Brian narration: This is BUILT, the podcast where you meet creative leaders in the commercial real estate industry and hear how they do what they do. 

I’m your host Brian Maughan, Chief Innovation and Marketing Officer with Fidelity National Financial.

And those of us in this business, well, we know the buildings. But how many of us know the stories of the people behind those structures?

In this first episode of our new season, we’re talking to Mary Ludgin. Mary is a Senior Managing Director and Head of Global Investment Research at Heitman, a real estate investment advisor with a little over $50 billion in assets under management in commercial real estate. Before she started her current role, Mary earned degrees in Education.

Mary is also an unlikely warrior in how we adapt to climate change, and her not-so- secret weapons are research and using data to make decisions.

Mary: What did it mean that warmer air collects water more? That means bigger storms, it means more flooding. Were we underwriting that as we were looking at an investment? Were we taking into account the potential for significantly higher taxes to pay for the lifting of roads and the creating of more porous pavements and other things to deal with more water in some places and not enough in other places.

Brian: Mary and her team know the impact that climate change has on the real estate market:

Mary: We were also looking at what was the risk that pricing would change. Certain parts of the globe adjacent to water have been much in demand historically. What if the water becomes the enemy as opposed to the attraction and those locations lose value?

Brian: At the time of our conversation, Hurricane Ian had just barreled through western Cuba and the southeastern United States, especially South Carolina and Florida, where it made its American landfall.

You may have heard about it on the news. This is NBC’s Lester Holt reporting live from Florida:

LESTER HOLT - NBC: Hurricane Ian blasting ashore near Cayo Costa, its fierce wind spinning at nearly 150 miles an hour. A major category four storm now tied for the fifth strongest hurricane in US history and continuing to sow damage…

Storms like Hurricane Ian are a direct effect of climate change, and will only become more frequent, powerful and a danger to life and property.

Through her research, Mary has become familiar with some of the places hit hardest by these recent storms.

Mary: And what we were finding was that, places that were subject to these risks in abundance were among the most richly priced locations in the globe, and we thought that that was perhaps a misapplication of risk.

Brian: To help manage this risk, as head of global research, Mary runs a team of 18 colleagues from Chicago to Hong Kong.

Mary: My group and I are looking at: what is the macro economy doing? And what does that suggest about the pricing for real estate and what in turn does that suggest about where we should be placing our clients' capital?

Brian: The capital spent in an area affects investment clients and those who call a place home.

Mary’s expertise today is a product of years of learning and applying skills from different industries.

Brian: Let's go back to your beginnings. Because I don't think that you were laser focused on getting into commercial real estate when you left Vassar College. Is that right?

Mary: Absolutely. I had been the weekend administrative assistant at a real estate company, Baird and Warner, in a suburb of Chicago, where I typed listing sheets and other documents, but I had no idea such a thing as my current job existed at that point. I went to a liberal arts college. I majored in political science… 

Brian: And so you left Vassar with the goal to be a teacher, if I understand correctly.

Mary: I wouldn’t say it was that well-formed. But I love to learn. I'm the daughter of a teacher and the granddaughter of a teacher, so it wasn't a long path to get me into a Master's in teaching program at Northwestern, and that was the beginning of my very circuitous career.

Brian narration: While at Northwestern, Mary took a history of education course, where the profess or noticed her natural skill in putting others' research into practice through her writing. He asked her to stay after class when Mary turned in her first paper…

Mary: He said, I don't usually get papers like this. So we began a friendship that was based on my writing a paper that he liked. And seconds later he was awarded a grant from the US Government Department of Education to help understand why it was that schools became the delivery service for a lot of social services. Why do we teach driver's ed in high school, for instance, Why are there shop classes? Things like that. Utterly unrelated to what I'm doing today. But in the process of going back, he would pay for the first year of a PhD program. So that changed me from interviewing for jobs, teaching eighth grade, into thinking about… what would I like to study further? And that brought me back to political science, which brought me into the world of urban politics and public policy.

Mary: Which is part of this circuitous journey that got me to this chair.

Brian: Mary worked as an urban planner for Chicago, and soon after, for a real estate investment advisor in the city. Heitman acquired that company in 1994, and Mary has been with the company ever since.

With Heitman, Mary’s commercial real estate investments are informed by her experience with dense collections of research and data.

She’s looking for patterns…

Mary: You’re bringing to mind my favorite quote from Mark Twain. History doesn’t repeat itself, but it rhymes. We’re looking for the rhyme. 

Mary: We’re also looking for the moment. Where secular change is happening, where the past is not a predictor of the future. So we’re trying to figure out when is real change occurring?

Brian: Take for example what the pandemic did to almost every sector of American business, including retail...

Mary: During Covid, it looked for a while as though the internet was going to be the way that so much more retail got delivered to us. Groceries, food, goods, large and small. And then that stopped for a period of time and people have returned to in-place stores. So that's an instance where a trend didn't keep going in the direction that some were expecting, but other forces were at work that caused a moderation in that trend. Is eCommerce still growing in market share? Yes, but not at the pace that it was during covid and people are picking out their own avocados again, maybe in part because of inflation. The fact that they don't wanna pay the $5 fee to Instacart or something.

So our charge is to try to sift through an array of different dynamics and figure out which is noise and which is trend. We don't get everything right, but a wonderfully challenging task to put before really smart people that like to learn.

Brian: You said you're looking for the moment, right? You're looking for that moment in time when something changes. And it brought to my mind this most recent multipart report that Heitman wrote in collaboration with the Urban Land Institute regarding climate risk and real estate. So could you just describe a little bit about what that report maybe shines a light on, in terms of the moment that might be ahead of us?

Mary: Well, it began in late 2018 as, collectively the ULI and Heitman, we began to explore what climate change was going to mean for the physical risk at the asset level. So we did a series of reports beginning with looking at what's the wildfire risk at a particular location? What's the risk of wind, be it typhoon or hurricane? What's the risk of storm surge?

Brian: Mary’s research has urgently considered all sorts of natural disasters around the globe: The damage they cause to lives and communities, and the damage they can cause to investments…

Mary: Risk had not been fully integrated in how investors were thinking about those locations, and that meant the potential for value to decline once those risks were identified.

From there, we went on to look at climate migration. So these are instances where people are changing their movement patterns because of climate change.

It's the migration out of Central America, toward North America because it's difficult to grow crops in a setting in which there's less water, the temperature is higher, pestilence, more pests, than in the past. That's part of the big migration, the surge at the border.

We're observing it right now in places like Indonesia where the capital Jakarta, there's contemplation of moving the capital city from Jakarta to a place in Borneo that's on higher ground. Think of the real estate value destruction that that represents for those that own in Jakarta and the value creation that it represents for those on the specific island in Borneo that's being contemplated for the new capital.

What's that going to look like as more mainstream parts of where we invest, the US… How about Miami? After Ian, are we prepared to help people on those barrier islands rebuild there? Or should we be thinking about a trend in the industry, which is called managed retreat? Can we help them move to higher ground so that we're not repeating this the next time a hurricane comes through? I don't mean to sound heartless. These are people's homes and businesses. This is a gigantic topic, but it's one that we need to have as part of civic discourse.

Brian: For those regions that have severe climate-based risk, like hurricane-prone areas of the United States, Mary believes the path to protecting investments is about changing mindsets.

Mary: Are there insights that can help as we will rebuild in these vulnerable locations. We're not gonna manage the retreat out of Florida as a whole. Maybe there'll be certain barrier islands that we’ll decide to keep as park space and to help them lessen the effect of a storm surge on an area. That’s the role barrier islands are supposed to perform. So as an industry, we'll be looking at what are the lessons from Florida and Hurricane Ian. What do we wanna do again and what do we not want to do again? But broader, my thesis is that at some point, the in-migration to this beautiful but really vulnerable area, there may be less in-migration and more out-migration as people say, “I love it, but I'm gonna visit it” or “I love it, but I'm not gonna own it. I'm gonna rent there… because the risk is just too, too great.”

So Brian, that catches both the risk part and the opportunity part. If you can see the direction, what would Gretzky say? You can skate to where the puck is going. We wanna make certain that we know where the puck is going.

Brian: And, there are many factors influencing the direction of that puck…

Mary: It also includes how well prepared is a city or a government body fiscally for the costs that will come to adapt to what climate change will wrought for a particular location. New York City has 533 miles of coastline to defend. Chicago has lakefront, let's call it 35 miles of lakefront. We have some waterfront in the form of the Chicago River Bank, but it's a different matter that we're dealing with than what a coastal location like New York is dealing with. Is New York prepared to make the investments or is the federal government prepared to make the investments to protect such a critical part of our infrastructure.

Brian: Let's talk about the migration-out-of. Are there communities that you can see right now just within the US that might benefit from this climate migration?

Mary: You can call them the climate winners or the climate refuges. Attributes to look for include an estimated climate 20 years or 30 years out that's tolerable. I'll point to Chicago. Chicago's climate's not renowned globally for its charm. Our winters are harsh. Our winters are likely going to get less harsh, and we have abundant water. Clean water. Water will be a challenge for the western half of the United States. It'll be a challenge for Spain and Portugal going forward. It'll be a challenge in lots of places. It's abundant in Chicago, it's abundant In Minneapolis, these places are going to get warmer, but not intolerably warm. So you're gonna wanna look particularly for what the projected temperature is going to be on an average basis, how many days above 90 degrees? Because one of the things we're figuring out is the toll on the human body to be exposed to extreme heat has perhaps been underlooked as its contribution to coronary disease and other things. So you wanna look at the share of days over 90 degrees projected and also think about what kind of jobs can be created in these locations? Canada is likely a big winner.

The Nordics are likely a big winner in this environment with their fresh water, with their natural resources, and with their ability to absorb a lot more people.

Brian: While Mary and her team look at the long term view of investing in commercial real estate, other teams at Heitman are more focused on the short term, and what real estate to acquire or sell.

Brian: What does that kind of tug of war look like?

Because I would imagine that there is some give and take. Here's the research, here's what it says…...and there's a short term view of commercial real estate. Because we're looking at turning this over. We've got a five to seven to 10 year horizon before we maybe choose to do something else with the portfolio. Perhaps that's within the threshold of still safe, low risk. Your information—extremely valuable, but probably a little more long term. Tell me about that back and forth.

Mary: The way we've handled it is to be both aware of the changes coming and pragmatic. We have not red-lined certain parts of the globe. We haven't said no to Singapore cuz it's so hot and so exposed to typhoon. Nor have we redlined Florida or Texas or Arizona.

But we've put collars on how much exposure we're taking to a particular risk. How much hurricane risk do we want in a portfolio? We’re typically bracketing it at 15 to 20%, how much storm surge risk do you want? So it's less about a specific state, and it's more about looking at the risk attributes of a particular property and then aggregating those across the investor's portfolio or what of their portfolio we control, and putting bands that say, “We're just not taking more than that risk.”

Brian: Case in point, in August, you announced the acquisition of the tallest multi-family tower in downtown Phoenix, right? So that might be an area where there's still opportunity, but it might need to be managed. Let's put some guard rails on that. Because we can take advantage of it now, but long term, we might wanna continue to look at what the Southwest has to go through in order for people to live there because of climate change.

Mary: Absolutely. And it's just down to the individual line item in a budget as well. What's it gonna cost to cool this building? If the number of days of 90 degree heat doubles, what's it going to cost to maintain the building? There's greater wear and tear on buildings in either extremely hot or extremely hot cold locations. So factoring it in across the budget for the asset.

Brian: Mary, I get the sense that you are thinking about the long view more often than the regular individual. Is that long view an important skill that anybody in commercial real estate needs to be considering? Even when we're looking for a return, we're looking at what will happen in the next three to five years?

Mary: You have to be able to anticipate change and it could be positive change, it could be negative change. You have to be able to think a couple of steps down the chess board, beyond just the first. And when can something reverse? 

I just came from a session in which we were talking about the future of LaSalle Street, the old financial district and the heart of downtown Chicago. Things were looking pretty bleak. Nine months ago, I chaired a technical assistance panel about the future of LaSalle Street on behalf of the city of Chicago. At that point, the vacancy rate for office was at the highest it had ever been, retail even worse. And then Google got wooed to take a large building on this wonderfully transit accessible location, five or six transit lines coming together, a quarter of a block from where Google will have this large presence. And with that, a lot of change took place. So it's recognizing that sometimes change can occur quickly, be it positive or be it negative. But you're also then thinking down five, 10 years, 15 years, trying to take the long view at the same time.

Brian: Do you like what you do?

Mary: Oh, I love what I do. And I love to get to tell the story, to weave things together, to help separate what should you focus on from what can you let go... And I adore that chance to stand in front of an audience of one or of a thousand and tell them the story of whatever content they've asked me to provide.

Brian: We are wired for stories, so I imagine that goes over very well. Between you and me, just the two of us, is there a cold weather city that I should be buying multi-family property in?

Mary:  Well, I'd look hard at that City of Chicago. It's a marvelous city. I'd look at Cleveland. I'd look at Columbus, Ohio. These are northern cities with lots of attributes that could cause job growth, population growth. Look for where universities are, because we are a knowledge economy. So I'd be looking at cities with a university, with great architecture, with natural resources, and toward the northern end of the United States.

Brian: Fair enough. That's good advice. You've certainly been a successful business professional in so many ways, an academic. What advice would you give a potential rising star on how to navigate all of what's ahead of them?

Mary: A couple things come to mind. One is: ask questions. Don't be shy. Make certain that you develop candor with your mentor and your peers, so that if something isn't immediately understandable, you figure out how to make it understandable.

Second: Give yourself downtime. I read fiction at night. There are so many business books I should be reading, so much news. But my brain needs time away from that.

And explore other passions. I'm a docent. I give tours for the Chicago Architecture Foundation. So by day I look at buildings based upon the cash flow they can generate. By night, I can look at them for the beauty that they represent or what statements they make about the collaboration between the developer and the architect, or the corporate owner and the architect. That's fascinating to me. So that's a compliment to what I do. I often give tours for our clients. I give tours for various industry groups, and it keeps me fresh. Make certain that people are more than just their job, because that allows them to bring more of themselves to the job because they're satisfied elsewhere.

Brian: Are there any questions that you think commercial real estate investors, institutional principal developers, what have you… Is there a burning question that we should be asking that maybe we’re not?

Mary: I would certainly say that five years ago, the burning question that should have been asked that wasn't, was: what difference will climate change make? So I'm thinking of what are we not asking ourselves now? I think we may have underestimated the extent to which people are going to go back to the office. And so we need to anticipate what that will mean as it occurs. I do think maybe the overriding question we should always ask is, what could change this?

Brian: And how can we better react to that anticipated change?

Mary: We've been involved in renovating buildings and helping to reactivate them. That gives me great joy. One of the things US hasn't focused on as much as Europe is: the greenest building is the one that already exists. So can we figure out how to reuse our buildings? Bring them back to life, whether it's in a version of the current use or a new use… We've been doing this as a globe for a long time. We're gonna have a lot of office space to repurpose going forward, and that excites me. The process of thinking about what kind of uses could go in this space.

Brian: The redevelopment of commercial real estate… Maybe it's transitioning something that used to be a manufacturing plant or an industrial location into a mixed use space. I think maybe that goes back to a little bit about what Mark Twain said as well. History doesn't repeat itself. It doesn't need to be the same thing it was, but it should probably rhyme. And it should probably feel and carry with it a little bit of that history because there's nothing that is better than a building that has some authenticity to it.

Mary: Absolutely right.

Brian: Thank you, Mary, for joining us.. I think we're better off because we have people that think big and think wide and think deep like you. So thank you.

Mary: Thank you. My pleasure. 

Brian narration: Thanks for tuning into season three of Built. We have more great stories coming up…with our next one in two weeks, which is a little different than our usual style. We’re going to be telling you the story of Manhattan West—a 7 million-square-foot mega development—and how it was built.

Brian: And if you missed the first two seasons, go listen! Our guests have been behind every type of structure from wind farms to warehouses. You can find all Built episodes wherever you get your podcasts.

The news clip you heard in this episode was from NBC Nightly News with Lester Holt on September 28th, 2022. The music was from APM Music.

Built is a co-production of Fidelity National Financial, PRX Productions, and Goat Rodeo. From FNF, our project is run by Annie Bardelas. This episode of Built was produced by Jay Venables with Megan Nadolski. Our Senior Producer is Genevieve Sponsler. Additional support from Sandra. Audio mastering by Rebecca Seidel.

The Executive Producer of PRX Productions is Jocelyn Gonzales.

I’m Brian Maughan.

And remember, every story is unique, every property is individual, but we’re all part of this BUILT world.