile and flexible and ultimately, resilient. We need to engage and lead. The imperatives of climate change and resource scarcity will change the way we do business. “

For all extensive purposes, the fundamentals have not changed much. We are still facing epic challenges, and for most part - we haven’t done much - but, that does seem to be changing. Finally.

To quote Jim Collins - “We’re heading into a world characterized by big events, big forces, massive storms. We’re going to be vulnerable little specks on on the mountain when when the storm hits out of nowhere.” [apropos to the 2021 Texas energy grid crisis]. “And if we’re not prepared, we’re going to die up there. Or we’re going to be in real serious trouble.”

Over the next few weeks I’ll begin to unpack what’s still the same (climate risk - on steroids now), what has changed - a pandemic, awareness around racial inequities and the importance of diversity, equity and inclusion, increasing interest in strategies that address climate risk, + a new administration which has named Climate Risk, Racial Justice, Economic Recovery and the Covid Pandemic as their top priorities.

Rinse, Repeat...Reprise

I recently watched a presentation by Spencer Glendon at the Sohn Investment Conference on the impact of climate change on our way of life and our economic fortunes. It got me thinking about some of my past posts. I thought it might be worth a reprise this one I did back in 2016 on Responsible Property Investing. It was pretty good back then and holds true today.

We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns.

I believe that the Responsible Property Investing is the leading edge. Call it "triple bottom line" or "people, planet, profit"  - it is about being really smart and intentional about our investments. The first hurdle to overcome is the notion that investing with an environmental or social sense will naturally result in lower returns or performance. I think it is just the opposite. We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we are creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values.

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, developers and lenders to take into account these topics?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future.

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

Navigating the Land of OZ: Understanding Opportunity Zones and Opportunity Funds

Flying under the radar in the 2017 tax reform package was a sleeper provision that authorized the designation of “opportunity zones” and the creation of “opportunity funds.” This versatile program has the potential to stabilize and revitalize distressed neighborhoods and surrounding communities by unlocking private investment capital through a series of tax benefits.

The provision allows individual and corporate investors to defer capital gains tax until 2026 if those gains are reinvested into new construction or major rehabilitation of projects in economically depressed areas via designated opportunity funds. If held for five years, the original amount of capital gains tax due is reduced by 10%; if held for seven years it is reduced by an additional 5%.  If the investment is held for at least ten years, gains on the invested amount accrue tax-free. 

Estimates suggest that $6.1 trillion of unrealized capital gains is held by American households ($3.8 trillion) and American corporations ($2.3 trillion). Getting to that capital will be a bit trickier. Much of the money is disaggregated across individual accounts managed across myriad institutions and platforms. 

At least 90 percent of the assets in such funds must be invested in government-designated low-income zones. The governor of each state was able to designate up to 25 percent of the state’s low-income communities (LIC) as opportunity zones. Up to 5 percent of the designated zones could be contiguous to LIC tracts. The zones are designed to be in areas that have a poverty rate of at least 20 percent or that have a median income that does not exceed 80 percent of the metropolitan area’s median income. The final designations were made in spring 2018. In total, 8,700 opportunity zones were chosen by state governors and approved by the U.S. Department of the Treasury. These zones range from a few blocks in large metro areas to entire municipalities in some rural states. The Treasury Department has indicated that no additional opportunity zones will be added. 

The expectation is that the added tax incentives will make investment in these disadvantaged areas just a little more enticing and add another option to the capital stack. Concerns exist that the investment capital that may come flooding in also has the potential to push out residents and achieve value primarily for investors. It is expected that states and local communities will provide guidelines to ensure that the objectives of affordable housing, strong neighborhoods, and vibrant, diverse, and sustainable communities are met. 

As of the third week in August 2018, final rules from the Treasury Department were still pending.

The Messy Complexity of Life

I’ve found  that buildings and communities are deceptively complex.  In their simplest form, buildings provide us with shelter and enable us to work productively. Communities link us together and provide the necessities of a civilized society - roads and schools, safety and security, systems of communication and infrastructure - energy, water and waste disposal,. But, beyond that they are also an eco-system that reflects the culture and values of the people that live, work and play within them. A unique matrix of individual parts that when put together in a thoughtful and intentional way create harmony and enable each of us to bring our best selves to the mix. Buildings play an important role in how easily and effectively we can do that. And the recognition of how people interact with each other is key to creating a resilient and vibrant community.

The best projects are ones in which we make the conscious choice to be mindful and think holistically and systemically about the solutions. The trans-disciplinary nature of the team and partnering with the community brings forth solutions that may not be obvious or expected, but in the end are more meaningful and durable. By sharing roles and crossing disciplines we learn from and challenge each other, ultimately pooling and integrating a wealth of expertise. Today’s world requires a vastly different analysis - one that looks at the total value of resiliency, sustainability and high performance. It includes the full range of economic, social and environmental impacts. Decisions around sustainability need to quickly move beyond neat rows of check boxes (and simple payback) to the messy complexity of real life.

There exists a quantifiable and integrated suite of payoffs at the property level that accrue to the owner and occupants, as well as at enterprise and community levels. Successful adaptation and change happens when we are able to articulate the benefits in the context of this complexity and make this the primary source of inspiration and the lever for action versus falling into the trap of easy black and white answers."

The best offense is a good defense.

 

re·sil·ience (rəˈzilyəns)

1. the ability to become strong, healthy, or successful again after something bad happens.
2. the ability of something to return to its original shape after it has been pulled, stretched, pressed, bent: elasticity

I'm about to head off to huddle with a group of colleagues to frame "10 Principles of Resilience" based on our work in more than a dozen communities.  This gave me the chance to look at some of the projects I've worked on, and think about lessons learned.  

Resiliency can be divided into four basic dimensions of urban resilience[1]:

• health and well being,
• economy and society,
• infrastructure and environment, and
• leadership, strategy and community engagement. 

The cost of preparing for a hard to see, long-range event can play second fiddle to immediate, day-to-day operational challenges particularly when there are competing capital needs.  However, resiliency is not merely a protective Band Aid, it is also an economic driver.  Economics is a combination of avoided risk and the capitalization of opportunities.

The objective is to proactively make cities and communities increasingly capable of overcoming both the day to day and catastrophic stresses placed upon them.    This is measured in terms of economic value- increased revenue, avoided cost, community cohesion, environmental health and resident physical and social well-being.  Each of which contributes to a desirable, future ready city.

Developing a plan for a resilient community involves a large and diverse number of stakeholders spanning the domains of economic development, industry, social equity, urban planning, design, and engineering.  Some of the focal points include establishing leadership structures, finding launching points to gain traction, and engaging business and residential community to help drive appropriate investments.   

Costs associated with resiliency measures must be viewed in conjunction with the avoided impacts – loss of property, business and economic exposure and critical life/safety mitigations.  At the same time, value associated with a stronger, more resilient neighborhood and quality of life must also be incorporated.  Communities rely heavily on linked networks.  The loss of one critical component of infrastructure can have cascading effects throughout a myriad of systems.    

For example, our work showed that in the event of a climate related event in the Duwamish River area in Seattle (such as a sea level with a King tide or prolonged precipitation) significant economic losses would be incurred.   Lost wages, property damage and business interruption would reverberate throughout the local, regional and national economy.  

While the actual amount is difficult to assess, a comprehensive commercial level assessment in the Green River Valley (GRV) shows total property value exposure between $30-50 billion.  Given, the Duwamish area accounts for about 30% of total sales/property tax and 10-20% of total employment in the overall GRV region, we estimated about a $10 billion exposure in property value in this area.  Business interruption, for days or weeks, would add exponentially to this cost.  Food insurance is generally an exclusion in most policies.  Even though many companies carry property damage and business interruption insurance, the downtime and inability to deliver a product or service in a timely manner has long term ramifications – for the firm, their employees and their clients.  

Research shows resilient people, possess three characteristics: a staunch acceptance of reality; a deep belief, often buttressed by strongly held values, that life is meaningful; and an uncanny ability to improvise.  Communities, made up of people, are the same.  

Resiliency strategies play a huge role in long term viability and economic value both for public entities as well as individual businesses and residents.   The objective is to future-proof against potential downside while priming to take advantage of opportunities. What region or business would, in their right mind, leave their long term fate to the vagaries of the environment, when reasonable, prudent and proactive measures can be taken to avoid property and profit losses? 

[1] Rockefeller Foundation 100 Resilient Cities Program