This article is sponsored by Fitwel
Joanna Frank
The power of research and data to inform real estate work 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 reviewed more than 7,000 public health research studies to identify strategies that have the greatest measurable impact on health, including mental and physical health, social health, and equity considerations.
Over the past two years, we’ve taken a similar approach to exploring the economic impact of prioritizing the health and well-being of commercial real estate occupants and surrounding communities. We focused on two key questions that will shape the future of real estate decision-making: what is the quantifiable value of health, and how can climate change and quality of life coexist?
We have arrived at a pivotal moment where we can clearly demonstrate that health, included in the “social” pillar of ESG, represents one of the greatest opportunities to future-proof assets.
Real estate has always had a mission to meet the demands of society. Currently, the real estate industry is undergoing major transformation due to COVID-19, ongoing climate change risks, and shifts in demand and usage across generations.
Impact on demand
A generational shift in demand for wellness-promoting spaces, accelerated by the COVID-19 pandemic, is spreading across all asset types, not just residential property, as people prioritise and are willing to pay a premium for environments that protect and enhance their health and quality of life.
For example, in the industrial sector, high employee turnover of 60% in 2020 has highlighted the need for healthier work environments to improve employee retention and productivity, while offices are racing to differentiate by offering people- and health-optimized environments in a market of shrinking demand.
“If you don't focus on health and well-being, you risk losing tenants, because properties that don't focus on health and well-being will be overlooked and have poorer economic outcomes,” said Mamoru Shimomichi, executive director and head of investment management planning at Japan-based Nomura Real Estate Investment Advisors, in the UN Environment Finance Initiative report “A New Global Deal.”
As COVID-19 comes to a close, there is no doubt that climate change is the biggest risk to the real estate industry today. New challenges arise as we seek to value assets that not only minimize their impact on climate change, but also adapt to mitigate the impacts of climate change on our residents and communities.
As a result, the real estate industry must strike a balance between reducing its carbon footprint and preparing the built environment to withstand the many threats that climate change poses. Adapting will not only improve quality of life and save many lives, it will also mitigate some of the industry's most serious financial risks.
As the medical journal The Lancet highlights, the true costs of climate change can only be understood from a public health perspective.
91%
Percentage of investors who say they invest in healthy buildings because of tenant demand and satisfaction (Active Design Center)
60%
Industrial Employee Turnover Rates 2020 (BLS)
71%
Percentage of residents who value health-conscious features in their apartment building (AMLI Residential)
75%
Employees expect their employers to support their health and wellbeing (JLL)
$863 billion
Potential earnings lost due to reduced work capacity associated with heat exposure in 2022 (The Lancet)
$325 billion
The productivity value of optimizing daylight and views (P MacNaughton et al., Journal of Applied Social Psychology 2021)
Future-proof assets
The industry recognizes the impact the “E” in ESG has on financial performance, but there is growing recognition that the “S” is the next frontier. Yet despite increased focus on ESG driven by investor demand and regulatory pressure, the industry lacks comprehensive strategies and tools for leveraging the social dimension.
These challenges, combined with asset stranding risks and changing reporting requirements, are prompting asset managers to develop benchmarks and roadmaps for maximizing portfolio value in the face of changing ESG and market trends.
Understanding and leveraging the synergies between health, climate change mitigation and value creation is key to unlocking untapped financial impact in real estate.
This alignment highlights the important role ESG principles play in identifying and quantifying non-financial risk factors in real estate portfolios. While ESG traditionally focuses on physical risks such as energy and climate change, the interplay between sustainability and health illustrates the importance of incorporating social considerations into real estate investment strategies, in line with asset managers' goals of efficient resource allocation and return maximization.
Investing in your health can protect you from the risk of your assets becoming stranded.
Connecting health and value
A recent survey by KPMG, a multinational professional services and accounting network headquartered in the Netherlands, highlighted the growing importance of expanding ESG functions, with 90% of companies planning to increase their ESG investments over the next three years. Despite this, almost half of the companies surveyed still rely on various spreadsheets to manage their ESG data.
After years of analysis, we have addressed this inefficiency through our Fitwel platform and built a new on-ramp for the industry: Social Performance by Fitwel. This organisation-wide certification pathway links social strategy to asset value, providing valuable performance data and insights across the entire real estate lifecycle and across funds. Leveraging technology and evidence-based data, we deliver organisation-wide ESG solutions, complementing asset certification and providing standardised social performance data for reporting in the real estate industry.
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Social Performance's first pilot phase was conducted last year in collaboration with EVORA Global and involved an exclusive inaugural group of leading commercial real estate owners and asset managers from around the world, 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 US life insurer Prudential Financial, used the pathway to develop a report highlighting specific areas for investment and improvements within focus areas such as environmental quality, stakeholder engagement, active living and biophilic design.
“Our strategic focus on enhanced reporting not only gives us greater insight, but also a competitive advantage,” said Christina Hill, global asset manager and head of sustainability at PGIM. “By incorporating insights from social performance into our strategy, we are building the foundation for data-driven decision-making and long-term sustainability.”
Fitwel is currently rolling out the second phase of its pilot.
The way forward
At a crossroads of unprecedented challenges and promising opportunities, it is clear that prioritizing talent is essential to unlocking value across the real estate industry. As we navigate this transformative era, we will see social reporting become standard practice, following in the footsteps of environmental reporting.
Embracing this paradigm shift is crucial in charting a path to value creation and risk reduction by putting people first. By demonstrating real estate data and incorporating health and well-being metrics, investors can gain actionable insights to enhance their assets and safeguard sustainability over the long term amid ever-changing environments and market dynamics.
Leveraging opportunities to address both environmental impacts and health will not only enhance ESG reporting, but also deliver positive financial outcomes. By strategically integrating built environment strategies that prioritize health while combating climate change, real estate companies can increase asset value on both the environmental and social dimensions.