Pursuing Global Real Estate Opportunities

In a recent interview, John D. Macomber, Lecturer and Gloria A. Dauten Real Estate Fellow at Harvard Business School (HBS), shared his thoughts on what it will take for organizations to achieve success in real estate investment and development, while managing resource scarcity as the economy begins to rebound. (Adapted from Harvard Business Review).

Q: Many real estate portfolios are under pressure from rising vacancies, crippling debt levels, and a slow economic recovery. What must owners and managers do to survive?

Although institutional demand for investment in commercial real estate appears to be waning, users of real estate are going broke or are under financial stress. Tenants are asking landlords for rights to sublease footage or to break their leases—even as the nature of the way they use space continues to evolve. A number of investors have walked away from properties, some with substantial publicity. On many corporate and bank balance sheets, asset valuations remain high, and will remain so until distressed assets work their way through the system and reach market equilibrium.

All of this means that investors, owners, and asset managers will have to be more strategic and perhaps more draconian about how they view and value their portfolios. They must ask themselves whether it makes sense to hold on to every asset as long as possible before writing a check or writing it off. For newer deals, they must find new ways to rationally evaluate a decision to put fresh equity into the asset. In every instance, they must make do with fewer resources in both cash and personnel. This places a premium on having the best people, the most current thinking, and the finest tools at hand.

Q: Where are the next sources of opportunity for real estate owner-developers?

For entrepreneurial companies pursuing scale and new ground-up projects, the biggest opportunity is in anticipating urbanization and the demographic and design changes it will bring. Chief among these is density. As the population of the planet moves to cities, resource efficiency will become more important. It’s hard to imagine that hundreds of millions of people can live in cities based on the sprawl and car culture of Atlanta, Mexico City, or New Delhi. In China today, there are 20 cities that have more than 5 million residents; nearly half of the country’s population live in urban centers. Even so, the megacities of Shanghai, Guangzhou, and Chongqing cannot absorb all of the migration.

Forward-thinking firms need to take into account not just the next short-term deal, but also urbanization trends, transportation needs, healthcare, resource scarcity, and policymaking related to the public-private financing of infrastructure development. These insights can be synthesized to help firms compete by building smarter, denser, and greener.

From a competitive point of view, metros that have more robust infrastructure elements—transportation, water, energy, and jobs—will thrive better than cities that don’t provide these essentials. This thinking leads to action steps both in the selection of cities and in the choices of development strategies within cities.

Q: You advocate for developers to carefully think through issues of resource scarcity. Why?

The key issue around scarcity relates to demand, not to supply. Take power. There are so many businesses working on the energy supply side—developing next-stage technologies for wind generation, solar, gasification, batteries, and so forth. These are expensive, and, let’s face it, exciting pursuits, with high potential for investors in technology.

But those of us who work in the built environment ought to focus on ways to reduce energy demand. In our classes, we use a McKinsey global cost curve that maps a cost-benefit construct for greenhouse gas reduction. This model also applies to other key resources like fresh water, by the way.

McKinsey’s analysis and our research show that we can save money and reduce demand for key resources through low-tech, trailing-edge practices—such as adding better insulation, lighting, air conditioning, and water-recapture systems in shopping malls; building more densely; and increasing floor-area ratios. This is both good business and good policy. It saves putting further pressure on resources, thereby allowing for more efficient economic growth. But the money-making opportunities that these approaches present are currently not well understood. Only now are the more progressive, leading-edge firms starting to deploy them.

John D. Macomber John D. Macomber is a Lecturer and the Gloria A. Dauten Real Estate Fellow at Harvard Business School. His professional background includes leadership of real estate, construction, services, and technology businesses. Macomber has been a lecturer at MIT in Civil Engineering and Real Estate for almost 20 years, and still teaches a course there in Real Estate Sustainability. He is the chair or co chair of several HBS Executive Education programs, including “Develop India,” the “Real Estate Management Program,” the “Real Estate Executive Seminar,” “Real Estate Development, Design, and Construction,” and the “South Asia Real Estate Seminar.”