Developers' Next Big Challenge: Finding A Way To Measure Social Impact Of Buildings

A focus on incorporating Environmental, Social and Governance best practices, or ESG, into development has sharpened in recent years. But tracking the social element, calculating output and returns, is complex — and becoming more crucial as investor interest and funding grows. 

“We don't have good measures for ‘S’ right now. You know, for E, we talk about carbon, and that's like a unit and people understand, but for S, what is it?” Head of Sidewalk Urban Development Alison Novak said at Bisnow’s Sustainable Development and ESG Investing event in New York City last week.

Sidewalk Urban Development is the commercial development advisory business of Sidewalk Labs, a subsidiary of Google’s parent company, Alphabet Inc.

“In development, oftentimes, it's like, ‘I have done this many affordable housing units, I've created this many jobs.’" she said. "But it doesn't really get to the root of what we're trying to achieve.”

As the climate crisis has worsened, managing the environmental impact of buildings has become more urgent. Increasingly, governments have raised the stakes by introducing regulations that require landlords and developers to reduce their emissions.

In New York, building owners could face hefty fines if they don’t reduce their buildings' emissions by 2024. The legislation, Local Law 97, establishes caps on greenhouse gas emissions for buildings 25K SF and over citywide — it could cost building owners up to $20B collectively, according to an analysis by the Urban Green Council. Panelists said in some cases, regulations have pushed the development community to consider environmental sustainability as a major part of its business plan.

Angie Scott, a director at the WELL Building Institute, said creating homes for people that are inclusive, safe and encourage a healthy lifestyle will have an enormous impact, too.

“[Our homes] inform how we interact with people, it informs physically, how we grow and develop,” she told the audience. “I think developers have a really powerful way that we can impact people on a large scale if we’re changing the way that we're thinking about what we’re doing.”

In July, the IWBI announced it was planning to launch the WELL Health Equity Rating, which Scott said is a recognition that there isn’t anything in the market of that nature.

“We spent almost a year right now just actually listening to what people need. And I think that's the first thing that you have to do when you are really talking about equity and really impacting people — listening to what their needs are,” she said. “We are trying to be very intentional with our writing, and talking to different people from all over different industries, as well as people who are just passionate about equity.”

Novak, who joined Sidewalk earlier this year from multifamily developer The Hudson Cos., agreed frameworks like WELL’s rating do help move markets.

“When I started at Hudson, around 2006, I said, 'I want to do green building.' And they said, ‘That's just something you young people do,'" Novak said. "And 10 years later, the president of Hudson was up on a stage and said, ‘I am unveiling the universe's largest passive house building.'"

“The way that we got there was by having frameworks that we could all have as a source of truth and rally around and understand and define," she added. "I think they really do make a difference in helping people sort of understand a shared sort of goal.”

Settling on a shared goal, when it comes to the social impact of a development, is a large part of the challenge, however. Where developments should be and how they should be built is a constant point of tension in urban areas like New York City. The city has introduced a new measure to the land use rules, requiring a rezoning racial impact statement as part of the process.

Direct Invest principal Carlton Brown said during the event that developments need to be more inclusive to a community they are built in.

“Frequently on development deals all across the country, you hear people say, 'We're entering into a CBA, a Community Benefits Agreement.' What that really signals is that there aren't benefits to the community inherently, and you're trying to create a little niche,” Brown said. “So if you're gonna do some of those things so that you create real stakeholders, it means real engagement early on and not a tack-on at the end.”

He added most new commercial developments have a narrow lobby, with heavy security, making it clear that the general public isn't welcome.

Emergent Capital Partners Managing Director Charu Singh said that it is important to acknowledge that in the U.S. wealth generation in households is largely through real estate.

“If we want market stability, if we want to broaden our base of clients, I think we need to find ways to help people earn equity and earn wealth through real estate,” she said. “Rather than agglomerating it among a certain group of people.”

Novak said there is a growing group of developers who are interested in shared equity models, though they still seem risky to many.

“I totally agree with you in terms of building generational wealth, and also in terms of aligning the developer and the stakeholders,” she said.