The trend of focusing on health and wellness in office and residential buildings has soared over the last several years as building owners look to both meet tenant demands for these kinds of offerings and stand out in an increasingly competitive environment. No one knows that better than Joanna Frank, the President & CEO of The Center for Active Design, a New York City-based nonprofit group that promotes healthy design and environments in buildings. In 2017, Frank’s organization was given the reins to operate and oversee Fitwel, a green building certification standard centered around creating healthy environments for building occupants. In a conversation with Propmodo, Frank discusses expanding Fitwel’s new product, the surging interest in healthy buildings from some of the world’s largest industrial owners, and what it will take to get the real estate industry to make healthy buildings a perennial priority.
Hi Joanna, how are you? How’s your new year going?
I’m doing well, thank you. It’s been a crazy year for real estate.
Now that we’re in a new year, looking back on 2023, what moments stand out to you in terms of progress in building healthier buildings?
It’s funny; I was just having this conversation with an investor. We actually saw a really marked shift in the conversation in 2023. It was actually around COP 28 that it happened because immediately prior to that, a big research paper came out from the Lancet that was really talking about quantifying the cost of climate change from a health perspective and the only way to really truly quantify the cost of climate change is from a public health perspective. It was this jewel message that certainly us, as the real estate industry, have to do two things now: we have to both reduce the amount of pollutants that we’re putting into the atmosphere and try to avoid catastrophic global warming, at the same time recognizing that there is global warming that we already triggered which is having impacts on climate and weather patterns and risk to value. So, we have to reduce the amount of carbon at the same time as adapting our environment to mitigate climate change and preserve life and quality of life. And so I think as we do the second, we are now very much part of the conversation, and it’s always interesting to see what this means for the business and not just the conversation. We actually did more business in December of last year than any month ever.
Wow, that’s significant.
Yeah. Revenue numbers, which are always cyclical because they kind of match the cycle of the real estate industry, in December was a straight line up. I think that it’s interesting that during the pandemic, everyone was focusing on health, and then immediately after COVID, we saw the conversation move rapidly to net zero commitments and Paris Accord compliance. And so we saw a really strong sort of retreat from health back into the “E” of ESG. So it was interesting to kind of see the shift back or now this more of a balanced approach that we have to do two things, we have to hold two thoughts in our head at the same time, and that is both the reduce and the adapt. That was very significant, as far as the conversation around health is concerned, in a real estate market that otherwise had a difficult year last year.
The other kind of driver in the conversation was around insurance rates. The second half of the year was really dominated by the conversation around insurance rates, and obviously, those insurance rates are going up because of that climate risk, so it is one in the same conversation. How can we, as an industry, mitigate our risk against those changes in the climate and changes in demand? It’s not just the climate that’s changed. It’s the demand that will change, or has changed?
The Center for Active Design began operating the Fitwel certification system back in 2017. How has the program grown since then, and what are some of the milestones you’ve hit?
It has grown significantly. Last year, we grew 40 percent on the asset level certification. The big thing that is changing right now is that last year, we actually launched a second product. Up until now, fitwel has just had asset certification, and we’ve expanded into different asset types, but it’s really asset by asset certification. What we did last year is launch a new product [Certified Metrics] looking at how to certify across an entire entity, so how you certify at scale basically. It’s really responding to that investor demand for high-quality data or “S” data. We are looking at how to take an individual asset and respond to tenant demand, but also, at the same time, this is increasing demand for high-quality data around risk mitigation around value related to ESG reporting.
We launched that at the end of last year as a pilot, and that will be the big launch this year, around supporting not just certifying your highest performing assets but understanding the risk and value opportunity across all of your assets. We always saw ourselves as providing data that would actually change the market. So that’s a big shift for Fitwel. It’s still an asset-by-asset approach, even when it’s at scale, because, obviously, every asset is different. But how do we ensure we use tech to really drive efficiency? So that’s a big difference. We are seeing good growth in that certification, and we’re seeing a lot of interest in this efficient approach, which will cover all your assets. It’s less ‘how do I reach a minimum score and get a star,’ and more ‘how do I quantify a risk from the perspective of S,’ basically.
The focus on health and wellness in buildings started to emerge in the years just before the pandemic and then really took off post-pandemic, as we all have seen. But what about now? Are you still seeing the same kind of interest from office owners and tenants?
On the office buildings you’re quite right, there was already strong demand pre-COVID because employees were demanding health promoting environments. The stat we quoted all the time was that 78 percent of employees—especially the Millennial generation, of course, there was no Gen Z pre-COVID—were actually using the health-promoting factors of an office environment as a critical decision-making factor. So staffing was very contingent on the physical environment, both the location as well as the office itself, and we can tie that very strongly to retention of employees and employee satisfaction. What was interesting is that we were not seeing that same thing, even though it’s the same people transferring over into residential.
Before the COVID-19 pandemic, there wasn’t a significant demand from multifamily tenants for health-promoting environments. We were seeing requests coming for data from investors in multifamily, but we weren’t seeing the dots being joined by tenants also asking for it. That changed in COVID. Now, everybody’s asking for health-promoting environments. Everybody’s aware of indoor air quality and all of those aspects—that mental health is affected by access to outdoor spaces, the location of your property, and daylight and views. And I feel like the entire population is now sophisticated and understands that the built environment affects your mental health, your physical health, your overall life expectancy, as well as your quality of life. During COVID, we saw that our fastest-growing sector was multifamily. It has outpaced commercial, although commercial remains our largest group of users, and they are re-certifying because now commercial is really a race to quality.
The one I was surprised about is that the industrial sector has gone from zero to 60 faster than multifamily. There was no interest from industrial pre-COVID and no interest immediately after COVID. We put out a report about industrial about 18 months ago, really looking at stats behind employees in industrial, and what we were seeing was a very high level of employee turnover. I think 2020 to 2021 saw a 60 percent turnover in employees, which is obviously an unsustainable turnover rate, especially in a small market. You are literally going to run out of people to employ in a small market.
We put out a thesis that by looking at the built environment and location of the properties, we can start to address some of the underlying qualities of that employee turnover, a lot of which was due to stress, mental health, anxiety, physical health issues, etc. There are a lot of underlying reasons for staff turnover in health, broadly defined. We thought that was pretty interesting, we didn’t have a lot of conversations about the report for about a year, then in the last 6 months—in fact the last month—we have had multiple conversations with the largest owners of industrial portfolios. It was a very quick turnaround in the conversation. Maybe it’s because the industry is beginning to compete, whereas there was such a demand for new industrial space and industrial space in general over the last few years that maybe you didn’t need to consider some of these other factors, but now, with the market getting tighter they are looking at differentiating assets. It’s always interesting when the biggest players come to the table.
That’s really interesting. I went to a panel not too long ago during New York Climate Week, and an executive from Prologis was talking about some big sustainable initiatives they are undertaking. If one big player jumps in, do the rest follow? Do you think that’s the way things are going with industrial?
I would say these are still just conversations we’re having, but it’s interesting they all want to have conversations at the same time. Maybe they all saw that panel. I don’t know what happened; maybe I should ask them all how come they are all suddenly interested. So we’ll see who the first is that will start using Fitwell at scale. Some are already using Fitwel, piloting it, and kicking the tires, so we’ll see who is the first to really jump in at scale.
How big of a role do policy and decarbonization efforts play in driving interest in healthier buildings?
I think the legislation that’s driving the conversation about ESG generally, and therefore health, is coming out of Europe; it’s the EU taxonomy, and this kind of requirement now that data be audited or certified. A lot of the folks that are the largest owners of real estate in the world are raising money out of Europe or already have assets in Europe at a scale that requires them to report through the EU taxonomy, so we’re seeing that as a big driver for the conversations, we’re having because we can provide certified data, we can substantiate with research. What we did to create the new “S” certification was that we took the Fitwel standard, which is evidence-based, with 7,000 peer-reviewed health research studies behind the standard, then took the last two years looking at the economic research and overlaid the two. We were able to identify which strategies had a measurable impact on value and risk that we could substantiate with evidence-based, which is very important so that claims that are being made can be substantiated. Nobody else has done that work.
Regulatory-wise, everybody’s kind of looking at Europe as far as setting the bar right now. I think with the delay in the SEC rules, in that kind of vacuum, folks are still using EU rules to guide their policies at the moment. When the SEC rules come out they really are focusing on EE, they’re not looking at S yet, so we will continue to use the EU taxonomy and all of those related frameworks not to inform what we are doing but to align what we are doing with those frameworks.
What would you say is threatening efforts to make buildings healthier?
I would say, generally, the teams that are addressing environmental and social issues are very small teams, even in very large real estate companies. I think that there’s always a bit of competition for time, resources, and priorities. It appears that the industry prefers to focus on one issue at a time. During COVID, everyone was focused on health. Immediately after COVID, everyone was focused on net zero, making net zero commitments, and how they were going to line up with the Paris Accords, but they were doing that rather than focusing on health, they weren’t doing it as well as focusing on health. And when they changed to focusing on health during COVID, I heard from a lot of folks in environmental sustainability that prior commitments to environmental sustainability had been forgotten during COVID. I think this is what we see, a kind of single priority, and I think it’s very much a resource issue. These are very small teams in very large organizations being asked to do a huge and growing amount of work.
What would it take to have that always be an issue that’s addressed?
I would say it’s a belief that we’re talking about something that has a direct impact on ROI because it does have a direct impact on ROI. Which is why I say belief, because the reality is it does impact ROI, it is a financial risk—if you fail to meet the demands of stakeholders, that will have an impact on the value of your properties. You will lose tenants, you will have high vacancy rates, and you will have low retention rates. If you don’t address the risk associated with climate change, that will impact the value of your assets as you will be at greater risk for flooding or, fire, etc. We can substantiate that there is a correlation between the strategies we promote and value. I think where it becomes essential in the minds of real estate is when we believe it. When we truly understand that you cannot look at the value of your asset without looking at these pieces.
Last question—is there a project that has really impressed you recently in terms of designing for health?
We saw a project last year that got the highest score I think we’ve ever seen because of its strong community. It’s a building in Taiwan called Eco Utopia. Rockefeller Center is also a community project that received Fitwel this year. We have these two extremes of community projects, which I think are always very interesting because they’re multifaceted, they’re a complex group of buildings, and they affect huge numbers of people. Rockefeller Center is a historic building, and it occupies a large amount of space. It has lots of outdoor space, buildings, and all sorts of uses. Then, the project in Taiwan is a new building that’s really forward-looking and state-of-the-art. If you could dream up the most health-forward environment, what would that look like? That’s what they’ve done on this project, which is fascinating.