As she approaches her quarter-century with AEW, the company’s chief executive, Lily Kao, remains deeply committed to seeing her company’s and industry’s diversity goals come to fruition. A member of AEW’s Diversity and Inclusion Committee, as well as Co-Chair of its Social Committee, Kao is well placed to help ensure that AEW promotes equality and inclusion within its workforce.
In this extensive interview with commercial real estate directorshe discusses these initiatives and how her company assesses climate-related investment risks, among other things.
What accomplishments are you most proud of as a member of the AEW Diversity and Inclusion Committee?
Lily Kao: One of the reasons I’ve spent my 24-year career at AEW is our unwavering commitment to DE&I. It is extremely important to have defined goals and a team that is held accountable for making measurable progress.
READ ALSO: Make the construction sector more diverse
Long before formalizing a DE&I committee, AEW demonstrated to me that it is a place that values and prioritizes diversity of thought. I am very proud that our investment committee, our risk management committee and our senior management team, which includes the best investment professionals from the private and public markets, are representative of the population of the company.
Additionally, our open core strategies are led by an all-female portfolio management team across the globe, US, Asia Pacific and Europe, with the US strategy alone representing $10.8 billion. of assets.
Establishing diversity at all levels of the organization, and especially at the most senior levels, remains an achievable goal for us and can be improved across the real estate industry. At AEW, it’s important that the future leaders of the organization see themselves reflected at the top. I am also incredibly proud of the affinity groups (AEW Pride, AEW Racial Alliance and AEW Women’s Network) and their tireless initiatives, as well as all the training and mentorship programs we have in place to foster a place of equal and inclusive work.
What is the impact of climate change on your use of “R” in ESG&R criteria?
Kao: Climate impacts will affect almost all regions of the world to varying degrees. AEW assesses climate-related risks using MSCI’s Climate VaR software, which allows us to measure physical and transitional climate-related risks across our portfolios. Since these impacts will affect different markets and different regions will experience idiosyncratic risks, climate risks are considered during the portfolio construction process in the same way as type of ownership, economic/industrial risk and climate risk. market/geographic are taken into account.
READ ALSO: The ABCs of ESG
AEW’s insurance risk management group monitors catastrophe exposure and works with engineers on resilience. Capital improvements are assessed during due diligence and as part of ongoing annual business plans at the property and portfolio level. We also continuously review renewable energy and battery storage opportunities for our investments to reduce GHGs and add long-term value to assets.
How has your team deepened its ESG&R due diligence in evaluating potential investments?
Kao: AEW’s process for risk monitoring and control is robust and disciplined. As part of the acquisition due diligence process, we created a physical risk dashboard to identify risks from flooding, heat stress, hurricanes and typhoons, sea level rise , water stress and forest fires.
Third party engineering consultants are often engaged to provide options to physically mitigate risk through the implementation of items such as flood gates, earth berms, white roofs, etc. This analysis allows us to assess potential climate risks and underwrite and budget the costs to improve the resilience of an asset if necessary.
In addition to physical risk, we seek to assess transition risk throughout the life cycle of an investment. This includes political and technological risks as markets around the world transition to a low-carbon economy.
When you push facilities to improve their efficiency before investing in them, do managers react more favorably than before??
Kao: I have seen a real change in the understanding, acceptance and prioritization of ESG&R initiatives within our industry. Our investors and third-party service providers are sophisticated and respond favorably when we can demonstrate the return on cost of improvements that reduce expenses such as LED lights, low-flow toilets and solar power, or the ability to increase income or rental prospects.
Many of our tenants are equally sophisticated in their ESG&R efforts and appreciate that we, as the owner, are proactive and committed to a vision of prudent property management with the aim of developing or improving environmental, social, governance and resilience of our real estate investments.
Which areas of commercial real estate currently have the greatest investment potential?
Kao: It’s an interesting time for price discovery as the Federal Reserve raised the benchmark interest rate quickly and aggressively, driving up borrowing costs as real estate cap rates are at historically low levels. Negative leverage occurs, giving an advantage to buyers with low or no leverage. AEW has a strong track record of investing through all cycles and maintaining disciplined underwriting and I believe there will be investment opportunities in all major real estate sectors.
Specifically, fundamentals continue to be strong for logistics and housing, where supply is tight and record vacancy continues to drive rental and NOI growth, providing a hedge against any potential expansion in yields. As medical costs continue to rise nationwide and the delivery of medical care shifts to ambulatory care facilities, we also see potential in healthcare investments with demand based on need. that provides a sustainable income.
Which sectors present the greatest potential investment risk?
Kao: Today, the greatest uncertainty surrounds the office sector. Tenant demand is still muted after more than two years of many people working from home. As a result, office occupancy has not recovered, prompting many companies to reassess their longer-term space needs.
Equally challenging are the costs of tenant improvements and the capital required to maintain or upgrade the building, which are significant and continue to rise. These headwinds are leading to tighter underwriting by lenders and liquidity in financial markets is less today than it was a year ago.
Read the August 2022 issue of CPE.