Regenerative real estate investing

Despite an enviable long-term growth record, the U.S. economy hasn’t benefited all groups of U.S. society equally. Growth disproportionately favors higher-net-worth individuals who have benefited not only from higher paying jobs, but also from wealth creation related to home and financial asset ownership. As a result, rising socioeconomic inequality has become one of the biggest challenges of our time.

We see market-driven private sector involvement in addressing this challenge in real estate as critical and something that’s been insufficiently tapped historically. Deploying capital into undersupplied and underserved micro-markets has the potential to yield both market rate risk-adjusted returns to investors and positive societal outcomes to a broader group of stakeholders.

With a deliberately inclusive investment philosophy, we believe return-seeking private real estate investors can play a meaningful role in addressing the systemic risk posed by socioeconomic inequality. A complex of disparities limits human development by curtailing access to basic services such as health and education; it also damages individuals’ sense of community belonging and fuels broad distrust of institutions. Recognizing these realities, the regenerative approach described in this article should be driven by a socioeconomic imperative that prioritizes investments that foster human-centered economic development, particularly in historically undersupplied, underserved communities. We believe profit-driven investors can achieve market rate returns by addressing this fundamental gap between undersupply and existing and emerging demand.

Why inclusive real estate investment makes financial sense

Concerns about inequity and disparity aren't simply moral issues. Research suggests that decreasing socioeconomic mobility and persistent socioeconomic disparity stifle broad-based demand and limit economic growth. The U.S. economy’s biggest demand driver is private consumption, which accounts for ~70% of GDP growth. Lower- and middle-income families tend to spend a much greater share of their income on consumption, yet their share of aggregate income in the United States has plunged over the past 50 years.

Research suggests that the additional household spending that comes from increased wealth and wealth equity can boost economic growth. A strong and growing middle class is correlated with employment, income, and household formation growth, which drive consumption of goods and services and, in turn, translate into demand for real estate. Supporting greater levels of socioeconomic stability and mobility for lower-income households could boost economic potential and real estate demand, particularly in areas that have historically been undersupplied with respect to attainable housing and other goods and services.

Housing affordability is down, climate risks are up

Across the United States, families are increasingly being priced out of residential real estate markets. By year-end 2022, the United States experienced its fastest-ever three-year deterioration in the affordability of home ownership. After housing prices soared during the pandemic, partially fueled by historically low interest rates, a severe rate shock more than doubled mort­gage interest rates. Homebuilders slowed new construc­tion, further reducing supply, resulting in a 30% jump in the median price of existing homes. The cost of rental housing was similarly affected; housing rental unaffordability hit an all-time high in 2023, with the share of cost-burdened households—defined as households paying over 30% of their income on rent and utilities—rising to 50%. Teachers, firefighters, and other essential workers are often unable to afford adequate housing within reasonable proximity of their jobs.

Further exacerbating access to affordable or attainable housing—already severely undersupplied—are shifts in development patterns, both in terms of housing type and location. For instance, the unprecedented shift in net migration toward Sun Belt markets during the pandemic triggered record levels of residential development. In order to justify new development, however, developers typically must charge market-leading rents at levels higher than where the majority of rental demand exists, at middle- and lower-income attainability levels.

The amount of development taking place in markets that are at high risk from a climate perspective is also notable. Climate change has been presenting populations and city planners with alarming present and future scenarios. Living in warming cities poses dramatic risks to health and well-being, while the concentration of housing, businesses, and infrastructure makes disaster-prone areas subject to a substantially higher risk of catastrophic damage and loss. From Boston to Miami and from Tampa to Galveston, sea-level rise, exacerbated by land subsidence, is climbing faster than the average rate around the globe.

Environmental risks aren’t felt equally by everyone. The legacy of now illegal, racist housing practices such as redlining in the United States has literally left parts of certain cities to swelter in so-called urban heat islands while the wealthier districts stay cooler due to their higher prevalence of green space. Research from the Proceedings of the National Academy of Sciences (PNAS) has shown that racial minority and economically disadvantaged urban populations face “environmental inequalities at three geographic scales: the neighborhoods they live in, their bordering neighborhoods, and the neighborhoods they visit” relative to predominantly white and wealthier populations. And housing affordability, accordingly, while bad for everyone, is worse for the economically disadvantaged in cities that don’t put substantial resources into developing attainable housing. Consequently, the housing and environmental crisis is disproportionately experienced across racial and class boundaries. Therefore, it's critical that responsible investors view climate change through an equity lens, incorporating intentionally equitable energy transition and climate resilience strategies to support a more just transition.

The role of regenerative real estate in thriving communities

Against this backdrop, we see a generational opportunity for investors to make a meaningful impact in terms of facilitating greater housing affordability, helping establish climate-related resilience, and fostering socioeconomic transformation.

As private markets investors working toward a more sustainable future state for the built environment, we see many potential benefits of taking a holistic approach to return-seeking investment strategies:

• Middle- and mixed-income housing—Middle- and mixed-income housing development is a critical piece of a regenerative real estate approach. The United States is significantly undersupplied with rental housing that’s affordable to middle- and lower-income households. Addressing the supply/demand imbalance at these income levels poses a systemic impact opportunity for investors: Fostering economic connectedness is expected to lead to greater levels of socioeconomic mobility over time. Mixed-income developments effectively deconcentrate poverty, allowing market rate units to help lower rents on more affordable units. Furthermore, public school systems can benefit from the presence of greater resources, and tolerance of cultural, class, and racial differences can be fostered.

• Healthcare-oriented real estate—We know that health outcomes are closely connected to socioeconomic status. Some of the barriers preventing access to healthcare for lower-income populations include the overall cost and complexity of health insurance in the United States, potentially lower levels of health literacy, and the distrust of—or, because of language differences, the inability to communicate adequately with—health professionals.² Improving the availability of healthcare, and more specifically the “geographic proximity of [healthcare] providers and facilities in relation to an individual,” could support better access to primary care treatment, which has been found to correlate with better health outcomes and lower overall healthcare cost.³ Mixed-income development that simultaneously seeks to establish quality healthcare facilities in close proximity or within easy reach of public transportation hubs could support more equitable health outcomes.

• Adequate food and essential services through necessity-driven retail—It's been well documented that access to healthy food is one of the keys to having a healthy population and to reducing systemic inequalities. Providing access to healthy food is an area of much current innovation, including building better local ecosystems for food distribution and engaging the healthcare system to expand the potential of food as medicine and produce prescription models in addressing diet-related and chronic diseases. The effectiveness of these innovations could be enhanced by increasing the number of grocery-anchored, community-serving retail centers in low food access areas within proximity of dense housing and public transportation.

• Improving the built environment to promote climate resiliency—We integrate environmentally sustainable considerations into all our investment and asset management practices across the real estate value chain. Accordingly, when we consider regenerative real estate projects, we seek to mitigate obsolescence in the built environment—whether in residential developments or in light industrial warehouse space—along with regulatory and reputational risks. Environmentally sustainable real estate has the potential to reduce operating costs, vastly improve life experience against the backdrop of climate change, and enhance asset values while strengthening tenant retention.

• Access to capital for unscaled local developers—Another important aspect of regenerative real estate investment involves proactively incorporating the perspectives and expertise of people living and working within the micro-markets in which we invest. Locally engaged real estate developers who have nurtured relationships with community and political stakeholders are ideally positioned to build consensus as they make real estate investments that help revitalize those communities. They’re also well equipped to identify the risks that must be mitigated to generate risk-adjusted market rate returns for those real estate investments. Here, we see supporting the potential for transformative change through joint ventures with real estate sponsors with successful track records but who have historically been unable to access sufficient capital to scale their investment platforms.

The socioeconomic urgency is clear

The need for regenerative real estate investment is evident and will be an important part of a collective effort between public, private, and nonprofit sectors to achieve the sustainable development goals (SDGs) defined by the United Nations. But as the “UN’s Sustainable Development Goals Report 2023” states, “The promises enshrined in the SDGs are in peril,” highlighting widening economic gaps and the uneven effect of the climate crisis as particular areas of concern. With an estimated global funding gap of $4 trillion annually to meet the SDGs by 2030, we see a yawning chasm of risk but an essential opportunity for private capital to make a difference in fostering good health and well-being and inclusive economic opportunity through investing in sustainable cities.

Encouragingly, the number and average size of impact investment allocations by investors and lenders have increased dramatically in recent years, influenced by lagging and reversing progress in achieving global sustainability targets.

Investing inclusively: supporting broad-based growth through return-seeking investment

Investing with an integrated focus on environmental and social sustainability, we believe can both mitigate investment risks and improve risk-adjusted return potential over medium- and long-term horizons. As a corrective to real estate development that unintentionally deepens preexisting socioeconomic inequities, we see regenerative potential through the prioritization of human-centered economic development, including equitable transit-oriented projects within proximity of employment nodes. As we look across metro areas in the United States, we see many examples of micro-markets with strong fundamentals where existing and emerging demand hasn’t been addressed with adequate supply. These are also areas in which sustainably focused institutional investment can support positive multiplier effects, including access to affordable housing, better healthcare, healthier food, essential services, and transportation and employment infrastructure.

Inclusive real estate investment that has an eye toward creating more equitable socioeconomic outcomes for all societal stakeholders supports broad-based consumption and reinforces long-term demand. Through impact investment, we can not only mitigate risks, but we can also increase potential returns on profit-driven investment when we invest in both the places and the people who occupy them.

1 Although it continues to reflect stark racial segregation and power imbalances, Atlanta offers an example of positive urban transformation through the development of mixed-use and mixed-income communities. See Urban Redevelopment and Housing Values: A Case Study of the Atlanta Beltline, TriCollege Libraries Institutional Scholarship, 2018. 2 See Barriers to Health Care Access for Low Income Families: A Review of Literature, 2018. 3 Health Care Access | CDC.