The new advantage in the age of AI: Building in the real world

0:02Hey, everyone. If you had to guess what's keeping real estate leaders up at night, you might think interest rates. You might think that, Lucia, but Laura Hines-Pierce, who's the co-CEO of Hines, which is one of the largest global real estate investment managers, she's got some different preoccupations. Yes, specifically, not enough housing, not enough electricians, and not enough infrastructure to keep up with growing demand. Yeah, and on this episode of the McKinsey Podcast, she speaks with Eric Kutcher, who's our managing partner for North America. They talk about why the biggest challenge in real estate isn't necessarily finding capital.

0:43It's actually getting projects built. And we'll hear about the state of housing, leading through uncertainty, and AI. Of course, AI. Let's get into it.

1:02Today, I'm joined by Laura Hines Pierce, the CEO of the Hines Corporation, one of our leading, I guess the best way to say it is developers across the country and the world. First of all, it's great to be here with you, Eric. It's good to see you. We are really one of the biggest global investment managers in the real asset space. So we started as a developer, and that's certainly how a lot of our history and reputation was made. We're a 70-year-old firm founded by my grandfather, so I'm a third-generation leader. And he started as a one-man shop developing small warehouses on the outskirts of Houston and are now, you know, we've got a hundred billion in AUM.

1:48We operate in 30 different countries and almost 400 cities. And we invest really across the risk spectrum and across all major asset classes of real estate. Amazing. Okay. So I got to start with then what are you seeing across the different asset classes of real estate as an investor today? When I look at really asset classes and, you know, where our conviction is, You know, we have very purposefully structured ourselves for diversification and for the ability to meet the market where it is. So I mentioned we're in nearly 400 different cities. The opportunity in Stuttgart, Germany right now is different than the opportunity in San Francisco, California.

2:30And we've really purposely set ourselves up to be able to kind of pull any lever, you know, across the risk spectrum, across asset classes to meet the market where it is. That said, our highest conviction globally is in living. As you can imagine, it's a hot topic. We're about 6.5 million units short globally. And that's then constrained on the supply side moving forward because of high construction costs, shortage of labor, et cetera, et cetera, permitting. and we think that's going to be a really sustained good bet over the long term. The other piece that we're spending a lot of time on is this is looking to be an energy and infrastructure super cycle moving forward and we're spending a lot of time in the powered land space and thinking about how our capabilities really expand across that.

3:28Maybe let's spend a little bit more time on two things you talked about. One is just this energy super cycle. And I think a lot of that is being driven by AI and data center build outs and so on. And frankly, you could argue the electrification of society, right? Even with EVs and so on. How does that play out? What are the limiting factors for us today? And how hard is it in what you do to help those that have the capital? And by the way, I don't think we're capital constrained. You can correct me, to actually get, you know, shovels in ground and kind of the infrastructure built. This is where I get to, I agree, we are not capital constrained, you know, in the current world.

4:10What we are is execution constrained. The ability to actually source opportunities, permit it, run it through, you know, run it through the right regulatory hurdles, and then actually bring power and think about it in a holistic way is, you know, it is the challenge. And I think there's a lot of noise out there right now. And I think the ability to execute, I'd say, is very, very varied, if you will. And it's going to be those who have the capabilities on the ground, the long track record of being able to do it. And, you know, that's and then and then you think about the supply chain as well. Those who can really think ahead on the supply chain and secure, you know, the necessary components there.

5:06That's going to be, you know, what sorts out the winners. What you could argue is part of the execution, right? If you're if you're if you're not thinking out ahead and thinking about. Yeah. It's more than just having a site that potentially has access to power. How do you think about where we are from a labor point of view and what is the implication of that? I think it's going to be a consistent challenge moving forward. You know, we this is a primarily a U.S. challenge, just given the the demand that is happening here and the constraints that, you know, are are in place. But we're not producing enough electricians.

5:53electricians. We're not producing enough engineers to meet the moment. And so, you know, I wish I could say I have a solution to that, but I don't. It's just, it's going to show up in increased costs. Yeah. I mean, I think this is the thing that my own experience is people don't fully understand. So I happen to sit on the San Francisco Fed board. And one of the observations I've had is we're in a different paradigm, right? We were a long time in a paradigm where you sort of had to have, I'm going to make up a number that probably isn't quite but 150 ,000 to 200 ,000 that do jobs a month to maintain stability in the workforce, to maintain the stability and the employment rate.

6:29We're now roughly zero. And the reason for that is you have very limited immigration and you have a retiring generation of boomers that are no longer going to be in the workforce, by the way, which have an awful lot of that knowledge and the tacit skill you talk about. And then you overlay that with a birth rate that is less than replacement rate. And the equation gets worse over time, not better. Exactly. I mean, the investment in the physical world and the ability to execute, I just, I cannot stress enough how big of a both challenge and scarce resource that is going to be. Because, you know, the way that shows up, as I mentioned, you can't magic new electricians out of thin air.

7:17And so it shows up in increased costs, right? Which means you need to be thinking ahead when you are underwriting an opportunity to make sure you're weighing that in. And those who really understand these markets and understand the dynamics are the ones who can then think appropriately, think about then how to capitalize it, finance it, etc. I feel like what we're seeing right now in creating value in the real asset space, there's also this shift broadly from a focus on the software to the hardware. And there's a recognition now, I think what AI is doing, it's incredible and it's an incredible tool, but it's democratizing the digital space, essentially.

8:11And where the differentiation is coming is the ability to execute in the real world, in the physical world. And, you know, I think that's where value is going to be created moving forward. Yeah, I know. I think you're exactly right. And as you say, you can't like you can't build a model that can replace, you know, and we have a real deficit. At least not yet. It is an interesting question. So I was at CES back in January. And if you said, what was CES this year? it was entirely around what they've now deemed physical AI, which we may call just robotics. But there is this real question and there are real applications.

8:48And by the way, it is this really delicate balance of, you hear a lot about, well, gosh, we're going to have this massive job loss. And you see the Waymos or the robo taxis that are driving around cities like we live in. But the reality is we are going to need different forms of labor. And so there's a bit of a reskilling question, but I don't think there's a shortage of opportunity anytime soon. Our focus is not about cost cutting. It's not about removing jobs. It's about how do we amplify our competitive advantage? We see our competitive advantage as creating value in the physical world. We have people on the ground in 400 cities who know their city better than anyone else, who are experts and better in the market than anyone else.

9:34And we want to use and leverage AI tools to get them out from behind their computer and out in the real world where they can create value. That's forming relationships with, you know, with people in the market to source the next deal. You can't, you know, that's not a replaceable technology is forming real relationships. You know, overseeing the physical development or, you know, operations of an asset, delivering a better experience to the occupants of an asset to retain them and create more value over the long term. Those are things that, you know, they require human touch. And, you know, that's how we're looking to amplify and frankly, you know, hopefully invest more.

10:21You talked about living as a major one of your investment themes beyond this kind of energy super cycle. And you also talked about a shortage of labor. And by the way, presumably that labor is going to go where people are willing to pay the most. And I think because of the way that the data center economics are working, that people are naturally going to gravitate there versus. So what is the implication on housing prices as we look forward over the next five, 10 years in a world where we're probably still constrained on total available housing units and cost to build probably goes up? I mean, I think we are in an inflationary environment and you'd have to have a lot of factors go right to bring down the cost of supplies, bring down the cost of labor and to increase the ability to build through regulatory changes to really make a dent, I'd say, in supply, which ultimately is what brings the price down.

11:20So I think, which from an investment standpoint is why we have a high conviction there. But, you know, we want to build, too. You know, we have, you know, we have a high conviction across the risk spectrum because, you know, there's such a supply curve. We did a recent piece of work. I don't know that you've seen it. There's no reason you would have, but it looks at the permitting challenge in the U.S. And again, I probably have more understanding of that market. It basically says we have$1.5 trillion of funded, you know, shovel ready projects in the U.S. that are waiting for permits. And you talked about this in the context of the inability to build and the complicated.

11:58Just maybe help the average listener who may not think about this every day understand what the complications are around permitting today that are leading to this$1.5 trillion. And that's already funded. There have been layered in, I'd say, some very well-intentioned laws and policy that have created the potential for, I'd say, less well-intentioned pauses in the process. where those with one neighbor can slow things down with a complaint or a challenge. And that can slow things down for months, years, but it can be a delicate balance that sometimes swings out of balance. I was talking to someone last night who's got this incredible piece of land that they want to develop, and they've got a NIMBY issue.

12:55And so we're going to have to sort through what are difficult challenges if we want to solve these problems, including the labor side and the supply chain side. I'm going to zoom out and talk a little bit about you as CEO and kind of what it's like in a family-owned, multi-generational, as you point out, third-generational CEO or family-run business. How does one go, especially in a family, from point A to point, I'm going to call it C, because there was a step in the middle. One of the proudest things that I've been a part of over the last several years in my role has been, I'd say, codifying that ability to grow and evolve and change.

13:33We believed in our core competency and our core values, which are, you know, focus on integrity and quality and an owner's mindset. And, you know, that's something you can bring as a family run firm because your values, you grow up with them, right? And so they're inherent in you. And when, you know, leadership changes, those values are already, you know, core to the leaders. One of the things that I've thought a lot about, and I'd be curious to test with you how you all think about is the difference, you know, we're not a family owned business, like you are, but in a partnership, I kind of think of it that way, right?

14:17And I and the word that I always think about is this idea of stewardship, and I know you have at least one young women. So I'd love to hear a little bit, by the way, how your father thought about this as he was obviously the shoulders that you're standing on and how you think about it as you know how, you know, you've got young children for, I'm guessing you hope, take an interest in this over time. Stewardship to me is a very active word. It's something that you have to know what you're, have a belief in what the future is and be constantly driving towards it. And especially in the built environment where, you know, the investments you make are long, the, you know, the assets you own and operate are, you know, will be around for a long time.

15:07You have to have a really active and strong view of the future into the, you know, into the long term. And then today, be doing a lot to leave what's in your wake better. And, you know, we think about that in our partnerships, in our partnerships with our investors, with our clients. Again, we take that long term view. This is, you know, an investment in a relationship over the long term. And we're stewarding those relationships as well. What is it like to take on the CEO role of an institution like this, which means so much, not just to all your employees and what you do around the world, but to the family and as I suspect, a big part of who you are collectively as an identity?

15:56Well, it's, you know, I'm actually a co-CEO. I'm currently co-CEO with my father. And that's actually been a really special experience. And I think, again, something really unique to being a family-led firm. And what that's allowed us to do is, you know, he brings 30 years of experience and, you know, leadership through cycles and stability. And I'm able to do something that, you know, he would say himself, he's frankly not able to do, which is to think about where do we need to be in 30 years and start to do the things today to set ourselves up for it. And, you know, it's been a wonderful experience because, frankly, I've been a bit forged in fire, if you will, with my CEO tenureship.

16:52I moved into the office of the CEO in February of 2020. And we all know what happened one month later. And then I moved into the official co-CEO seat in February of 2022, which was a month before Russia invaded Ukraine. All the while, during those five years, I also had three children. So as you mentioned, so it's been, you know, I think I am learning something in this that I think is actually setting me up for success into the future. because I do think we're in a world now where change is the only constant. You know, that's, of course, been true in the past, but it's happening at such a faster pace now that you have to just, you know, the firms that are going to win are the ones that have that ability to change and evolve and lead and almost run towards the opportunity and the change.

17:54And, you know, and at the same time, his partnership is, I think, a real stabilizing factor for us as a firm. And we really balance each other of pushing into the future and holding on to who we are. And I got asked this question the other day on one of the news stations about, you know, how are CEOs coping with this? And I think you just answered it perfectly. You basically said, I don't worry about what's coming at me every day. I worry about where I think we need to be five or 10 years from now. And I just navigate towards that. And by the way, that means I may have to go around an obstacle along the way because that's just the world we're in.

18:35But as long as I keep true to that belief of where we're going and I'm open-minded to what would change that belief, I can stay on path and on course. And I do think one of the benefits, and you've lived this early in your tenure, is you're just more battle-tested, right? You've lived like you don't - For better or worse. For better or worse, that's right. But I think it leaves the impact of the shocks. I don't hear CEOs get as flustered today as they did in kind of moments of uncertainty. Now they just expect the uncertainty. Right, right. Right. And that's, you know, what, as I think about sort of evolving our culture, that's the part I'm now looking to formally, like I said, codify into who we are is that as a culture, we embrace change and uncertainty and find the opportunities in it.

19:31And, you know, one of our values is, you know, an entrepreneurial culture. And I think that can apply really well in this world if you, you know, if you take that mindset. As you said, you've got three young kids that may one day want to listen to this. What would you what would you want to tell them about leadership, especially leadership and what you've learned kind of under fire that are the things that you want to you want them to take forward? I think if you focus on your North Star and where you want to go for the long term and you do take a truly long term view, which, you know, is about stewardship, as you mentioned, for us, then you're going to make the right decisions with partners, with investments, with, you know, design.

20:27mine. And that's, you know, it makes it easier. How are you thinking about AI today? Where do you see yourself in that journey? And then one of the things I'd love to spend a little bit of time on is how do you change the organization? Like, how do you change the organization to see what is the realm of the possible? I'd say we're approaching this in the way that we approach a lot of change, frankly, internally, in the sense that there's top-down direction, but there's also bottom-up opportunity and ideas to do that on a smaller scale and do it within their business units or within their functional teams.

21:12And then we're creating a team in the middle that we're leveraging for governance to then think about, you know, how do we ensure that once we've solved a workflow, it's being used consistently across the teams that need it. And again, the goal here is to really enable our people to use the democratization of the technology to do what they uniquely can do, which is, again, forming relationships with business leaders in their community, because that's where deals come from. Or, you know, overseeing, you know, actually getting on site and overseeing a development or redevelopment and, you know, making sure that that execution is driving according to plan.

22:05or delivering superior, you know, we operate buildings, we manage buildings, delivering superior service to the people in the building. And so then the change management side, how do you get, and I'm curious how you find different people at different places in the organization and their own personal readiness and how do you get, how do you challenge? We're viewing this as a like 70 % people challenge. This is not a technology is like 10 % of the solution. The other 20 % is, you know, is processes, but 70 % of this is about people and change management. Right. And, you know, frankly, that's what, that's really the change muscle that I've been working on building internally as we've been, you know, made some real strategic moves internally.

23:02So we now I'd say have this muscle, which is great. But what we're looking to do is empower people, those who have the curiosity, who have the, you know, the wherewithal and capability to say, I want to, you know, I want to drive this. We're identifying those champions within different functional groups who then are linked into our more core group to help train them, give them the tools. But those people are sitting side by side with the business teams. So they are coming from the business teams, or we will put them in with the business teams to deeply understand what processes will actually help this team, then help develop it, spread it across that team.

23:52And our core group then will enable taking that across the firm where appropriate or necessary and making sure it's not crossing wires. One of the things that I'm trying to get my head, I get this question all the time internally, which is, do you have to bring everyone along? And I have to say, I feel a little bit more Darwinistic in this, meaning I've got to give everyone the opportunity to learn and create the set of tools and learning programs and give them the experiences. But if they choose not to participate or choose not to learn, honestly, I feel like that's on them. I'd frame it in the sense that, you know, all jobs evolve, all companies evolve, all jobs evolve, all industries evolve.

24:34And those that are successful are the ones that, that, you know, the ones that are most successful, frankly, you know, charge the hill in that evolution. But, you know, I think those that are successful are the ones that evolve with it. And, you know, I think that that's been true for forever. And to me, this is one of those evolutions. All right. So this has been unbelievable when I just wanted to say a heartfelt thank you. It's been awesome. Well, Eric, I've really appreciated the conversation. It's always great to, you know, to dive into these types of questions.