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.

What I Learned at the Competitive Edge Workshop #1

“Teaching is half learning.”

That’s a Japanese proverb, originally from the Chinese Book of Documents.  After teaching the first Competitive Edge workshop last week, we definitely believe that’s true — teaching involves a great deal of learning.

In addition to a personally amazing experience with a fantastic group of high-caliber professionals, we found ourselves reflecting deeply on how much we learned from them.

If you’ve been following previous posts on this blog or getting Pacesetter, Investment Analysis of Green Buildings, sponsored by the US Green Building Council - Northern California Chapter and law firm Hanson Bridgett was held last week, we taught to a nearly sold out room.  On top of that, the course was granted CEU-status by USGBC national, a first for the Northern California Chapter — and for green finance anywhere, to the best of our knowledge.

Here is what we learned from listening to and working with the workshop attendees:

#1: Green finance is important to a much larger group of professionals than you might think.

While we deeply believe that green finance can change the world, we had still oriented much of this course’s material to real estate finance and investment professionals. And, we had a full house of folks from some of investment real estate’s household names, which was flattering.  In addition, however, there were also professionals from the building technology,  construction, corporate real estate, affordable housing and legal sectors. In our conversations, we asked attendees about why they attended the course. The answer we received repeatedly was that professionals were finding it critical to understand the perspective of the property owners that they worked with and they believed that updating their knowledge of financing sustainable properties would be a good way to do that.

Real estate professionals in the room were leading change within their firms or they saw the workshop as a good way to help themselves transition within real estate by upping their knowledge and skill of financing green  real estate.

#2: Attendees most liked learning a simple, cohesive underwriting approach, how to apply LEED to finance decisionmaking, metrics and taking away a rich set of resources

We had definitely focused on creating actionable content, and when we reviewed the feedback, the following  topics were voted as being most significant time and time again:

• the GAPS approach simplified underwriting: We had really focused on reducing the complexity associated with underwriting and received strong, positive feedback on this. The participants gave high marks to our own system for green real estate underwriting, which we use to help decisionmakers quickly to define, evaluate and communicate the value-add of green real estate. It was interesting that folks from many non-finance sectors found this approach quite useful, too, in their structuring of their own work with property owners. (Don’t know about GAPS, yet? You should check it out at the next Competitive Edge, Financial Considerations of Energy Efficiency Retrofits, on 7 April; sign up here.)

• Learning how to connect LEED credits with the project operating cash flow: This particular need, a core requirement of our work here, got high marks as well. Most of the feedback was along the lines of participants feeling much more comfortable in conversations at work and with clients, now that they could point to very concrete areas within the LEED-NC system, which were prioritized according to cash flow impact.
  

• More metrics, please!: Green Journey readers know of our papers and posts about metrics for responsible property investing. This topic came at the end of the day, when people are typically a little tired. However, the participant feedback revealed that the topic of metrics was considered very important, telling us that professionals assign a value to incorporating both double and triple bottom line metrics within their practice.

• In-depth resources for self-study: Getting a packet of distilled, vetted sources of the latest green finance research plus tools and tips for further learning and takeaway was voted as very valuable by the attendees. While we taught course materials from  powerpoint slides and handouts, we had originally thought it would be helpful if people received an extra resource book compiling the research, tools and tips on real estate underwriting and sustainable finance that we’ve come to rely on here. So we prepared an 87-page resource book, to support the underwriting of new green construction, which expanded upon the information being taught in the course. We really focused on the green building, finance data and information that we most like to geek-out on. We were pleasantly surprised at how many attendees stated that this information was very valuable. Just this evening, I received a note from a participant saying, “I wanted to thank you for your great insight and the wealth of information that you shared”.

It was really gratifying to be able to share our knowledge and passion with a sharp group of professionals. Their feedback about the topics and resources that were most valuable to them opened our eyes also . This will definitely help us in the upcoming Competitive Edge events.

P.S. → The next Competitive Edge workshop, Financial Considerations for Existing Building Retrofits, takes place on 7 April 2010. We are excited about the fact that the City of San Francisco and PG&E will also be taking part with great information that will help properties to better finance existing building retrofits. Sign up and join us in an exciting day! Seating is limited and several of Workshop #1 attendees have indicated that they’ll be attending again, so register sooner than later. On top of that, early bird pricing runs through 24 March 2010.