From covid to climate change: Fitwel on redefining risk in real estate

The roadmap for navigating asset value and future-proofing portfolios involves prioritizing people and social performance, says Joanna Frank, president and CEO of Fitwel.

This article is sponsored by Fitwel

Joanna Frank

The power of research and data to inform real estate practice is the foundation of Fitwel. For nearly a decade we have led global efforts to translate public health research to demonstrate the value of prioritizing people in the built environment.

In collaboration with the Centers for Disease Control and Prevention, we have reviewed over 7,000 public health research studies to identify strategies that have the most significant measurable impact on health, including mental and physical health, social health and equity considerations.

Over the past two years, we have been taking a similar approach to examining the financial impact of prioritizing health and well-being for commercial real estate occupants and surrounding communities. We focused on two key questions shaping the future of real estate decision-making: what the quantifiable value of health is, and how climate change and quality of life can co-exist.

We have reached a pivotal moment where we can definitively show that health, encompassed in the ‘social’ pillar in ESG, is one of the greatest opportunities to future-proof assets.

Real estate has always been about responding to societal demands. Today, real estate is undergoing profound transformation as a result of covid-19, ongoing climate change risk and shifts in generational demand and usage.

Impacts on demand

We are witnessing a generational shift in the demand for health-promoting spaces, catalyzed by the covid-19 pandemic, which is extending beyond just residential properties to all asset types. People are prioritizing – and are willing to pay premiums for – environments that protect and enhance their health and quality of life.

For example, in the industrial sector, a high turnover rate of 60 percent among employees in 2020 emphasizes the need for healthier work environments to improve retention and productivity, while offices are competing to differentiate themselves in a market of shrinking demand by providing environments that are optimized for people and health.

In A New Global Consensus, a report by the United Nations Environment Programme Finance Initiative, Mamoru Shimomichi, executive officer and general manager of investment management planning at Japan-based Nomura Real Estate Asset Management Co, says: “Failing to focus on health and well-being could result in assets losing out on tenants, because properties that do not have a focus on health and well-being will be overlooked, resulting in poor economic outcomes.”

With covid receding, there is no doubt that climate change stands as the paramount risk to the real estate industry today. New challenges arise as we aim to value assets that not only minimize their impact on climate change but also adapt to mitigate the effects of climate change on occupants and communities.

As a result, real estate must strike a balance between lowering carbon emissions and preparing the built environment to withstand the numerous threats posed by climate change. Adaptation will not only improve quality of life and save many lives, but it will also mitigate the industry’s most serious financial risks.

As emphasized by medical journal The Lancet, the true costs of climate change can only be understood when looking through a public health lens.

Percentage of investors that say they are investing in healthy buildings due to tenant demand and satisfaction (Center for Active Design)

Turnover rate of industrial employees in 2020 (BLS)

Percentage of residents who place an increased value on healthy building features in apartment buildings (AMLI Residential)

Percentage of employees who expect employer support for health and wellbeing (JLL)

Potential income lost in 2022 due to loss in labor capacity related to heat exposure alone (The Lancet)

Value of productivity gained when optimizing daylight and views (P MacNaughton, et al in Journal of Applied Social Psychology 2021)

Future-proofing assets

While the industry has acknowledged the impact of the ‘E’ in ESG on financial performance, there is growing recognition that the ‘S’ is the next frontier. However, despite the increased focus on ESG due to investor demand and regulatory pressure, the industry lacks comprehensive strategies and tools to capitalize on the social aspects.

These challenges, combined with the risk of stranded assets and evolving reporting requirements, are prompting asset managers to benchmark and develop a roadmap for maximizing portfolio value in the face of changing ESG and market dynamics.

Understanding and harnessing the synergy between health, climate change mitigation and value creation holds the key to unlocking untapped financial impact in real estate.

This alignment underscores the principles of ESG, which play a crucial role in identifying and quantifying non-financial risk factors in real estate portfolios. While ESG traditionally focuses on physical risks like energy and climate change, the interplay between sustainability and health showcases the importance of integrating social considerations into real estate investment strategies, aligning with asset managers’ goals of efficient resource allocation and maximizing returns.

Investing in health can safeguard your assets against the risk of becoming stranded.

Connecting health to value

A recent study by KPMG, a multinational professional services and accountancy network headquartered in the Netherlands, highlighted the increasing importance of scaling up ESG capabilities, with 90 percent of companies planning to boost their investments in ESG over the next three years. Despite this, nearly half of the companies surveyed still rely on disparate spreadsheets to manage ESG data.

Following our years-long analysis, we have addressed this inefficiency through the Fitwel platform and have built a new on-ramp for the industry: Social Performance by Fitwel. This entity-wide certification pathway links social strategies to asset value, providing invaluable performance data and insights across the entire real estate life cycle and throughout entire funds. Leveraging technology and evidence-based data, it offers an entity-wide ESG solution, complementing asset certification and providing standardized social performance data for reporting in the real estate industry.

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The first pilot phase of Social Performance was conducted last year with EVORA Global, engaging an exclusive first cohort of major commercial real estate owners and asset managers worldwide, including BGO, Harrison Street, Hudson Pacific Properties, Lendlease Americas, PGIM Real Estate, QuadReal Property Group and Vornado Realty Trust.

During the pilot, PGIM Real Estate – the asset management arm of Prudential Financial, an American life insurance company – used the pathway to generate reports that highlighted specific areas for investment and improvement amid focus areas including environmental quality, stakeholder engagement, active living and biophilic design.

In the words of Christina Hill, global asset manager and head of sustainability at PGIM: “Our strategic focus on strengthening reporting not only enhances our insights but also helps give us a competitive advantage. By incorporating insights from Social Performance into our strategy, we are creating a foundation for data-driven decision-making and long-term sustainability.”

Fitwel is currently rolling out the second phase of the pilot.

The path forward

Standing at the crossroads of unprecedented challenges and promising opportunities, it is clear that prioritizing people is the linchpin to unlocking value in the larger real estate industry. As we navigate this transformative landscape, social reporting will emerge as a standard practice, mirroring the prevalence of environmental reporting.

Embracing this paradigm shift is pivotal in charting a course toward value creation and risk reduction through prioritizing people. By substantiating real estate data and incorporating health and well-being metrics, investors can obtain actionable insights to fortify assets for the long haul and safeguard sustainability amid the ever-evolving environmental and market dynamics.

Capitalizing on opportunities to address both environmental impact and health not only strengthens ESG reporting but also results in positive financial outcomes. By strategically integrating built environment strategies that simultaneously combat climate change while prioritizing health, real estate companies can enhance the value of their assets across both environmental and social dimensions.