The Value of a Human-centric Approach to Real Estate

Monday, April 4, 2016

When looking at the S&P 500 and the market value of their constituents, which percentage do you think is made up of intangible assets? By that we mean assets such as intellectual capital, innovation capital and digital capital. Basically, what the human mind produces.  84%! Considering this component was 32% in 1995, we can safely say the knowledge economy is a fact and here to stay. So knowledge, innovation and creativity are the differentiators of the 21st century, it’s where a company’s competitive edge lies. It is interesting to see how fast-growing disrupters master the art of intangibles. Airbnb is the biggest hotel chain with zero real estate on their balance sheet and Uber is the world’s largest mobility company owning zero vehicles. The only asset they invest in without compromise? Human capital. Good, high performing, talented, happy, healthy, productive people.

The numbers speak for themselves: Facebook had 150 employees in 2006. Grew to 3,200 in 2011. LinkedIn had 370 employees in 2008 and grew to 3,458 in 2012. These companies understand you cannot grow your company, compete and compromise on human capital at the same time.

A recent survey performed by The Conference Board in 2016 among a large group of global CEO’s confirms this paradigm-shift. For the first time this survey was done, human capital was mentioned as the number one (two and three) asset to address the worlds’ biggest challenges companies are facing worldwide: stalling economic growth, disruption from new market entrants and customer retention.

And yet…. Work related stress is taking on epidemic proportions. Lifestyle–related chronic diseases such as diabetes, obesity, coronary diseases and mental problems are the biggest threat not only to public health but also to economic growth.  Stress is responsible for 60 to 90% of healthcare problems and the costs in France alone add up to 2 billion euros per year, 24% of the total spending on social security. Productivity loss due to depression is costing the EU 100 billion euros per year as calculated by the London School of Economics. So it’s no surprise that a leading company in sustainability like Unilever has decided to add health and well-being to the strategic agenda, on top of the more traditional sustainability topics. And many others are currently following suit. Caring for people’s health and well-being is simply part of their value proposition. It makes good business sense. Given the fact that for a company like Unilever personnel costs significantly outweigh rental costs (9%) or energy costs (1%) by 90 %, one can imagine where they will put their money and effort. A 1% gain in productivity will always outweigh whatever they decide to invest in energy efficiency or pay in terms of extra rent. Let me remind you, these companies are our tenants.

So why should the real estate industry take health and well-being seriously? Because the industry has something to offer and to gain from all of this. We can be part of the solution, instead of the problem. We can reaffirm our relevance and future-proof our business by integrating a human-centric approach into the real estate value proposition.

We are in fact spending 90% of our time indoors. We live, work, shop and send our children to school in buildings. Did you know that the air quality of an average school in the Netherlands is worse than in the average prison? We can only imagine what the impact on our children’s ability to concentrate throughout the day and subsequently their school performance is. These are our future employees, entrepreneurs and academics. They will be responsible for our prosperity as a society (and our pensions) in a few years’ time.

From a macroeconomic perspective the numbers are telling us the same story. The total socio-economic costs of indoor air pollution in France are estimated to be 20 billion euros per year, 1% of GDP. This includes productivity loss, morbidity costs and the impact on public finance such as health care and pensions not paid.

The effect of our surroundings on our ability to concentrate, be productive, creative and healthy is largely underestimated but offers the real estate industry, from design, construction to facility management the opportunity to create real value for tenants, end-users, society and the bottom line. If productivity gain and increase of well-being for occupiers can be monetized, the added value of a human-centric approach to real estate development and management might even translate into a tangible business case: one that would even perhaps impact rent levels and property value. A recent report by the WGBC Health, Well-being and Productivity in Retail points this out for retail: The Impact of Green Buildings on People and Profit, says that although there is a surge in interest in health and well-being in the property sector, most retailers are currently missing a key opportunity to better understand how the physical retail environment can affect staff and customers – including the retail experience – and therefore the impact on overall business performance.

More empirical research is needed to prove this equation, but the value proposition is certainly appealing in a rapidly changing world where the wellness industry is the fastest growing sector in the world, by now three times larger than the pharmaceutical industry, where human capital is top of mind and tenant attraction and retention our biggest challenge.

Join Lara Muller and other industry experts and senior executives at the GRESB event Health & Well-being in Commercial Buildings on April 6 in the Hague. The event will build awareness about emerging opportunities for institutional investors and property companies and funds to create value and manage risk by promoting health and well-being.