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Prioritizing Occupant Health Leads to Better Real Estate Investment Returns

Just a few weeks ago, Tyler Technologies, a property tax software and services company, cut the ribbon to their newly-renovated Lubbock office. Hoping to attract more workers in Texas’ windy city, Tyler Tech spent a considerable amount of time, money, and effort into expanding and improving its existing office space. The upgraded Lubbock office now boasts a game room, a café, lots of lounge seating and breakout spaces for employee collaboration. But there’s a common thread woven through each of these spiffy enhancements, and that’s a focus on occupant health. All of the office’s conference rooms are outfitted with the latest A/V technology, stand-to-sit desks are the norm, and you’ll find ergonomic chairs for every employee.

Now Tyler Tech is no stranger to taking public health into consideration with its real estate footprint since that very building was already one of the first LEED-certified buildings in Lubbock when it opened in 2009. But Tyler Tech’s renovation in order to attract more workers and boost productivity is indicative of a growing understanding amongst landlords and property owners of all sectors that people will spend more time in buildings that are considered healthier, and that increase in time translates to higher gains in ROI.

The impact of emphasizing occupant health and ROI has traditionally been most apparent within the office sector, especially as prospective employees decide where they want to work in the first place. Joanna Frank, President and CEO of the Center for Active Design (CfAD), a nonprofit organization that champions design changes to the built environment that promote healthy living, told me that a whopping 78 percent of millennials were actually “citing the design and amenities and overall kind of health-promoting features of the physical office space as one of the main contributing factors as to whether they wanted to work at a company or stay at that company, and this was a trend we were seeing before the pandemic.” 

If companies weren’t paying attention before, the havoc wrought by the pandemic made it abundantly clear that one fewer sick day per employee can reap exponential yields. But as we edge into a post-pandemic world with a competitive labor market, businesses are becoming acutely aware to ensure that the buildings in which they operate are considered healthy, lest their labor pools shrink even further. 

But the correlation between health and ROI isn’t limited to the office sector. Franks’ company, CfAD, is the operator of Fitwel, a healthy building certification system originally developed by the US Center for Disease Control and Prevention. In CfAD’s latest piece of research (derived from Fitwel data), the value of broad investments in health-promoting operational strategies, such as how well-maintained a building is, has the strongest correlation to tenant satisfaction, which directly impacts value. This finding took Frank and her team by surprise. “I think we would have probably thought that it was maybe amenities that would have the strongest correlation,” she said. “But it’s not, and that’s why you do research, right?”

Frank told me that Pre-COVID, demand for healthier buildings was beginning to filter through to the residential real estate owners. However, that demand wasn’t framed as a health concern per se. “When individuals went looking for apartments, they were not asking for help selecting environments. They were asking, interestingly, for the individual attributes which we know promote health, like having outdoor space and having amenity space in the location and access to gardens and so on.” 

Frank told me that when any of these requests were initially categorized as part of an overall amenity package. But after the pandemic launched concerns around healthy living into the forefront of the echo chamber, those delineations have been redrawn. Not only is Frank’s firm seeing an acceleration of demand for health-conscious buildings in the residential sector, but they are also just beginning to see a shift in demand on the industrial side. 

If the dreaded COVID-19 pandemic showed us anything, it’s that public health is no longer the domain of healthcare professionals. Architects, urban planners, and real estate developers not only have the power to influence public health, but a growing body of data is also showing the business case for emphasizing occupant health. During the White House’s first-ever summit on indoor air quality last month, Dr. Joseph G. Allen, director of Harvard’s Healthy Buildings Program and associate professor at the Harvard T.H. Chan School of Public Health, put the shift in focus rather bluntly: “healthy buildings are the new minimum.”

A healthy building is regarded as “any structure that supports the physical, psychological, and social health and well-being of people,” according to the World Health Organization (WHO), but it wasn’t until 2020 that a more exhaustive definition arose. Both Allen and fellow Harvard professor John D. Macomber dove further by outlining the 9 essential characteristics of a healthy building in their book Healthy Buildings: How Indoor Spaces Drive Performance and Productivity. Those 9 elements include a focus on ventilation, air quality, thermal health, moisture, dust and pests, safety and security, water quality, noise, and lighting and views. 

Each category represents an actionable summary of the low-hanging fruit that owners and operators can snatch to address the health of their building, such as conducting regular HVAC inspections, preventing stagnation in water pipes, incorporating blue-enriched task lighting for workspaces, and so on. Allen claims that any building can be a healthy building. “It’s not hard to do, and it’s not expensive,” he said. “Sick buildings are what’s expensive.” 

Not-so-healthy buildings can wreck returns in more ways than one. In the workplace, a well-lit and well-ventilated environment can lead to a reduction in sick days. Another publication from Professor Allen showed a correlation between enhanced ventilation and reduced absenteeism in workers. “Change in ventilation improved the performance of workers by 8 percent,” Allen and his co-authors wrote, “equivalent to a $6500 increase in employee productivity each year.” 

Healthier building strategies have been largely framed as a win-win for both the owner and the occupier. In a healthy building, the occupant feels better and is more likely to spend more time in the space. After all, happier tenants lead to higher tenant referral rates and more occupancies. Meanwhile, the owner has the precedent to raise rents and command a higher return. The expansion of building health research has led to an overall understanding from savvy real estate players that the correlation between place and well-being is too valuable to overlook. Now quantifying the exact monetary impact of that consideration varies between asset classes and market landscape, but research conducted by MIT’s Real Estate Innovation Lab finds that healthy building effective rents transact between 4.4 and 7.7 percent more per square foot than their nearby non-certified and non-registered peers. 

There are several advantages to investing in people’s health. The COVID-19 pandemic spurred a paradigm shift in the way we think about the buildings we occupy. Investor sentiment has changed globally when it comes to priorities in real estate assets. Unsurprisingly, health has skyrocketed to the top of the list, but when you look at the data, it’s easy to see why.

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