The challenge with investing in healthy buildings

Health and well-being are increasingly factors in investment managers’ sustainability considerations, but quantifying the financial benefits remains challenging.

Wellness initiatives include providing gyms, cycle racks or yoga classes. In some cases, buildings, mainly for owner-occupiers, are designed to encourage more activity – using stairs instead of lifts, for example. Healthy buildings are those where measures are undertaken to improve factors such as natural light, views of nature and clean air in order to improve the end-user experience.

Office buildings have been the major focus of healthy building initiatives, as well as multifamily assets, as their occupiers spend the most time there. Studies have found clean air, natural light and lower noise levels all improve office workers’ scores on cognitive tests.

In theory, any initiatives that improve staff productivity and reduce absenteeism will boost a tenant’s bottom line and thus drive higher rents.

According to data in a research paper published by consultant Integrated Environmental Solutions (IES), staff costs are roughly estimated to be 90 percent of an occupier’s costs, compared with 9 percent for rent and 1 percent for energy. So a 5 percent uplift in productivity is worth more than a 50 percent cut in energy costs. Cutting the staff absenteeism rate from 2 percent to 1 percent is worth more than a 10 percent rent reduction.

However, even if occupiers are able to compare productivity and attendance across their portfolio, it is tough to establish the cause of increased productivity – for example, it might be down to better management rather than cleaner air.

Sophie Carruth, head of sustainability, Europe, at fund manager LaSalle Investment Management, says: “There are quite a lot of parallels between how people view healthy buildings today and the way they viewed energy efficiency a few years ago. Everybody was asking the same questions: what is the link to value, how can you demonstrate that spending on improving energy efficiency is benefiting investment performance?”

Expectation is growing

It is relatively straightforward to prove that reducing energy costs will be financially positive over the life of a building, but far less simple to prove these savings are reflected in the asset’s valuation.

“Everybody talked about a green premium and in most cases that has been quite hard to prove. However, it has been relatively easy to show there is a brown discount for buildings which are falling behind,” says Carruth. “I think exactly the same will come about for healthy and unhealthy buildings. Landlords will need to deliver a healthy building in order to attract the best tenants. They still might not pay a rental premium, but if you’re not delivering a healthy building, then you should probably expect a rental discount.”

Anna Duchnowska, senior director and head of Polish operations at fund manager Invesco Real Estate, says: “Healthy building initiatives will gradually become part of what is expected for a prime asset. It is hard to quantify the value of ‘soft’ ESG components, such as health and wellness initiatives. However, we believe these measures will improve employee satisfaction, which means tenants are more likely to want to stay in the building.”

Investment managers tend to lean toward ‘software’ wellness initiatives, unless they are developing or are engaged in substantial remodeling of an asset. For example, LaSalle, in partnership with JLL, refurbished 27 Great West Road, an office building in Brentford, West London, which has around 700 people working for tenants including video game company Sega and engineering firm WorleyParsons.

The refurbishment created a café with healthy food options and a reconfiguration of the parking lot created 80 cycle spaces and shower facilities. The building offers weekly yoga and bootcamp fitness sessions for tenants and a pop-up nail bar.

However, ground-up development offers opportunities to hardwire wellness into a building. US developer and investment manager Hines’ One Museum Place office tower in Shanghai has been constructed with the health of end-users in mind, says Derek Hrzek, senior associate at Hines.

“The design by Gensler, with the support of Hines Conceptual Construction, sought to maximize open space around the building and also natural light within it. One Museum Place has a full glass curtain wall system with floor-to-ceiling windows and nearly 3.2 meter-tall vision glass, which is unique in Shanghai,” he says.

“Air quality is a massive issue in China. It is not unusual for tenants to have their own personal air-quality monitors and for average citizens to check air-quality readings on mobile apps. We have 112 monitors on the building’s 60 office floors and we filter particulates through two separate filters and then implement a UV light filter in order to maintain the required quality. The building has a full-time indoor air-quality manager and we believe this, combined with the volume and quality of data coming in from this quantity of monitors, is a first in China.

“The building also focuses on healthy water. Tenants can access plumbing and drainage locations at six points on each office floor. These multiple access points make the installation of in-line filtered water stations easy for both instant hot and cold drinking water. This is primarily to help eliminate plastic bottle use, but of course encouraging hydration with clean water is another positive health initiative.”

Hrzek admits it is hard to quantify the financial benefits of these initiatives, even though factors such as air quality can be measured. “Although we can measure real-time air quality with remarkable specificity, it is harder to quantify the monetary value of these initiatives, but we do believe they have been positive for the leasing efforts to date – we are doing well on rental rates and leasing velocity. These initiatives are all required to create a premium product and we believe we are already getting payback.”

Certifying health and wellness

Just as building certifications such as LEED reward sustainability, there are newer programs focused on wellness. The International Well Building Institute’s WELL building certification has been awarded to more than 200 buildings around the world. Buildings are assessed on factors including air and water quality, thermal comfort, light and physical activity.

However, the certification does not come cheap. Duchnowska says: “The WELL certification is still very expensive and is also fairly new to Europe, so is not yet widely recognized. We use the WELL pre-assessment, which is useful for pointing out areas for improvement and we would rather invest in addressing these before spending money on the certification itself.”

There are other certifications available, such as Fitwel, whose founding members include Tishman Speyer and Vornado Realty Trust.

The Global Real Estate Sustainability Benchmark has included a wellness module since 2016 and this year incorporated it into the main assessment. GRESB notes: “Health and well-being programs are not yet uniform or standardized. Leading companies have comprehensive programs informed by an intentional health promotion process including policy, needs assessment, action and monitoring for health and well-being. Lagging companies have disjointed, incomplete processes for health.”

Tenant-driven

Despite the difficulty in demonstrating the dollar value of a “healthy premium,” managers are increasingly treating wellness as part of their sustainability remit and not simply for altruistic reasons.

Carruth says: “Tenant engagement on sustainability matters has been really challenging over the past few years. However, where tenants have been uninterested in talking about energy efficiency they are completely engaged in talking about staff well-being.”

Tenant engagement is crucial, because without input from the end-users, landlords cannot know whether their initiatives are having an impact. “Absenteeism is the most quantifiable way to measure healthy building benefits but there is also value in qualitative assessments via regular surveys,” says Carruth.

Naturally, anything that is front and center for corporate tenants is of importance to real estate investors. There is also a sense among landlords that advances in technology which empower end-users will force owners of real estate into action. “The time is not very far off when you will be able to use your mobile phone as an indoor air quality monitor,” Carruth notes. “As soon as that happens there’s a relatively large risk to landlords that are not delivering good air quality.”

As more and more property owners become involved in wellness initiatives, the costs are falling. Hrzek says: “The costs of sustainability are also falling. For example, between when we first considered the air-quality monitors in 2014 and purchased them in 2018, the overall costs roughly halved and they continue to drop.”