Over the last few years, global concerns about climate change and business ethics have brought forth the need for businesses to focus on environmental, social, and governance (ESG) issues and their associated risks. Sustainable and environment cautious business practices have become more prominent in overall corporate strategies – addressing concerns on climate change, business ethics.
While opinions about ESG often get restricted to issues surrounding climate change and pollution, the concept itself has more far-reaching goals. The ‘social’ pillar of ESG focusses on businesses’ responsibility towards labor practices, talent management, and other stakeholder relations – while the ‘governance’ pillar focuses on ethics, leadership diversity, and the provision for providing livable wages.
For businesses functioning in the real estate sector, the need to imbibe ESG principles is not just a moral imperative, but also a fiduciary responsibility. With increased scrutiny on ESG, CRE stakeholders need to understand, improve, and leverage their performance on this front to drive value and stay competitive.
The essential question is no longer what to do, but rather how to do it.
Planning from the ground-up
With the growing understanding of ESG, the real estate sector has started imbibing these strategies into its overall corporate functions. What’s essential is the need to incorporate ESG across the entire real estate lifecycle.
During the planning phase, occupiers should conduct due diligence around the environmental factors that will either help or hinder their business operations and ESG goals. Understanding these factors up front, as well as the associated risks, can help occupiers make educated decisions at a market and property level that will make it easier for them to do business in the future.
The number of companies that acknowledge the risk of climate change in their financial reporting has increased significantly since 2017. From a macro perspective, occupiers can take climate change risk into account when choosing what market, and even submarket, in which to locate operations. The frequency and severity of natural disasters can have vast implications on building operations and is part of the risk profile that occupiers aim to understand before choosing a location. Being educated about, and mitigating against, these risks is a critical factor in planning to ensure continuity of operations in the future.
Other opportunities might exist within special business improvement districts that seek to achieve sustainability goals and to align their efforts with those of local businesses. Sustainable operations are also becoming more sophisticated and may require facility managers and engineers to upskill their education in this area.
Perhaps the most key consideration in this area is simply understanding how the facility measures up to best practices in terms of sustainability, creating measurable actions in turn and monitoring those actions to pave the path for a more sustainable future.
The social spotlight
Companies and CRE leaders can revitalize and transform communities by being deliberate with a real estate strategy that not only encompasses facilities and space, but also incorporates the community. The recognition that well-capitalized businesses have a shared responsibility in the communities where they operate is common today.
These companies can support the strength of their community by creating an interconnection with local leaders and businesses to drive positive outcomes.
Similarly, connecting employee health to the built environment is now a business essential. While the long-term effects of the pandemic remain to be seen, the ‘built’ environment will play a key role in promoting and maintaining healthy behaviors. Organizations like WELL and Fitwel and principles like Harvard’s “The 9 Foundations of a Healthy Building” help owners and occupiers assess and improve the quality of their building environment.
The future
In Asia and Africa, the total building stock is expected to double by 2050. In addition, the material used is expected to more than double globally by 2060, with building and construction to account for a nearly one-third share. Hence, it will be important for the building and construction sectors to inculcate ESG practices throughout the lifecycle of the projects for a sustainable future.
Measuring organizational success is evolving to include not just financial performance, but also how companies perform against ESG objectives. The task of fully integrating these issues into corporate business strategy is complex and will require the commitment of time and resources, as well as partnership with multiple stakeholders.
As we look to the future of ESG and the corporate real estate agenda, additional considerations for
occupiers might surface:
· Technology will play a key role in creating significant and long-lasting change within investors’ practices and portfolios by enhancing the collection and reporting of ESG data. These technologies include data management platforms to store and process ESG data, monitoring platforms to streamline ESG review and delivery processes, and PropTech-based platforms to enhance tenant experience.
· The convergence of a more pressing ESG agenda with new working arrangements represents both a challenge and an opportunity for corporations. As new norms around working patterns and business travel start to become established, the role of remote and flexible work arrangements will evolve for occupiers. One consideration for the future will be whether these arrangements will offset carbon footprints and have a positive impact on energy management.
· Against the backdrop of the target to reduce carbon emissions from the built environment, energy audits are expected to play a critical role in conserving energy and cost savings. These audits go a long way in identifying and designing cost-effective energy savings opportunities.
As we move forward to a more cautious business landscape, incorporating ESG into the heart of the planning process will create the building blocks of a strong strategy.
Role of Startups in the evolving acceptance of FLEX
Our collective journey through the COVID-19 pandemic has been shaped by an understanding that business operations would never be the same. The growing number of Startups are accelerating the adoption of flexible workspaces that provide capital saving, speed, and flexibility. Flexible workspaces are most popular in the Startup ecosystem, for their relaxed, vibrant, and most importantly non-restrictive environment—the trend is now fast gaining traction among large organizations as well.
Flexible workspaces, once considered a niche offering, has become an important part of building owners’ and corporate occupiers’ real estate strategies due to large scale adoption of hybrid work model. Post the pandemic, the use of flexible spaces in commercial real estate portfolios is becoming more prominent in the long term. The flexible space stock in India is expected to grow from close to 29 million sq. ft. in 2020 by 28% y-o-y to touch 47-48 million sq. ft. by 2022.
The ‘Startup’ effect
We are witnessing a Startup boom in India (and globally). The Startup ecosystem has created as many as 14 unicorns in the first three months of 2022, and for the third consecutive quarter, they have received over $10 billion across 334 funding deals. Early-stage Startups often lack the requisite capital and credit-rating to rent traditional office spaces, which in turn made flexible workspaces popular. For the better part of the last decade, landlords discredited this large and growing share of the office market that the sector could potentially demand. Going back to 2019, exacerbating landlord problems, vacancies increased as businesses opted to downsize footprints – in hope of lowering operational costs and meeting the requirement for hybrid-work. Driven by this change and influenced by the ‘Startup’ culture, many landlords were challenged by a new breed of office providers who were willing to meet the growing demand for collaborative, amenitized, managed, scalable, and flexible office spaces.
Flexible workspaces provide Startups the benefit of no upfront CAPEX, cost saving, operational outsourcing, data security, customization & branding, and access to amenities which otherwise they would not have had in case of their own office set-ups. This forms as cost-effective solution for small/variable headcounts of early-age Startups, allowing organizations to focus on improving operations through better collaboration & productivity. Also, enabling them to channelize their time and efforts on their core business. Flex workspaces also facilitates remote hiring from Tier II and Tier III cities, hub-and-spoke model within a city, co-working and remote-first models. Agility and flexibility will continue to be the pillars of Startups across stages and the realty sector is all set to welcome this revolutionary change.
The perception shift
Landlords & developers, who until recently were not forthcoming in leasing spaces to Startups owing to lower business viability, are now viewing Startups from a different lens. They have now actioned to cater to the evolving market; a trend that is likely to drive growth within the office segment.
The increasing number of Startups are creating avenues for more Flexible Workspace operators and Flexible Workspace supply. Increase in hiring and technology adoption is playing an important role in accelerating growth of flexible workspaces.
To cater to Startups, flexible space operators can also be expected to differentiate themselves by providing more premium service offerings featuring advanced technologies, wellness and the evolving needs of the segment. With greater ‘hybridization’ of work, there is more anticipated investment in managed workspaces.
What’s next?
While prior to the pandemic, Startups used flexible spaces mostly for smaller size /short- to medium-term real estate capital light needs, post the pandemic, the use of flexible spaces in their real estate portfolios is likely to become more prominent in the long term and large format requirements as well. We have already started seeing unicorns occupy large spaces (upwards of 1000 seats) in prominent tech park across the country.
With the volatility brought about by the pandemic, flexible workspaces have been a preferred and practical choice for Startups to ensure resilience and growth. Earlier considered a feasible choice for only Startups in their nascent stage, flexible working is now being adopted by established organizations globally as well. Moreover, as collaboration at the workplace, community and networking forms the essence Startup culture, Startups will increasingly choose flexible spaces for the value that it offers.