The Real Estate Innovation Lab Research Shows Healthy Buildings are a Win-Win
Put together by the researchers at the MIT Real Estate Innovation Lab (REIL), a new paper has been released detailing ‘The Financial Impact of Healthy Buildings’. Whereas other studies have reflected on the qualitative benefits to health and productivity that healthy spaces provide, the team at REIL has, instead, taken a closer look at how healthy buildings are a win-win for both tenants and owners, with average rents significantly higher than counterparts.
Behind the study are Natasha Sadikin, a tech analyst at REIL, Dr. Imrak Turan who is a Research Associate, and Dr. Andrea Chegut who is the Director of REIL itself. Leveraging data provided from the team’s ongoing partnerships with CompStak and public databases, the paper takes a deep dive into which factors contribute the most to this healthy space premium, using a regressive hedonic model.
The paper can be read in full here , with a summarization of its salient points below.
What are healthy buildings?
Despite people the world over living longer lives, our health is taking a hit. In general, we are leading increasingly less healthy lives, with estimates showing that, by 2030, more than 52 million will suffer and die from chronic diseases brought about by poor lifestyle choices.
A compounding factor in all this is our tendency to spend more time indoors. Unhelped by the Covid-19 pandemic, individuals in Western countries can spend anywhere up to 90% of their time within their home, office, workplace, or other building.
With such an enormous amount of time spent indoors, then, the societal focus has now turned to how these spaces can help improve the quality of life for people who inhabit them.
One way in which societies are going about doing this is through Healthy Buildings.
Healthy buildings are defined by the World Health Organization (WHO) as “a space that supports the physical, psychological, and social health and well-being of people.” Healthy buildings include features that will help benefit the mood of inhabitants, reduce illness, enable better focus, and be generally more pleasant and comfortable to be in.
Healthy buildings features include a combination of proptech and savvy construction, including:
Plenty of daylight
Stable, comfortable temperatures
Clean, filtered air
Layouts that are conducive to both privacy and cooperation
A recent study (https://pubmed.ncbi.nlm.nih.gov/11089326/) has shown that poor ventilation, for example, is responsible for more than 57% of all sick leave, with risk factors like a dirty carpet contributing to headaches and decreased productivity. The case for clean, healthy buildings for the inhabitants is well-made.
But while the benefit of these technologies and design choices to tenants are generally well-understood, the authors argue there has not yet been enough research done to understand the financial effects of “Healthy” certification of buildings. The team claim “this is because healthy-certified standards are new and recently established, with Fitwel and WELL certification programs leading the charge in the United States.
With the pandemic now ushering in a surge in demand for safe, healthy spaces, the team’s paper highlights why healthy buildings are not only good for the tenants but also a boon for owners in terms of value.
REIL’s findings and methodology (hedonic model)
The findings of the study were that health-certified spaces transact between 4.4 and 7% more per square foot than their nearest non-certified counterpart. In other words, if a non-healthy space transacts at $50 per square foot, a healthy space will do the same for $52.50.
The team’s findings suggest that, despite healthy spaces requiring more diligence and financial outlay, the ongoing benefits to both tenant and owner can prove substantial.
To reach their conclusion, the team at REIL used a hedonic regressive model that revealed how much each contributing factor of a healthy building adds to its value. Commonly used in real estate economics, hedonic models reveal the demand for different aspects of a building that are not directly observable.
In this study, the model was used in conjunction with data drawn from four main data sources: CompStak, Fitwel, WELL, and Green Building Information Gateway (GBIG).
CompStak’s commercial real estate data was shared with the MIT REIL team and used to access real estate data that is otherwise difficult to find. Compiling information collected from tens of thousands of members and clients, CompStak’s tools gave the team key insights. These included the effective rent, the number of floors, transaction per square footage, renovation data, lease term, and many other factors that are otherwise unavailable.
The study also made use of databases provided by the health-certification organizations Fitwell and WELL. These public databases list the level of certification of addresses and their star rating. Used in conjunction with CompStak’s data and the data from GBIG the team was able to paint a detailed and yet broad picture of the real estate landscape in the United States, focusing on the top 10 healthy building cities.
The team discovered that while healthy buildings are typically more expensive spaces, tenants are happy to pay a premium.
Notably, the team found that this willingness to pay a premium is independent of other factors, such as the age of a building, the state of renovation, lease duration, and even LEED certification.
These findings suggest healthy buildings are assets that not only improve employee productivity and well-being but also give owners the edge over the nearby competition.
Costs and incentives
Still a relatively new concept, healthy building interest is now growing. The paper details that this interest varies at different levels of involvement with a building amongst owners, architects, interior designers, contractors, tenants, and other stakeholders.
Using data pulled from Dodge Data & Analytics in 2016 and a study by Petrullo et al (2016), the paper highlights that the most important aspect to stakeholders is an improvement to indoor lighting and the harnessing of natural daylight. This was closely followed by a concern for “enhanced thermal comfort” and “enhanced ventilation”, all of which combine to produce a base-level healthy space for tenants. As of the date of the study, attention on other healthy building factors such as spaces that can enhance social interaction, access to natural features, or the encouragement of physical activity, was of less concern.
With the pandemic still not yet in the rearview mirror, the importance of these less-considered features has now been brought back to the forefront.
An impediment to implementing these features has, until now, been the cost involved. Building owners have been somewhat reluctant to stretch budgets to meet the Fitwel or more stringent WELL standards and receive certification.
With tenants now increasingly recognizing healthy building accreditation, meeting this consumer demand may no longer be a choice. Fortunately, what this paper shows is that there is a clear business case for prioritizing the health and well-being of tenants.
The paper argues that owners can now see the implementation of healthy building strategies as “key market differentiation opportunities for companies and owners around the world. Health features stand to pay back in both qualitative and quantitative benefits.”
Importantly, the benefits of healthy features far exceed the per-person energy costs relative to salary costs. Widening the scope, we can also see these health benefiting features are good for the economy too. Researchers from Lawrence Berkeley National Laboratory found that improving the air quality of buildings can add up to $20 billion to the US economy alone.
The REIL team argues that owners should therefore feel comfortable justifying their investment in healthy building features.
After detailing their methodology for peer review, the REIL team concludes the paper with a discussion on their findings.
The team argues that owners and developers should now recognize both the economic and social value of healthy spaces, expecting the adoption rate of the standards to accelerate over the coming years. In highlighting the premium market value that these spaces fetch, the team of researchers believes governments and planning agencies now have a good case for adding healthy features and design ideas in all spaces at the municipal level.
Expecting a similar path to that of Green Buildings, the authors look at how these energy-conscious design decisions have been adopted as a matter of policy, promoting the same at the commercial level. They expect the financial results of their research to do much the same where Green Spaces now fetch 2.8% more per square foot and tenants are willing to pay.
For several reasons, the adoption rate of healthy certification is double that of green building certification. Notably, the implementation of these changes is easier than developing or converting a building into being more green.
The team believes the design and development features construction and commercial real estate industries should focus on most are:
Designing with density: setting aside a percentage of square footage to be experimental and flexible, prepared for learning new behaviours in a post-COVID world.
Proptech enhancing safety: sensors and other scanning tech can help re-acclimate people to public spaces through encouraging hand washing, preventing the overpopulation of rooms, etc.
Touchless workspaces: to prevent viral transmission risks, spaces will need to be designed with smart materials in mind, avoiding pinch points, and include voice activation where possible.
Outside airflow: the inclusion of fresh, clean air helps maintain the health of inhabitants and dilutes airborne elements that can be detrimental to health.
Off-site construction: during the development of healthy buildings, the fabrication and assembly of components off-site can be beneficial to the health and well-being of construction workers and local residents.
Mixed-use real estate: finally, the authors suggest real-estate companies look to the creation of mixed-use spaces that support “organic density”. Buildings of mixed-occupancy can connect communities and are experiencing a resurgence.
Moving forward, the REIL authors look to working with an even more complete set of data with both public and private observations, also accounting for construction costs to help build a yet stronger argument for the development of healthy spaces.
Proptech Ireland is leading and facilitating transformation of the property and construction industries by connecting innovators with industry organisations and investors (angel and VC). For real estate companies to be successful, innovation is now a critical competency. Proptech Ireland consultants take on the role of in-house digital transformation and ESG strategists, advising on tech suitability, procurement, and ROI calculations – from vision to operational veracity. www.prop-tech.ie.