James Cook and Rebecca Kent
For the rest of our lives the year 2020 will forever be remembered by these two words: global pandemic. If you're in the United States, or in Australia, or any other place in the world, I'm willing to bet that 2020 did not end up how you thought it would. But as we focused our attentions on COVID-19, big things were happening while we weren't looking. Today, we're going to learn about two of them. This is Building Places from JLL North America. My name is James Cook. And this is JLL's Perspectives podcast from JLL Australia. I'm Rebecca Kent. That's right, James, this is a crossover podcast.
James Cook
Aren't you so glad I made you do that Rebecca?
Rebecca Kent
Cheese fest!
James Cook
Yes, yes. Okay. Today, we'll learn how the pandemic actually helped speed up several huge infrastructure projects, and slowed some down as well.
Rebecca Kent
We'll also talk about a ground-breaking court case that could have global implications for how investment funds treat risks from climate change.
James Cook
Okay, so Rebecca, this is interesting. This is a story about climate change and investment funds. What are we talking about here?
Rebecca Kent
Yeah, so James, this is a really interesting one. It popped up on my feed quickly and disappeared again. But I couldn't quite let it go. Because I thought this would have ramifications for property investment funds across the world. So, specifically, it relates to a superannuation fund, otherwise known as a pension fund in other parts of the world. The fund was taken to court by one of its members for not properly managing the risks associated with climate change. This case was settled out of court, so it doesn't have the legal precedent that you would normally find otherwise. Even still, I guarantee you lots of pension funds were watching very closely, and then probably checking back at how they're managing some of their climate risks.
I've teed up an interview with Lisa Hinde, who's in our sustainability team at JLL. And Scott Armstrong, who oversees property at Local Government Super, which is actually doing a phenomenal job of managing their climate risks. And so we talk about sort of how to do it the right way.
James Cook
Let's check it out. I'm looking forward to hearing this.
Rebecca Kent
I've got with me Lisa Hinde, the strategic sustainability director in JLL's energy and sustainability services department. Hi, Lisa. Thanks for joining us.
Lisa Hinde
Hi, Rebecca. Thanks for having me.
Rebecca Kent
And Scott Armstrong, head of property at Local Government Super. Scott, thanks very much for joining us.
Scott Armstrong
Thank you. And Hi, Lisa.
Rebecca Kent
So Lisa, today we're talking about things that may have passed us by in 2020. When our focus was rightly elsewhere. Among those here in Australia, a superannuation company or pension fund, as they're also known, was sued by one of its members for failing to provide him with information on how it is managing the risks of climate change. That could mean fossil fuel companies decreasing in value or infrastructure being damaged by extreme weather. So, my first reaction was what an interesting and significant precedent this potentially sets for property funds. The superannuation industry is a cornerstone of the Australian economy. Australia is the world's fourth largest pension market worth A$2.9 trillion. So there'll be reverberations for sure. What was your reaction?
Lisa Hinde
Yeah, it was quite a surprise to see that. But I guess looking at the industry and the size that it is, it was only a matter of time before something like this was to happen. And having worked in property for a number of years, and seeing the cogs moving behind the scenes on sustainability, my first thought was, wow, this is going to have a massive impact, particularly around transparency and disclosure. It was only a matter of time before the veil needed to be lifted because the impacts of climate change have been felt around the world and investors want to know that they're contributing to a positive movement and future proofing their assets.
Rebecca Kent
So Scott, property and infrastructure accounts for 14 percent of investments across all superannuation funds in Australia. You oversee the property investments for Local Governments Super and you work pretty hard at managing sustainability outcomes. Tell me how your fund is addressing or managing climate change risks.
Scott Armstrong
Our commitment to purchase 100 percent green power for the entire base building requirements of the property portfolio kicked off in 2007, over 13 years ago, so we've been on the path for a while. As far as investments go, the broader LGS fund screens against things like tobacco, weapons and gambling. And for property, we also make sure that prospective tenants coming into the portfolio are not involved in those sectors.
We've made some significant capital investments over the years and our commitment to on-site solar generation has been a major focus with a really good return on investment. Today, around half the LGS direct property portfolio has solar panels on top, and those panels take care of around 36 percent of the energy use of those buildings.
Rebecca Kent
That's amazing. What’s the size of LGS’s property fund?
Scott Armstrong
The direct property portfolio is just over $A700 million, comprising eight buildings across New South Wales. That represents around five and a half percent of total funds under management, so the fund is around about A$12.5 billion at the moment.
Rebecca Kent
Obviously the return that you're getting on solar has been really successful. Are there any other positive outcomes you're seeing from some of your investments?
Scott Armstrong
We've been able to achieve market-leading NABERS ratings and Green Star ratings across the portfolio. And ultimately, our carbon neutral certification, which we achieved in 2019. LGS was the first property portfolio in Australia to achieve that. We've also been focusing on clean and healthy buildings. More recently, during COVID, we're focused on indoor air quality for our offices.
Rebecca Kent
Not everyone may be familiar with NABERS. Would you mind just quickly explaining what that is?
Scott Armstrong
NABERS is the National Australia Built Environment Rating System. It's a government tool that allows owners to compare the sustainability performance of their buildings. It really started out across the energy and water streams. But now it's pushing into indoor air quality, as well as waste and recycling.
Because we've got head room with our NABERS ratings, we've been able to start looking at fresh air across our buildings. We're looking to try and increase fresh air by around 20 percent to 30 percent by increasing air filtration. Moving forward, we’re looking to move beyond base building and into tenant sustainability, in the tenant space. The challenge there is data collection, so we need to do a bit more work there. To get people on board, we're also looking to promote some free NABERS assessments. We're going to roll out a program across our tenancies next year as an engagement tool.
Rebecca Kent
Why do you think it's important for Local Government Super to be so sustainability driven? And what would be the risk of not acting?
Scott Armstrong
Ultimately, it's important because, sure, it's great for the environment and future generations, but we believe it increases our ability to attract and retain tenants across the portfolio. And so we expect better long-term returns from our sustainable buildings compared to stock standard buildings.
One statistic I'm particularly proud of is that the LGS direct property portfolio has consistently outperformed the peer benchmark. Not only has that been the case over the past seven years, but it has delivered a return of 10.76 percent per annum since the inception of the fund over 23 years ago. That's an outstanding result for our members. Importantly, the heart of all this comes from property management. For buildings to achieve sustainability excellence, they must be extremely well managed by the building supervisors and up from there. Then that flows through to the tenant experience.
Rebecca Kent
Lisa, what does it mean to invest sustainably in practice in property?
Lisa Hinde
On the building level, we obviously have performance tools including NABERS and Green Star. These work really well to be able to identify which properties are performing better than other properties. But it also serves as a way to identify gaps in performance. So if there's a certain level of efficiency that you want to achieve with a particular property, or even as an average across the portfolio, they’re quite good metrics to establish yourself against and be able to aspire to on the management level.
There's a lot of focus from a governance perspective in terms having very sustainable assets, but also, how are you managing that moving forward? Tools like GRESB, which is the Global Real Estate Sustainability Benchmark survey, provide that holistic view. Each year, there are different questions and different updates, just reflecting the industry. So that’s a really good way for investors to understand what their fund is doing for them.
Also, it would be remiss of me not to mention on a personal level that superannuation is one of the most significant investments you can make for yourself across your life. With the increase in transparency around superannuation funds, you do get the opportunity to invest sustainably, to pick and choose if you want to make sure that you're not investing in fossil fuels, or tobacco, or remove other elements that may not align with your personal ethos for a particular investment. I think any level of transparency that shines a light on those options is a good thing.
Rebecca Kent
Yeah, absolutely. So members ultimately will vote with their feet.
Lisa Hinde
Absolutely. I liken it to when you when you go to the shops and you have the option to buy the caged eggs or the free-range eggs from the one company. I think we're seeing a lot of superannuation funds providing different products to service different members. But what I'd hope to see is that they see the free-range egg equivalent of the superfunds performing better, and then move a lot more of their actions to that bucket. That would be the dream.
Rebecca Kent
Love it. Thank you so much, Lisa and Scott. I feel like this is quite a fast-moving area of real estate, something that so many companies are getting on board with. And certainly this particular case with the superannuation fund being held to account on their the way they're managing climate change may very well accelerate that movement. We'll watch this space.
James Cook
Rebecca, that was a fascinating interview. For me, one of the most resonating things was the idea that investors in these funds can really vote with their values.
Rebecca Kent
Absolutely, James. So there's a real obligation now for companies to be transparent. And this transparency is leading to people having a choice about where they put their money. As Lisa said, your investments in your pension, or superannuation, is one of the most significant people can make in their lives. Frankly, people are just getting smarter.
James Cook
Yeah, and this is not going to be the first or last time that we talk about sustainability, because it's so important.
Rebecca Kent
The built environment contributes 40 percent of carbon emissions into the global environment. So that's huge. The impact that anyone in the real estate sector can potentially have by making changes, from sourcing green power to constructing timber buildings, to utilising he circular economy and recycling and upcycling, they're not going away.
James Cook
So, we talked about what might be the biggest investment in an individual's life. Let's now talk about what the biggest investment might be for a nation. I'm talking about infrastructure projects. I had heard that some big infrastructure construction projects were taking advantage of the fact that car traffic and air traffic is so low this year, because of the pandemic. In order to find out if that was true, and what that meant, I called up Phil Ryan. Phil is a researcher at JLL, based in New York. He has a passion for ambitious infrastructure projects.
Phil Ryan
I am Phil Ryan. I am the senior manager of U.S. office research at JLL.
James Cook
One of the things that I really wanted to talk to you about today, Phil, is that there have been a few silver linings around this pandemic and it feels like an acceleration in infrastructure projects has been one of them. I had seen a piece about the LA Metro, and the speeding up of the construction of the Purple Line into Beverly Hills. Is it true to say there has been an acceleration of infrastructure thanks to the pandemic?
Phil Ryan
Yes. Especially for projects that were already underway. The Purple Line is the most high profile example of this. If people aren't commuting to Beverly Hills or throughout the Los Angeles region, infrastructure companies can take advantage of Wilshire Boulevard not having much traffic and doing a lot of the cut and cover tunneling station build-outs. I believe that they've been able to accelerate the timeframe by more than six months. Almost a year, possibly. You have lower operational and labor costs by accelerating that timeframe.
Similarly, when people aren't commuting this also helps transit projects that don't necessarily need street space. In New York, the MTA (Metropolitan Transportation Authority) was able to do quite a bit of fast-tracked maintenance on the system and was also able to implement accessibility measures in more than 11 stations on a much faster timeframe that they would have been able to do otherwise. That’s because they didn't have to deal with large amounts of commuters.
Road projects have also benefited. For instance, in Central Florida, Interstate 4 was able to undergo a number of upgrades on a slightly faster timetable. That's particularly important in such a fast growing super metro area between Orlando and Tampa.
James Cook
LaGuardia is the closest airport to Manhattan, most famously called by our soon-to-be-president a third world bus terminal.
Phil Ryan
I'm not going to say he was wrong.
James Cook
Has the pandemic allowed the construction of that new Central Terminal at LaGuardia to speed up?
Phil Ryan
The reconstruction was in full swing well before the pandemic, but the pandemic has made it a bit easier to do some of the last-minute logistics stuff. Anyone who has used LaGuardia knows that it's a very space-constrained environment. With a lot of aeroplanes simply parked there, it hasn't been able to get the full benefit of the emptiness during the pandemic, but it has helped.
For anyone who has had to deal with a lot of the LaGuardia reconstruction, they would know that there were issues with reduced road capacity, and along with the absence of a mass transit option, it was really annoying to get in and out of the terminal area. So having that freed-up road space meant that fewer people were inconvenienced, and a lot of that congestion had been ameliorated during some of the last components of that terminal's reconstruction.
James Cook
Has the pandemic been a good thing for infrastructure? It sounds like projects have been able to speed along.
Phil Ryan
It's a very mixed bag. In the short term, it helps with projects that you want to accelerate the timetable for; you have all the funding, you have the labour, you have materials. Those projects get an advantage. Over the long term, things are actually a little concerning.
Pretty much every state municipality at this point is severely in the red from a financial standpoint. I live in a city that has a US$9 billion shortfall. The MTA, which operates the subway, bus and commuter rail in the New York metro area, covering 20 million people – more than five million people use the subway alone – has been particularly vocal about the absence of federal funding. That's because it has to effectively run an essential service on a normal schedule, with 30 percent of its usual ridership. That's a lot of lost revenue. The absence of additional stimulus as a stopgap and to cover some of those losses means it has had to cut back pretty significantly on its capital program. That's hard in a city with more than a century-old infrastructure that really needs repair and improvement. And the last thing you want when economic recovery is needed is to have to start cutting services and reducing mobility, access and connectivity, because those are so important.
For the office market, active transportation, whether that be walking, cycling or public transportation, is a real selling point for tenants and investors. People want to be somewhere where there are multiple modes to get there. So it is a critical component of what our recovery over the next few years will look like.
James Cook
I'm not an expert on this at all, but I certainly know that after the Great Depression, the New Deal delivered a lot of high profile infrastructure projects, which seemed in a lot of ways to get us out of the Depression. What is it about infrastructure projects that seem to have such a positive impact on the economy?
Phil Ryan
Mobility is basically the cornerstone of economic growth. You cannot have a functioning economy without the ability to transport goods and services. That means an effective transportation network for shipping Amazon parcels. It means getting your food. It also means how you get to work. When infrastructure is better, people's mobility improves, they have more opportunities to do things, and that means more potential investment, more potential spending, and broader economic activity. All of that equates to a higher BCR, or benefit cost ratio. Infrastructure usually has a very high BCR of well over 150, which is the economic return for every dollar that's spent on it. Some projects go into the two or three-times multiplier range and they’re not always high profile. They could be incremental improvements, like improved electrical grids. The movement to more renewable energy is a big jobs booster because it requires a lot of manual work to actually build out that infrastructure. It’s a big boost in particular for rural areas where a lot of it has to be built.
James Cook
Awesome. Phil, thank you so much for joining me. This topic is so key to the workings of our entire economic lives.
Rebecca Kent
So James, interesting interview there. Actually, I can identify with some of the comments made there about LaGuardia Airport. I've been there and I have to say it wasn't the nicest airport experience that I've ever had. So, good to hear that next time I'm there it will be a completely new experience. Also, it looks as though global economies are really leaning on infrastructure to pull themselves out of the economic disaster that has been triggered by the global pandemic. They see it as a route to economic recovery.
James Cook
Phil made the comment that investment in infrastructure has more than 100 percent return in your country's economy. So there's no reason not to do it, especially in a time where unemployment might be up. It gives people jobs, infrastructure, airports and highways. Those are the lifeblood of our economy and how a modern economy is turbocharged and made possible.
Rebecca Kent
Oh, and to be in a big international airport again. I cannot wait for the day.
James Cook
With the international borders closed here in the U.S. I've only been doing a bit of car travel. Have you have you done any travel yourself there in Australia?
Rebecca Kent
Not so much, in 2020. I've hunkered down, so I have a pent up wanderlust.
James Cook
Oh my gosh, me too. But you know what? I have been listening to a lot of podcasts because I've got plenty of time now. That includes JLL Perspectives. If people subscribe to Building Places, you should also be listening to JLL Perspectives. Every trend they cover is also relevant to commercial real estate all around the world. And you can subscribe on your favorite podcast app. Just search for JLL Perspectives podcast. You can also check them out on the web at jll.com.au/perspectives-podcast.
Rebecca Kent
Oh, I like your segue there, James. Allow me to say that Building Places the podcast is very much worth a listen as well. Every episode tackles a big question about the future of real estate. You can search for Building Places on the iPhone podcast app, on Spotify, or wherever you listen to podcasts. Also, stream it on the web at buildingplaces.show.
James Cook
I feel like this is the first but not the last crossover podcast. I think there are so many more topics that we can cover together from a global perspective.
Rebecca Kent
Absolutely, James. It's been a fun experiment this one. I hope our listeners like it. It's been really nice having a chat to you.
James Cook
And we'll keep our eyes peeled for more stories to cover in 2021.