With the COVID-19 pandemic elevating expectations for healthy indoor environments, centering decision-making around buildings that prioritize well-being presents a significant opportunity for developers, tenants, and investors alike.
In a discussion with Dr. Joseph G. Allen, and Manulife Investment Management’s Matt Warner, discover why the economics of healthy buildings investments make sense.
Dr. Allen on healthy indoor environments: “We’re an indoor species; we spend 90% of our time indoors … yet if you think about what we spend most of our time focusing on and studying, it’s the 10%—things like outdoor air pollution. We even have protection for that 10% of where we spend time. We have things like the National Ambient Air Quality Standards. There is no corollary for that 90% of where we spend our time. There is no national indoor air quality standard. There should be.”
Matt Warner on how Manulife Investment Management is prioritizing healthy buildings: “With the help of Dr. Allen and his team at 9 Foundations, Manulife Investment Management’s real estate team developed a return to office playbook, which provided a clear overview of how our buildings should be managed amidst the rapidly evolving landscape. It included guidelines on employee behavior, communication standards, and operational system upgrades.”
This material originally appeared on Institutional Real Estate, Inc. and is repurposed with permission. Unless otherwise noted, the views expressed are those of Dr. Joseph Allen, Director, Harvard Healthy Buildings Program, and are subject to change. Manulife Investment Management is not responsible for the comments by or views of anyone not affiliated with Manulife Investment Management or its affiliates.
Matthew Warner (MW): Good morning, good afternoon and good evening. My name is Matt Warner and I’m the portfolio manager of Real Estate Equity at Manulife Investment Management. At Manulife, we know that buildings have a tremendous impact on our health and well-being. The COVID-19 pandemic has elevated the expectation for healthy indoor environments, centering decision-making around buildings to prioritize people, and social impact presents a massive opportunity to developers, investors and tenants alike. Today, with the help of world-renowned healthy buildings expert Dr. Joseph Allen, we’ll discuss the 9 Foundations of a Healthy Building, how building owners and investors can prepare their workplaces for a healthy and safe return, and the economics of healthy building investments, building the case for healthy real estate. Today’s presentation is brought to you by IREI, in partnership with Manulife Investment Management. We will spend the first portion of the presentation hearing from Dr. Allen, and the second portion will be allocated to questions and answers. You will notice there is a Q&A feature at the bottom of your screen. Please submit your questions at any time throughout the presentation and we will get through as many as possible. As a reminder, this session is being recorded and will be sent to those who registered early next week in case you miss anything or want to forward this presentation to a colleague. The playback video will also be available on irie.com. If you’re interested in receiving a free copy of Dr. Allen’s book, Healthy Buildings: How Indoor Spaces Drive Performance and Productivity, please submit a question using the first and last name you used to register for the event. Someone from our team will then be in touch to coordinate its delivery.
I would now like to introduce you to Dr. Joseph Allen. Dr. Allen is the CEO and founder of 9 Foundations and an associate professor at Harvard T.H. Chan School of Public Health, where he directs the Healthy Buildings program. Before joining the faculty at Harvard, he spent several years in the private sector, leading teams of scientists and engineers to investigate and resolve hundreds of indoor environmental quality issues. His academic research focuses on the critical role the indoor environment plays in our overall health. With the help of Dr. Allen and his team at 9 Foundations, Manulife Investment Management’s real estate team developed a Return to Office playbook, which provided a clear overview of how our buildings should be managed amidst the rapidly evolving landscape. It included guidelines on employee behavior, communication standards and operational system upgrades. Our team at Manulife continues to engage with Dr. Allen, and we are happy to have him here today to learn more about healthy buildings and how they have shifted from optional to obligatory overnight. Dr. Allen, thank you and welcome.
Dr. Joseph Allen (JA): All right, thanks so much, Matthew. I appreciate that nice and kind introduction. It’s great to be here and I want to thank IREI for the invitation. It’s been a pleasure working with the Manulife team now for many months, and this Return to Office playbook plan and their entire Investment Management real estate team. And really, this goes back to my earlier work doing consulting around forensic investigations of sick buildings and in 10 years or longer of doing that kind of work, it became quite apparent we know what needs to be done to keep people safe indoors. In fact, we know what it takes to keep people not just safe but also help them thrive.
So, in addition to Manulife, I have been working with and advising organizations across the spectrum, everything from biotech and finance to K-12 schools, universities, the prison system, courts, police departments, big entertainment companies. So really, it’s all starting with the fundamentals of the science. But really what we’re talking about today is a broader idea of healthy buildings and this new norm, and also the business case for healthy buildings.
One of my co-authors there, John Macomber, co-author of the book, is a professor at Harvard Business School, and we’ve teamed up over the past several years to make this business case for healthy buildings and I’m going to make the case from the health side, certainly, and also bring in the business case. So, I’m going to keep this pretty zippy and I’ll move it along so we have time plenty of time for Q&A.
But let’s start with some big picture framing. I’m not going to go through all these global mega changes, none bigger than the current pandemic of course, but think about even where we were before the pandemic. Rapid population growth on a path to nine billion people on the planet; rapid urbanization, first time in history more people live in cities than do not; these forces are colliding, creating strains on our natural ecosystems; we have a changing climate; and thinking about population growth and urbanization, India alone will add 400 million people - 400 million - to cities by 2050. So, to put that in perspective, I’m in Boston right now and it’s the equivalent of adding a city the size of Boston every three weeks from today through 2050. So massive changes are happening, changing definitions of health, our buildings and of course the nature of the Earth. And last, number 10, our values are changing, in a good way in my opinion, and rightly so.
So, let’s jump into buildings, specifically. I start most of my presentations by asking this question: Why are we ignoring the 90%? And there’s two parts to this. The first is, we’re an indoor species; we spend 90% of our time indoors. So, I’ll have you do a little experiment here. Take your age; multiply it by 0.9. That’s how many years you’ve lived indoors. So, I’m 45, I’ve lived 40 years of my life inside schools, offices, my home, airplanes, cars, and these days it seems like 99% of my time, if not more, is spent in this one single room. Yet if you think about what we spend most of our time focusing on and studying, it’s the 10%, it’s things like outdoor air pollution. We even have protections for that 10% of where we’ve spent time. We have things like the National Ambient Air Quality Standards. There is no corollary for that 90% of where we spend our time. There is no National Indoor Air Quality Standard. There should be. The other part of this 90% we’re ignoring is the true cost of operating our business. So, this is a savvy group in this space. I don’t have to talk about this at length but of course that’s the people inside of our building. Yet if you think of what we’ve been doing so far, we’ve mostly prioritized green buildings, and green buildings come with a lot of important benefits: reductions in energy, waste, water. But that actually accounts for maybe 1% of that 10% cost. The true cost, and where the movement is going, is to capture the value of the 90% cost: People, and where they spend their time.
All right, so another thought experiment. If we were live, I’d call on people to answer this question, but I’ll do it this way. I want you to think about how you know what you know about healthy living. How do you know that exercise is good for you? We all know this, what is it these days, 30 minutes a day, or something like this (again, I’m failing miserably there, thanks to the pandemic). We all know that this is a healthy meal. We all know that we have to eat healthy to be healthy. We all know that outdoor air pollution is bad for us. We all know that cigarette smoking is bad for us. But really, how do you know these things?
I would argue that most of what we know about healthy living comes from these large human epidemiological cohort studies that follow tens of thousands of people for decades, following their behaviors, their actions, and also tracking health outcomes. So, who gets cancer, who doesn’t; who has heart disease, and who doesn’t. Well, we’ve learned a lot from these studies. The Framingham Heart Study, the Nurses’ Health Study, tens of thousands of nurses participated, hundreds of thousands, the famous Harvard Six Cities Air Pollution Study. Okay, these are really important studies, but what do they all have in common besides following tens of thousands of people over time? None of them talk about the place where we spend all of our time. None of them talk about the role of the building and that 90% of our life.
And so, it’s actually a glaring hole in our understanding - I’d say widespread understanding - of what it means to lead a healthy and live a healthy life. Very few people would point to buildings first and say, well yeah, certainly you have to exercise and eat well but also my indoor air quality matters, right? It’s a total afterthought. Hopefully that’s changing right now in the pandemic. There is a massive opportunity in front of us. So, what matters in terms of the 90% of where we spend our time? Well, there are a lot of things that matter, actually.
My Harvard team released a report a few years ago called the 9 Foundations of a Healthy Building and here, this was in response to conversations with industry leaders, where I think I was at the real estate roundtable many years ago now and said, look, we’re overcomplicating what it takes to have a healthy building. It’s just a handful of factors. And a whole bunch of people leaned in and said, well, what are they? And it occurred to me there was this disconnect. We had what I think as decades of science in public health that hadn’t permeated the market. So, I wrote this report, highlighting all these nine foundations of a healthy building and how they influence health, and bringing in some of that scientific evidence we wrote our report around.
So, I’m going to start talking about a couple in particular up top: ventilation and air quality. A few years ago, we wanted to look at what is the impact on worker productivity as it relates to indoor air quality. We started a series of studies called the Cog FX Studies, for cognitive function, and in the first study we enrolled knowledge workers. Twenty-four knowledge workers spent six days with us over two weeks in this kind of ugly, cubicle farm in the top right, did their normal work routine, 9 to 5, and we fed them and kept them there. They were blinded to what we were actually doing and at the end of the day we would administer a cognitive function battery.
What they didn’t know was that from the floor below (depicted in the bottom right) we were changing the air they were breathing in really subtle ways, and really just changing three variables: Bringing in more outdoor air, lowering the CO2 concentration and lowering the chemical load on the space of common VOCs (volatile organic compounds), things that off-gas from dry cleaning, personal care products, carpets, wood furniture, surface cleaners. So, a highly controlled environment, controlling for everything else. Caffeine intake, how well they slept, salary, education.
And what we find is really quite dramatic and shocking. It should be shocking to most people. Across nine domains of higher order cognitive function, we saw that when people spend time in this optimized indoor environment, again of just three variables that most buildings can hit right now, and controlling for all these other factors, we find these significant and dramatic impacts across all domains - so that’s the dark green bar relative to a conventional office building (that brown bar). Across domains that you will recognize as being quite relevant to business: crisis response, how you orient yourself to problems and tasks, how you seek and utilize information, the breadth of your strategic thinking and approach. So again, indoor air quality, big picture indoor air quality, minor adjustments can have big impacts on cognitive function.
We also see impacts of CO2 and across the horizontal axis there, that’s carbon dioxide concentration. And for reference, a typical office building has about a thousand parts per million of CO2 and we started to see effects at these levels, and in fact, I wasn’t planning on doing this but I’ll do it, I tracked CO2 in my office. It’s at a thousand parts per million, 1,100 parts per million right now. So that’s high. These are above levels at which we see effects. Previously, we had thought this was a level that was benign, not really impacting us. I feel fine, I hope I am performing okay here, but it’s telling me that the CO2 levels are actually high in my office right now, and our research shows that this has an impact on my decision-making performance and cognitive function. So, I’ll open my window and see if the second half of the presentation is better. But I’ll show the data, I’ll show the monitor again towards the end and we’ll see if the CO2 concentrations go down. They should.
All right, I want to move from buildings to bring this into something everybody knows and talks about: Airplanes. For many years I researched airplane air quality and in 2013, I was the lead author of a National Academy’s report on infectious disease transmission in airplanes. So, I know airplane ventilation quite well and you all do too. So, here’s a graph showing a typical flight. The red line is pressure so with boarding there’s nothing, then the pressure changed during ascent and cruise. But pay attention to the blue dotted line. That’s the CO2 concentration. So, I told you that a thousand parts per million was too high. And if you look at the bottom of that y-axis, the vertical axis, this is all above 1,200 to 1,800 parts per million. And look at that really high concentration at boarding. It was very common for us to see CO2 concentration during our testing of airplanes at 2,500 parts per million.
Now think about what happens when you get on a plane. Maybe some people haven’t been on a plane in a while, but recall, very often it can be a middle-of-the-day flight. You sit down in the plane and what happens? You fall asleep. You’re tired. There is no ventilation. Planes rarely have gate-based ventilation operating. So, I’ll talk about it in the context of cognitive function performance, but I have been writing a lot about buildings and COVID and airplanes too. Airlines need to make sure that gate-based ventilation is running, particularly in the middle of a pandemic for this reason. All right, but let’s stay on productivity.
So, we’ve studied office workers with the Cog FX Study, but this time we studied pilots. We actually enrolled 30 active commercial airline pilots, this is in a flight simulator, a brand new A320 flight simulator. The person on the left in the back is our scientist, a professional FAA rater, and we subjected the pilots to three-hour flight routines, repeated, randomized and blinded, and the only thing we changed was the carbon dioxide level in the cockpit and we tested their flight performance against 21 advanced maneuvers, including things like a single-engine failure during flight. You all saw those quite scary videos of an engine on fire after the engine ripped apart in-flight. And things like a failed or aborted takeoff. And when we do that, we find that the pilots who are breathing the air with higher CO2 concentrations were more likely to fail advanced flight maneuvers, including mid-air collisions, when the air quality was worse in the cabin, controlling for all other factors again. Here’s an example of rejected takeoff. The pilot in the green does a good job, recognizes there’s a problem, slows the plane down. The pilot in the red has a hard time with the plane, takes too long, fails the maneuver following the same protocols that the U.S. FAA follows. So, I just brought this in because it’s something we all know and have experienced, sitting on an airplane, getting tired, ventilation not working and showing that these effects we saw in office workers extend to all sorts of activities. This is real-world life performance with active commercial airline pilots. I won’t tell you the fail rate, but air quality matters in the airplane and everywhere.
All right, so let’s get back to buildings and this idea of worker cognitive function and indoor air quality influencing performance. Well, the other part of the 90% that we’ve been ignoring is the business implications of better indoor air quality. I’ll walk through the second analysis we did from our Cog FX Study. We knew we’d get pushback, but what does it cost to create this healthy building with better ventilation? So, we modeled it all across the United States, commercial office buildings, all different types of building typologies and mechanical systems. It doesn’t really matter that it was in the U.S., we just wanted a broad geographic representation with different climate zones, so all climate zones.
We estimate the cost in the order of worst case $40 per person per year to achieve this higher ventilation rate. If you use energy-efficient technologies, it’s down to dollars per person per year. If you ask facilities managers what this costs to do, they overestimate it by a factor of three to 10. In other words, you say, what do you think it’s going to take to implement this? They say it’s $100 per person per year. Our worst case - worst case - was $40, after energy-efficient systems down to dollars per person per year. So sometimes 100x over estimate. And that’s important because that’s where the conversation historically has stopped. Hey, there’s a cost here; can’t do it; it’s not in my facilities budget. A facilities director job is not worker productivity, not necessarily worker productivity. Most of them are not tasked with that. It’s energy savings only.
Now we model our Cog FX results using employment data. This is all peer-reviewed and published. I’ve written a couple of articles in Harvard Business Review about this now, but we find that when we look at the benefits, it’s in the order of $6,000 to $7,000 per person per year, U.S. dollars per person per year, against that backdrop of a couple of dollars per person per year. This is a gross underestimate of the benefit, because the reality is we know that there are more benefits to higher ventilation rates: Reductions in worker absenteeism I’ll talk about in a second; reductions in infectious disease transmission. So, if anything, a gross underestimate. I had a CEO of a major company tell me, look, if your math is off by two orders of magnitude, it’s still worth it. And he’s right. In one sense, it’s still worth it even if it’s wrong, but he’s wrong in the other sense. Our math is not off by two orders of magnitude.
All right, so let’s bring you to the book here. It’s really generous of Manulife to offer a book to anyone who types a question into the box, so I think you have to leave your name. But there’s a lot of good information there we hope that extends. We talk about this study so you can read about it in more depth than I’ve covered here, but also, we walk into the business case here. This is a podcast we did with Harvard Business Review “Is the Healthiest Building in the World Worth the Rent?” I teamed up with Harvard business professor John Macomber, my co-author, and I’ll walk through some of the thinking in the book to see how this plays out.
So here in the book, and we have some real examples of buildings, but in this case it’s a made-up company, Health & Wealth, Inc., a baseline company, 40 employees, average annual salary $75,000, payroll as a percent of revenue 50%, revenue at 2x revenue to payroll, and we followed the rule of thumb given by JLL, a nice little way to think about this, the 3/30/300 rule. For every $3 in utilities, $30 in rent, $300 on payroll. And so, we create this basic pro forma for this company and then we can model out what happens with this $6 million company here when we start to put in some of these healthy building strategies. We walk through this in the book in more detail. So, on the left there, what if the company says, hey, we’re going to give you the greenest, greenest, greenest, we’re going to chase every last piece of energy in the building, we’re going to reduce energy consumption by 20%. Remarkable and significant and important. You save about $6,000 on utility costs, that’s great. Bottom right there, the net impact on income after taxes is less than half a percent. Really good for the environment, we need to do this. Business impact is minor at this point. And many organizations have already captured all the low-hanging fruit. It’s difficult to find another 20% in energy savings right now. What happens if we extend to some of the benefits, so in this case, let’s add a payroll effect. A 1% difference. Is that reasonable? And we see on the bottom right, net change. Now we’re approaching a 2% increase in net income after taxes. But is that reasonable, that 1%?
Well, we can look at other studies. And this is what we did in the book. The study by a colleague, Don Milton, looked at worker absenteeism as it relates to healthy building strategies, and he found 1.6 fewer missed workdays in companies that pursued these healthy building strategies. And what are the healthy building strategies in that study? Higher ventilation rates. And so, you can map this out - 250 worker days per year with this salary, it’s about two missed workdays from Dr. Milton’s study and it’s not hard to come up with this 1% number. So even if we say 1%, you’ve already covered your energy costs and you get an almost 2% net increase.
Well, let’s extend that and bring in the worker cognitive function work that my team and others have done. So, to be clear, I mention a few studies here but the literature here is really deep, actually decades deep. So, let’s say a 2% productivity boost, top line. Is that reasonable? Well, I’ll tell you that the cognitive function test scores I showed you in the Cog FX Study worker test scores doubled. They doubled in terms of their performance by just changing a couple of these factors. So, let’s say it’s 2%. Bottom right, net change 9%.
And this is the key point. If we start addressing worker health and productivity, it leads to massive impacts because obviously workers are the biggest expense in the building, yet the green building movement hasn’t fully embraced this healthy building movement. So, there are costs to this, right? Higher energy, higher ventilation rates. The extra utility costs for higher ventilation rates, we add this into the model. Really no real impact on bottom-line performance. This is cheap relative to the game.
Now one of the things we talk about in the book that I think is really quite important is this barrier to adoption and sometimes its perceived conflict. If I am a building owner and I develop a healthy building, why would I spend more if the benefit all goes to the tenant? Tenant workers are getting the benefit. Well, we show in the book and make the case throughout the book that there’s plenty of room for sharing here. So even in this company, if they were hit with a 10% higher rent for this healthy building, they can absorb that cost and still see a premium, an overall massive net impact on net income after taxes.
Another way to think about this is what we heard from another CEO who is pursuing healthy building strategies and essentially saw it as a hedge: In an up market, I get the premium; down market, I get the tenant. And that’s what we’re seeing right now. So, all else held equal, which building are you going to go back to? A healthy building or a not healthy building? I think very few workers are going to go back into anything that’s not a healthy building at this point. The norms and expectations have fully changed.
All right, so let’s stretch it here. What if our Cog FX Study is a gross underestimate of the benefit of healthy buildings? So, I talk about the nine foundations of a healthy building, all these factors that influence our health. So far, I’ve just talked about ventilation and I gave us a 2% boost on productivity. So, I’ll add one more percent here for all the other foundations and I’ll bring in some other studies to justify it. So, we did work at Harvard looking at the impact of temperature. It turns out people like a certain pretty tight temperature range in their buildings and when it drifts off of that, as we sometimes see from these minimum targets for temperature and thermal health, in our work we found a 2% dip in worker throughput, again knowledge workers. This was young knowledge workers between 20 and 25 mostly. So, a 2% dip in throughput. Lawrence Berkeley National Lab did a study and finds a 10% decrease in relative productivity when you’re outside of this preferred thermal condition. So just adding one more layer on this, on top of ventilation, thermal health, one of the nine foundations of a healthy building.
I just gave you two