Investing Workers Capital to Renew Cities

There is a strong interest to invest in the revival and revitalization of America’s urban centers and town squares, as economic, demographic and resource shifts bring young, working and retired people alike back to cities and towns. This revival is targeting transit-oriented, walkable, service-rich, opportunity-dense communities with access to arts, education and green spaces. Such revitalization “may create a healthy environment that improves real estate values across whole neighborhoods and increases tenant satisfaction and economic activity in commercial and residential real estate alike.”[1]

According to one report, “Eighty percent of Americans now live in cities. The trend toward urbanization will continue. Long-term sustainable investment opportunities lie in the massive amount of change our cities are about to undergo. Cities will intensify; homes and work will become transit-oriented in the face of rising oil prices. Demographics will drive change, as will innovation. We can expect changes in energy use, new infrastructure, and ‘green’ jobs that result from our push to greater sustainability. Each of these changes provides an opportunity for savings to be put to work in advancing long-term sustainable growth.”[2]

Pioneer pension funds, such as the building trades pension funds, have kept pace with these trends by investing in urban revitalization projects that have generated risk-adjusted market rates-of-returns while creating good jobs and positive community and environmental impacts. These projects have included new construction and renovations of:

  • Affordable and workforce housing;

  • Special needs housing, such as for the elderly and students;

  • Multi-family housing and multi-use facilities;

  • Commercial real estate, such as industrial & office buildings, hotels, etc.;

  • Hospitals, retirement centers, assisted living facilities; and

  • Warehouses and industrial parks.

Generally, these investments have been made under the label of Economically Targeted Investments (ETIs). In the 1970s, as pension consultant Jack Marco recalls, there was stiff opposition to the concept of ETIs, and many pension fund principals were hostile to the idea. Along the way, various federal administrations have either supported or hindered the ETI cause. Eventually, responsible multi-employer and public retirement funds, along with other like-minded investors, began investing in the triple bottom line, although adoption was slow to catch on. Some four and a half decades later, many, many billions of dollars have now been invested profitably in ETIs, and progressive new global investment alliances, with much larger assets, are investing in the next wave of responsible investment with a focus on achieving positive Environmental, Social and Governance (ESG) impacts.[3]

Regardless of the label, there is an opportunity for pension funds to capitalize on the rising demand for sustainable and resilient built environments that improve social and environmental health, increase operational efficiencies, and provide better investment returns in the long-run.

But barriers remain. Chief among these is the perception that such investments lead to concessionary financial returns. However, academic research and investor experiences confirm that pension fund investments in urban revival have been “based on sound investment practices driven by a market rate of return…. consistent with sound fiduciary standards.”[4] Other barriers include potentially complex investment structures, small deal sizes, limited deal flow, higher perceived risk, and difficulty in measuring and tracking impact. We address these barriers below though 5 key principles for successful urban revitalization investments.

1. Achieving competitive returns. A 2004 paper by scholars from Oxford University identified a number of public pension funds in the U.S. that encouraged and/or mandated investments in urban revitalization projects. These funds included some of the nation’s largest public pension funds such as California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and New York City Employee Retirement System (NYCERS), as well as some smaller funds such as Los Angeles County Employees Retirement Association (LACERA) and Oregon Public Employees Retirement System (PERS). Regardless of the size of the pension fund, investments undertaken by these funds were aimed at achieving both competitive financial returns and community benefits.[5]

A joint report in 2007 by Oxford University and Harvard Law School specifically used the New York City and State retirement systems example to support the claim that urban revitalization investments by pension funds “can produce competitive returns with the community benefit being a spillover effect.” Among its various strategies for investments in urban revitalization, NYCERS, for instance, was invested in the AFL-CIO Housing Investment Trust (HIT), which outperformed its benchmark over 5 and 10-year periods as of the writing of the report.[6] The financial success of NYCERS investment in the HIT supports the formers recent allocation of an additional $150 million towards the HIT’s $1 billion investment in New York City to build and sustain affordable housing.[7]

2. Selecting an appropriate asset allocation mix. Investments in urban revitalization projects can be made in traditional assets classes such as fixed income and in alternative asset classes such as real estate and private equity. Additionally, investments can be made through pooled funds or direct placements. Each strategy and product is defined by different risk-return characteristics based on the scope of the underlying investment.

For example, the AFL-CIO Housing Investment Trust (HIT) is an open-end mutual fund that makes responsible fixed income investments primarily in multi-family Mortgage-Backed Securities (MBS). The HIT’s mission is to generate competitive risk-adjusted fixed income returns while providing affordable and workforce housing and creating union construction jobs.[8]

In another example, the Multi-Employer Property Trust (MEPT)Fund invests in commercial real estate properties including multi-family, office, industrial, and retail assets. MEPT’s primary focus is on achieving strong investment returns. However, responsible investing has always been a key part of MEPT’s investment strategy; the Fund’s management team believes that ESG benefits, if properly applied to an investment, improve asset performance and lower investment risk. Accordingly, every asset that MEPT considers is vetted for ESG performance and enhancement opportunities.[9]

Finally, private equity investments can also be targeted to support urban and economic revitalization in neighborhoods that are “ready for redevelopment, but (where) information asymmetry and market biases have prevented private equity funds from taking advantage of opportunities that exist for market-rate investments that have particularly beneficial side effects.”[10] KPS Capital Partners, LP manages the KPS Special Situations Funds, a family of private equity funds that takes controlling equity positions in distressed companies across a range of manufacturing industries. Unlike many so-called turnaround private equity firms that strip and flip target companies for a quick profit, KPS sees itself as “constructive” investor that takes a long-term approach and seeks to align the interests of management, employees and all stakeholders in facing challenging operational situations.[11]

3. Building internal investment expertise or selecting the right external manager. The extent of internal expertise that pension funds wish to develop will depend on the level of internal engagement and control desired in regards to the investment. If the goal is to have better control over the resulting financial and non-financial outcomes, pension funds may be well-served to build in-house investment management expertise for their urban revitalization projects. However, this can be a slow process, and it may be hard to achieve economies of scale.

For pension funds that do not have urban investment expertise within its staff team, or that do not desire to build such expertise, appropriate external managers can accomplish the fund’s urban revitalization goals. By effectively pooling capital and resources and providing concentrated expertise, the external manager can help remove some of the barriers associated with such investments.

4. Working with a community partner. As discussed in another Oxford University and Harvard Law School report, the involvement of a community partner can better achieve the pension funds urban revitalization goals.[12] According to the report, “the community partner intermediates between the investment fund manager and the economic development area… (It) is the essential link for a successful urban revitalization investment venture.” By leveraging the skills of a community partner, the investment manager can thus help yield targeted financial returns while ensuring positive impacts in the community. Such partners generally consist of non-profit organizations such as local Community Development Corporations (CDCs). Further, in some cases, specialized consultants may act as intermediaries linking the investment manager to the community partner.

In addition, pension funds can collaborate with new community apprenticeship programs that provide career ladders for local young people and people of color, supporting new community benefits agreements that share the dividends from investment and economic development with existing residents.

5. Ensuring positive ESG impacts, for all stakeholders. Community and/or environmental benefits, though secondary to competitive financial returns, are a necessary condition for achieving a fund’s financial goals for its urban revitalization investments. Without positive community and/or environmental impacts, the financial success of the urban revitalization project is not likely to extend beyond the short-term. In addition, urban revitalization that causes displacement of current residents and businesses – or so-called “gentrification” – is not a sustainable investment strategy.

As universal owners,[13] pension funds in particular should evaluate the performance of their investments based on the impacts of their investments on the broad economy. Such an evaluation should include externalities, that is, “the financially or economically measurable impacts that a company may have on employees, communities, ecosystems, or other stakeholders.”[14] These externalities can be positive or negative, and correspondingly can have a positive or negative effect on the financial value of pension assets.

Smart investors recognize the opportunity in benefiting all stakeholders, particularly in the interest of meeting their financial return expectations. For instance, through its $1 billion initiative in New York City as mentioned above, in addition to delivering competitive financial returns, the HIT aims to “preserve the affordability of 12,500 to 15,000 housing units and construct 5,000 to 7,500 new housing units. The HIT will also work with city and state agencies to finance and improve affordable public housing. When the Strategy is completed, the HIT will have financed more than 50,000 affordable units in the City. The HIT’s $1 billion new commitment should result in $2.6 billion in total economic benefit to New York City, 14,700 total jobs across industries, 7,300 union construction jobs, and $1.0 billion in personal income, including wages and benefits.”[15]

In another example, the AFL-CIO HIT’s subsidiary, Building America CDE, made a unique investment in Paseo Verde, a multi-use project that will revitalize a distressed neighborhood in North Central Philadelphia near Temple University. This affordable housing and retail complex was built with 100% union labor and boasts the utilization of new LEED construction, renewable energy sources and transit-oriented development strategies. The project bridges the perceived gap between "sustainable" and "affordable,” citing Paseo Verde's green roofs, permeable paving, solar panels and wallet-friendly rents.

Similarly, beginning in the 1990s, MEPT recognized that building and maintaining properties that are efficient and sustainable creates a competitive advantage in terms of attracting high-quality tenants, improves net operating income, and protects against obsolescence. As such, MEPT invests in development assets that are designed to achieve LEED silver certification or better, and its operating portfolio is included in the U.S. Green Building Council (USGBC) LEED certification program and benchmarked to the U.S. Environmental Protection Agency’s (EPA) Energy Star program. As a result, MEPT owns 10 million square feet of LEED certified and Energy Star labeled properties. MEPT’s investment approach has placed the Fund at the top of the Global Real Estate Sustainability Benchmark (GRESB) survey rankings for the last several years, including being ranked the #1 U.S. Diversified Fund and earning a “Green Star” in the 2014 survey. Concurrently, GRESB named MEPT’s real estate advisor, Bentall Kennedy, the top firm in the Diversified peer group in North America and globally for 2014.12 In addition, Bentall Kennedy has received the Energy Star Partner of the Year award for the last 5 years.

The above examples are aimed at providing peer-to-peer learning opportunity to pension funds interested in investing in urban revitalization. While the evidence in support of utilizing pension fund assets for such projects is overwhelmingly positive, investments can fail. For instance, a few years ago, CalPERS began winding down a $1 billion initiative to invest in economically disadvantaged areas in California. Per a news report, “while the program has produced intended secondary benefits of economic development in depressed California markets — 41% of companies are located in areas traditionally underserved by institutional capital and 55% of employees live in economically disadvantaged areas — “the California Initiative has not met CalPERS investment return expectations,” the review says”.[16] As such, as with any investment decision, pension funds need to exercise caution, consulting with their advisers and internal staff teams before taking action.

This article is part of a series highlighting key themes of the upcoming Responsible Investor Guidebook authored By Heartland Capital Strategies. For more information or to place an order for the book, contact,, call us at 412-342-0534, or write us at Heartland, c/o Steel Valley Authority, 1119 South Braddock Avenue, Swissvale, PA 15128.


[1] David Wood, “Handbook on Responsible Investment Across Asset Classes,” Institute for Responsible Investment and Boston College, Carroll School of Management, Centre for Corporate Citizenship, (2008)

[2] Tessa Hebb, “New Finance for America's Cities. Regional Studies,” Carleton Centre for Community Innovation, Carleton University, (Ottawa: University of Oxford, January 1, 2012). Available at

[3] Excerpt from our interview with pension consultant Jack Marco, Marco Associates (December 8, 2014)

[4] Lisa A. Hagerman, Gordon L. Clark, and Tessa Hebb, “Revitalizing New York City and State: The Role of Public Pension Funds,” University of Oxford, School of Geography at the Centre for the Environment Harvard Law School, Pensions & Capital Stewardship Project, Labor and Worklife Program, (August 2007)

[5] Tessa Hebb and Gordon L. Clark, “U.S. Public Sector Pension Funds and Urban Revitalization: An overview of Policy and programs,” University of Oxford, School of Geography at the Centre for the Environment, (November 2004)

[6] Lisa A. Hagerman, Gordon L. Clark, and Tessa Hebb, “Revitalizing New York City and State: The Role of Public Pension Funds,” University of Oxford, School of Geography at the Centre for the Environment and Harvard Law School, Pensions & Capital Stewardship Project, Labor and Worklife Program, (August 2007)

[7] “NYC Retirement Systems $150 Million Investment Helps Expand Affordable Housing in NYC's Five Boroughs,” (October 15, 2015) (

[8] Excerpt from our interview and survey with AFL-CIO HIT (November 25, 2014)

[9] Excerpt from our interview and survey with Sarah Stettinius, Sr. Vice President, Bentall Kennedy (U.S.) LP/MEPT (January 15, 2015)

[10] David Wood, “Handbook on Responsible Investment Across Asset Classes,” Institute for Responsible Investment and Boston College, Carroll School of Management, Centre for Corporate Citizenship, (2008)

[11] Excerpt from our interview with Michael Psaros, Managing Partner, KPS (January 11, 2015)

[12] Lisa A. Hagerman, Gordon L. Clark, and Tessa Hebb, “Investment intermediaries in economic development: Linking pension funds to urban revitalization,” University of Oxford, School of Geography at the Centre for the Environment Harvard Law School, Pensions & Capital Stewardship Project, Labor and Worklife Program, (February 2007)

[13] Pension funds and other large institutional investors have been called “universal owners,” a term that was coined by Monks and Minow in their 1995 book on corporate governance. The term was expanded on by Hawley and Williams in their 2000 book on fiduciary duty, The Rise of Fiduciary Capitalism. A universal owner is a “large fiduciary institution which by virtue of its size or asset allocation strategy owns a cross section of publicly traded equity. Such an institution might hold between 1500 to 4500 different stocks, in essence owning the economy as a whole.”

[14] Kimberly Gladman, “Ten Things to Know about Responsible Investment and Performance,” GMI Ratings,, (March 2011).

[15] “NYC Retirement Systems $150 Million Investment Helps Expand Affordable Housing in NYC's Five Boroughs,” (October 15, 2015) (

[16] “CalPERS to wind down in-state private equity program,” (August 7, 2012) (

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