Put Fortune 500 Product Innovations to Work for Your Green Initiatives

Now that the economy appears to be improving, we expect billions of dollars of fresh capital to flow into green development and energy efficiency retrofits over the coming years.

However, we also know that many firms are still hesitant to proactively green their portfolios and financial offerings. We think we know why and have new tools to boost their confidence.

These practitioners are saying something that the green building crowd simply can’t ignore. They feel they’re in a Catch-22: they know their companies are at risk if they don’t go green, but they don’t have a clear view of the possible results of committing their capital to green investments at a meaningful level.

Even though researchers have published studies indicating that green properties earn an average 3% higher valuation, or 16% higher net operating income, that still doesn’t mean that you are going to make that on your properties. It doesn’t mean that your particular tenants are going to pay you more rent on a given date. Nor does it mean that you will absolutely realize these results upon sale of your particular green assets.

The truth that leaves these firms skittish is that realizing the value-add of green depends on many variables for which no data exists. Not only must you do the right things, but the sub-market around your asset has to do (enough of) the right things, too, in order for you to be properly rewarded for your sustainability initiatives.

That’s a very hard disclaimer for many investors, lenders and governments to tell their shareholders and voting taxpayers.

So we’re stuck, right?

No, we’re not. There is a much better way.

What Real Estate Can Learn from the Fortune 500

We noticed that leading global players – players like VeriSign, SAP, Genesys, etc. – face similar issues as commercial real estate investors.

They also have the predicament of committing billions of dollars each year to create new or revamp existing products and services in an unclear business environment. The B2B product development gurus who work for these companies told us about the secret sauce of their success – what has made the difference between so-so and blockbuster products, even when the economy is tough.

It turns out that Fortune 500 companies reduce their investment risks within new/revamped product and service initiatives by using sophisticated “voice of the customer research” (VOCR) tools very early in the design process. These tools gather how customers perceive and experience their products and services, which is perhaps the most difficult information to obtain. It is also the most valuable for developing new products and services – particularly the kinds of products and services that are very new to an industry, like green building and energy efficiency.

The B2B product development gurus stressed that these techniques minimize capital at risk because the company obtains key insights up front on what might enhance their product’s success with their customers. Products and services can then be further developed to fit customers’ needs as closely as possible. Often times, these methods reveal data about unspoken or hidden needs customers have never clearly expressed, leading to innovative product breakthroughs.

Galley Eco Capital has carefully adapted VOCR tools to work specifically for the real estate finance and investment sector as well as municipalities engaged in energy efficiency and green building programs. They are available within a branch of special services called Real Estate Innovation Advisory®. REIA now offers special collaborative forums that power green initiatives by enabling investors, lenders and governments to collaborate with their customers on their green space, investments, and service offerings.

Join an upcoming Mini-forum at Competitive Edge Workshop #3

If you are attending Competitive Edge Workshop #3 on June 24, you’ll participate in a mini-version of an interactive Real Estate Innovation forum titled, What Real Estate Investors Think about Your Products & Services (And How You Can Communicate Their Value).

Whether you are a real estate practitioner, investor, service provider or government employee, you will have hands-on involvement in learning how owners perceive green building products and services. You will take away insights about interactive forums as well as specific content that is immediately applicable for your own business.

Understand Your Customers, Minimize Investment Risk and Boost Investment Value

If you don’t have the voice of your tenants, borrowers, partners and customers influencing the development of your green building space, products, services and offerings, then you are missing an incredible opportunity to bring more certainty to your capital programs. You could also miss the chance to find more breakthrough ways to do smarter green initiatives.

Call me today to talk about how Real Estate Innovation Advisory® Services can help you gain clarity about enhancing your existing products and services or get customer input on new ones.

Galley Eco Capital Moves to Hub SoMa, Summer Get-Together in the Works

We’ve moved — here are the details:

We’re excited to announce that we’ve moved our offices to the Hub SoMa!

Hub SoMa is the newest Hub Bay Area venture - taking their co-working, collaboration business model into the heart of downtown San Francisco.

What’s great about the new location is that we can do more of our lab work — creatively designing green finance programs and collaborating on great ideas with the other companies focusing on social and environmental change.

Add to that the great event space we’ve gained where we can hold more workshops, talks and related events for the green finance and investment community. We can’t wait to show it to you!

In fact, we’re already psyched that it is the perfect place to to host our new Real Estate Innovation Advisory® forums (see the upcoming May Pacesetter for details on that other exciting offering!).

Summer Get-Together, Anyone?

We’ll be announcing our Summer Get-Together, happening sometime in June. We’ll have a meet-up among friends new and old, for an informal, fun time. Of course, you’re always welcome to call or stop by anytime before then.

If you want to make sure you hear about our Summer Get-Together plus upcoming green finance and investment workshops and events, make sure you’re on our newsletter list — sign up for it here and we’ll make sure you get the word.

Till then, please update our contact details in your records:

Galley Eco Capital, LLC

901 Mission Street, Suite 105

San Francisco, CA 94103

(415) 305-9512

(P.S. I’m off to Germany for the next few weeks — you might see a blog post or two if I run across any interesting green finance happenings while I’m out there (volcanoes permitting).

Auf widersehen!

Mini-Workshop: GAPS! in practice with 7-Eleven Corporation

Could the shift to sustainability shrink your investment footprint right under your nose?

Here’s a cautionary case study from a real life business, plus a tool to help with early detection of fatal shifts in your pipeline.

The shift to sustainability is driving many jurisdictions to rethink land use on a major scale. That can make structuring an investment program covering several markets quite complex. While land use changes happen all the time, they usually address site specific issues. Investors are very rarely confronted with the possibility of regional land use changes by multiple jurisdictions at once, due to a mega-trend like sustainability.

The sweeping nature of these changes, and the negative consequences to your program if you can’t stay in front of them, are two reasons why you need to employ better tools during program underwriting to detect broader shifts within your investment case; those that might be beyond the information analyzed in typical real estate market analysis studies.

7-Eleven moves to the suburbs

The case of 7-Eleven, covered in the May Harvard Business Review, highlights that problem in a former era - when the shift to suburbs went undetected by the real estate intensive convenience store operator.

Briefly, 7-Eleven had followed an investment strategy of locating stores on roads that connected residential areas with commercial business districts. As suburbs became more popular, many cities removed those roads or they were simply less traveled by suburban-focused consumers, forcing 7-Eleven to locate in shopping centers, where other retailers, such as Target, started mimicking its late business hours and drawing away shopper traffic.

7-Eleven’s U.S. stores’ productivity decreased over the subsequent years as the company gradually lost access to many of its preferred sites and was forced into tougher competition in strip malls and neighborhood shopping centers. The article’s author notes that 7-Eleven’s business in Japan did very well, however, since those stores remained accessible within walkable neighborhoods.  The entire 7-Eleven corporation was eventually bought by one of its very successful Japanese franchisees.

The GAPS! Map

If you’ve attended the recent Competitive Edge Workshops in San Francisco or were at the National Community Development Lending School in New Orleans, you learned how the GAPS! Map tools can help you to develop your business case for the potential value-add that a green or energy efficiency strategy can bring to your investment program.

The GAPS! framework helps practitioners structure the sustainability-driven assessment that is critical for real estate underwriting because sustainability exerts dynamic influences on nearly every facet of a project. The graphic here presents an overview of the tool.

The “P” in GAPS! stands for ‘PIN’ down the causes.  The GAPS framework looks at the sustainability challenge as a complex business “problem”, with root causes that need to be discovered and “solved” via mitigation within the green investment strategy.

Pinning down the causes refers to investigating factors within and external to the project as well as the capabilities of the team that will implement the green strategies. A full description of the available tools is beyond the scope of today’s article, but the case of 7-Eleven highlights the usefulness of one aspect of the assessment. The outcomes are qualitative and quantitative factors that will positively and negatively affect the success of the project.

To evaluate the factors external to the project, you have to investigate the ways that sustainability might exert influence on the social, regulatory, political and of course, environmental forces operating around the project or in the market area where invest.

Typical real estate analysis focuses on real estate specific market factors, but ignores broader regulatory or political action in adjacent markets. It is always assumed that this information is only relevant when it is priced into the real estate, but that is often not the case. If a negative trend has progressed to the point where it can be priced into real estate within your target markets, then it may be too late for you to avoid the damage. You’ll have to either accept that price, rework your investment plan to include countermeasures or leave that market.

With Pinning down the causes, you would have to ask yourself about possible sustainability interactions at a broader level and determine how that might harm or help your green building project, markets, or doing business as usual (conventional investment) if that’s your focus.

The 7-Eleven case highlights the fact that 7-Eleven never connected the dots between the mega-trend of people moving to the suburbs and how that might lead them into direct combat with category killers in suburban strip malls and neighborhood shopping centers.

If the 7-Eleven management team had applied Pinning down the causes within their investment strategy, they might have been able to turn a challenge to their business model, such as consumers moving away to the suburbs, into a bigger opportunity in urban areas:

• Instead of simply following consumers out to the suburbs one market at a time, and getting into a long destructive war with big box category killers, they could have stepped back and noted where the broader trend of suburb life was most prominent and made the decision to capture business in areas that would remain permanently “urban,” where the category killers cannot obtain sites due to their larger store format.
• It took a very long time for many retailers to understand how population density in urban areas is a big plus for retailers. 7-Eleven could have seen these urban shoppers as being a prime customer segment that had been largely overlooked by the category killers (for the first few years anyway).

Both of these ideas are strategic in nature. If a company remains too “close to the ground” in its market analysis and underwriting, it will not see the bigger trends that will impact the long-term success of its investment program.

Using Pinning down the causes forces the investors to ask the bigger, tougher questions in addition to the traditional real estate analytics, to make sure that the project is in sync with larger influences or the investor has at least had an early warning of problems on the horizon that she should make sure to protect her strategy against or possibly turn into a brand new opportunity.

These and many more aspects of using the GAPS tools and frameworks for investment programs and project underwriting are covered during our workshops on green finance. Make sure you are signed up for Pacesetter, our newsletter, so that you’ll get announcements of upcoming classes.