The ROI of Healthy Buildings

Kira Golenko:

Sarah, thank you so much for having me. I am thrilled to be here today and look forward to our conversation. As you just mentioned, my name is Kira Golenko, I'm the founder and CEO of Motko. Motko is an accredited health and wellness solutions provider for office and residential spaces. So we help companies and real estate owners create healthier and better performing communities.As for my career, prior to founding Motko, I spent over a decade in finance. I started my career in Neuberger Berman here in New York. And prior to founding Motko, I was principal at Actis, an emerging market private equity investor that acquired by General Atlantic earlier this year. Fun fact about myself, as you can tell about my accent, I am from Latvia originally, and fun fact, I'm a former competitive tennis player. So thank you so much for having me and I look forward to the conversation.

Sarah Brand:

You started your career in finance and you worked in a very high intense industry. What made you not only talk about the health and wellbeing of someone, but to turn that into an opportunity, entrepreneurially, to bring it into real estate, to bring it to effect so many more people by putting it into buildings and how it was going to operate?

Kira Golenko:

Oh, thank you. That is a great question. When I started Motko, we started out as a health and wellness company actually, health and wellness technology company. That was our first product, where we basically went to corporates and helped to create programs that would improve employees' wellbeing, performance, and also a sense of community in the organization. But coming from finance, and a good chunk of my career I did spend working in real estate directly, I saw the potential there is for real estate to support and enhance people's health. So when the pandemic hit, for example, one of the biggest concerns was air.

Sarah Brand:

Quality, yeah.

Kira Golenko:

Quality of air. I mean, the thing about air is, today is a great example, it's a beautiful hot day in the city, we're talking mid-nineties. We're not made of sugar, we're not going to melt, but our productivity and wellbeing is heavily impacted by the quality and ventilation of air in this room. But we don't see the air, we don't know whether it's clean or not. Let's say you were going to drink a glass of water, you can look in the glass and you can tell whether the glass is clean or dirty. You cannot say the same thing about air. So landlords, property owners, operators, they have an incredible opportunity to create healthier spaces for people, and happier. That got me really excited.When Covid broke out and we all were working remotely from home, it was really a big division between whether people need to go back to the office. Do people want to go back to the office? One factor was clear, community and the relationships was a key reason why people wanted to go back to the office. But at the same time, people wanted to return to a safe environment. Hence, I would say, I mean, driven by unfortunate circumstances, but Covid gave this opportunity to start a company, that was the right time to start a company that is heavily focused on health and wellness.Now, as you look at what's happening in the industry with regulations, if you look at Europe, you look in the US, energy transition requires investments in wellness and sustainability initiatives in the building, whether we're talking efficient air ventilation systems and all that. So landlords, they have to invest in health and wellness if they want to be relevant and they want tenants to be back in their buildings.

Sarah Brand:

So if I have a building and I wanted to reach out to you and get the certificate, right, is what we're talking about, one of the options that you have is to certify my building. What's entailed of it? Do you come through and do an analysis? Talk a little bit about how your company were to help me if I was a building owner.

Kira Golenko:

Motko is an accredited health and wellness solutions provider. We operate two divisions, our technology division, which hosts our occupant software that helps to strengthen the community initiatives in the space and also activate buildings' amenities, and then we have our real estate consulting arm.Our consulting division can help in three ways. Number one, we can help to obtain healthy building certification for your properties, we can create and execute a health and wellness strategy for your property, and we can perform a more holistic repositioning of your asset. In this scenario, we basically act as an extension of your investment or sustainability team. We really think about it as a part of your team. We perform a very in-depth analysis, we do budgeting, we help you to select vendors. So we're really a part of your team. And these, I would say, are three ways.Now, if you are interested in obtaining certification for your property, first of all, congratulations, that's not only a smart way that will benefit occupants in your buildings, but it also is going to help your bottom line, which I'm sure we'll get into shortly, there are different programs on the market.You may be familiar with BREEAM, with LEED, with GRESB, with WELL, and each of these programs have their own underlying certifier.Now, we were fans of WELL from day one, due to their evidence-based framework and commitment to elevating occupants health and wellbeing, a commitment that's very close to Motko's heart, and our mission, and values. What is great about WELL is that over the years the program has had many successful case studies that shows not only how it benefits occupants' and tenants' wellbeing, but also how it drives the financial performance for the landlords and operators. Basically, the impact on the bottom line.

Sarah Brand:

Let's talk a little bit about the bottom line, right? What statistics do you have? What data sets? If I'm interested in your product and your help and your consulting, what would you go over with me, saying for every dollar I spend, I'm getting back X? What's the return on my investment?

Kira Golenko:

That's a great question. We hear it often from our clients. The very frequent question we get is, if I invest this much CapEx into getting this certification, how much am I expected to get back in ROI? Unfortunately, there is no magic solution. The reason for that is it does depend on the age of the property, on the location, on the size. But in terms of what we've seen and what data shows, on average, you can expect up to 7.7% higher net rent. That's adjusted for the expenses. On the cap side, up to 30% capital value appreciation at the exit. So it's about 2.5% increase in annualized average return over a 7-year investment period. It's quite significant.

Sarah Brand:

That is.

Kira Golenko:

And on the vault side, health attributed buildings have 88.3 months average vault, compared to 75.3 months average vault for non-healthy attributed buildings. So as you can see, there's significant upside for landlords and property managers to invest in certification.Now, I know earlier you asked about how exactly the process works. I pointed out that we are big fans of WELL, and the way WELL certification is structured, there are different levels for the certification. It starts from bronze at 40 points and goes up to platinum at 80 points. There are 10 pillars that the building is evaluated upon. These pillars are air, water, nourishment, light, movement, thermal comfort, sound, community, and mind, and materials. Each of these pillars has preconditions that need to be met regardless of your target certification level, and optimization features, which contribute to justification level.For example, for the air pillar, prohibiting indoor smoking is a precondition, while enhancing indoor ventilation will be an optimization feature. In recent years, there have been significant partnerships between the different certifiers and this has made it easier for building managers and landlords to obtain several certifications at the same time. For example, now you can obtain WELL, LEED and BREEAM certifications during the same process. Navigating these certifications is a difficult task and Motko can help interested building properties to obtain WELL certification for their properties.

Sarah Brand:

So it's good, because you said you become part of the team.

Kira Golenko:

Yes.

Sarah Brand:

You act as a consultant. You're there, you're interactive with them, in order to overcome some of those challenges of here's all the certifications, here's 10 pillars. You get the baseline, you make sure that everything is up to where they need to be, and then you'll continue to consult going forward? What is your process after the original consultation and getting them those certificates?

Kira Golenko:

Great question. A few more words on how we work with a client. We perform CapEx analysis early on in our engagement with a client, because each asset is unique. So we take a deep dive into the property, understanding the unique characteristics, understanding the competitive landscape, what's being offered on the market? So not only we are experts when it comes to the framework of WELL certification, we need to understand what's happening in the local market, so we know which features will amplify the asset's attractiveness in the market, because we're always wearing the investors hat as well. We understand our clients, they want to create healthier and happier spaces for the occupants, but we also understand the pressure that comes in meeting the bottom line benchmarks. So we always think, "What will help our clients stand out?" Now I'll give you one example. For one of our clients, we're able to decrease the certification budget by 30%. We took a deep dive into understanding the project. We started working with this client early on, it's a development project. We were a part of their project management team, we worked with the architects, we worked with the developer, with the project manager. Initially, the owner had designated a space for active occupants and tenants. Now, after further review, we actually advised to use a part of the space as a lactation room, and the rest part of the space to use it as rentable office space. Instead, we proposed to look for a high-end gym operator as one of the tenants on the ground floor. In that way, occupants and tenants in the building still have opportunity and access to showers and lockers, and moreover, they have fantastic equipment and even coaches available. But more importantly, now they have the lactation room, and a high quality design lactation room is highly supportive for young mothers in the workforce. Actually, this helped to amplify the attractiveness of the asset in the market. It was one of the very few buildings in the market to offer a high quality design lactation room.

Sarah Brand:

And it's interesting to have you come in the development stage, right?

Kira Golenko:

Yes.

Sarah Brand:

And get your foot in the door and say, "Let's look at some of these costs, and how can we turn in some space to be rentable as well?" You split that up and you rented some as office space, and you created this great environment, which is amazing. And it's nice to have one of the tenants cover the cost of building out your showers and your facility, which is wonderful.

Kira Golenko:

This is how we operate. Yes, we come in as a consultant for a specific purpose, to get the certification, but we're always thinking how can we bring value to our clients? How can we help them, yes, to obtain the certification, but also to do it in a way that maximizes benefits to all the stakeholders involved in this project?

Sarah Brand:

Let's talk about the current market and what's happening in our market. It's hard to get people into commercial buildings, residential and multifamily are hot and really going strong. But let's talk a little bit about the data of what's in the marketplace.

Kira Golenko:

Real estate is going through a pivotal change right now. I mean billions of dollars are at risk due to regulatory environments, aging inventory, both in Europe and in the US, and consumer demands. If we look at Europe for example, 85% of buildings in Europe are over 20 years old, and 85% to 90% of those buildings are expected to be standing by 2050. Now, 76% of office buildings in Europe are at the risk of [inaudible 00:14:27]. If we look at the US office market, it's predicted that by 2030 there'll be over 1.1 billion square feet [inaudible 00:14:37]. I mean, it's a pretty gloomy picture, right? Then if you look at the consumer side, the consumer sentiment, tenants want healthier spaces and they're prepared to pay a premium for it. If we look at the data on the consumer side, 57% of homeowners are valuing wellness features more than energy savings. 49% of investors and occupiers would pay a premium for buildings that help to improve mental and physical health and wellbeing. Interest rate environment presents another challenge. So all this is to say that there are structural changes that are happening in the real estate market, that landlords need a solution for today and in the long run. This is basically why I founded Motko, is to help to create healthier and happier spaces for occupants and tenants, while helping landlords to have a solution to improve the financial performance and the attractiveness of their assets.

Sarah Brand:

So when it comes to the buildings, and the B buildings, the C buildings, and how in the market they are rated and where we're going with that, how is your company helping those properties?

Kira Golenko:

Yeah, it's a great question. I mean, look, there is a clear flight to quality. There is a fierce competition between B and C properties. Again, to put some data into the context, in Europe, class A represents 25% of all office inventory, the rest is split between class B and C. I think class B is around 60, 61, 62, and class C is about 14%. In the US it's a similar situation, 15% class A buildings, 60% class B and 25 class C. So when we're looking at class B and C buildings, the question is, what will make your property stand out, right? And health and wellness is the only lever these landlords have. That's the only lever they have. Otherwise, a bunch of these properties will become wastelands, if landlords do not invest in health and wellness. And when we're talking about health and wellness, it starts with safety. Today, we talked before, it's a beautiful day in New York, our productivity and wellbeing in the office heavily depending on air ventilation. What about taking the elevator? I mean how often we visited class B, class C buildings, you get into the elevator and you don't know if you will get to the intended floor? We've all been there. What about heatwaves? It's becoming more and more prevalent in our lives? Is the facility management aware of different strategies that can help occupants and tenants to get through the heatwaves? These are some of the initiatives that landlords can deploy in their properties that do not necessarily require hundreds of millions of CapEx investments. But then of course, property owners can choose to reposition the asset, let's say from class B to class A, and that will involve heavier CapEx investments. For example, right now we have an active proposal for repositioning an 800 square feet office building in Germany. This is more than just fresh paint on the walls, this involves some heavy refurbishment. As a part of this repositioning strategy, the owners are considering certifying the building to increase asset's attractiveness in the market and to increase the financial performance of the property.

Sarah Brand:

So the health option and wellness option that you guys are helping to provide, or your company is helping to provide, what is the data and the outcome of me, the individual who's in this office? What kind of statistics do you have around the consumer of the product?

Kira Golenko:

Community-based physical activity initiatives help to decrease depression symptoms by 20% to 30%. Improved air quality helps to increase cognitive function between 61% to 101%, depending on the air quality improvements, and to increase employee productivity by $6,500 to $7,500 per year. Other research shows that occupants in a well certified building report 10% higher mental health, 2% improved physical health, and a 30% improved overall satisfaction with the workplace. Additionally, socially responsible companies that invested in health and wellbeing of their employees saw their stock value appreciate 325%, compared to the market appreciation of 104% over 14-year track period.

Sarah Brand:

It's great to hear the passion in the company yourself and what you guys are providing to your customers, and therefore to us as tenants, and people who are living in those communities and being impacted from a health and wellbeing sense. How else can you help your clients in return on investment in some issues that are happening right now in the marketplace from a real estate perspective? How else can you guys help us?

Kira Golenko:

Thank you. There are two ways we can help. We can help property owners to analyze their existing assets as well as identify potential acquisition targets. Some firms find it especially useful if they need additional support on a specific asset or a specific strategy, but they don't want to expand their headcount. Effectively, we would act as an extension of their investment team or sustainability team. The second way we can help is we can consult on sustainability linked financing. Specifically, sustainability linked bonds that fund initiatives around repositioning the building, or a new strategy, for example, social housing. We're seeing some companies finance their CapEx to reposition assets through this type of financing. So this is something where we can also consult the clients on the social bond issuance on a green stock exchange. The typical candidates for this type of financing are established companies with strong track record. But the success of this strategy depends on several factors, including the relationships you have with the arrangers, the strength of the strategy, as in the use of funds and team's track record, but we're also seeing some young firms with strong teams pursue this type of financing.

Sarah Brand:

As an investor, if I don't want to go through the certification, what may I want to do and how could you help me?

Kira Golenko:

Absolutely. We can work with your property's CapEx and create and execute a sustainability strategy that will still improve occupants health and wellbeing and increase asset's attractiveness in the market.

Sarah Brand:

Kira, thank you so much for joining us. How would I get in touch with you? Can you let the viewers know how they might be able to get in touch with you if they would like to reach out?

Kira Golenko:

Sarah, thank you so much for having me. I really enjoyed our conversation. We would love to help in any way that we can, and have explorative conversations. Please feel free to reach out to me directly. My email address is kira@Motko.co.

Sarah Brand:

Thank you so much. Thank you to our viewers for joining us here today on EisnerAmper's podcast. Please subscribe for future EisnerAmper podcasts and Breaking Ground. I hope you have a great day.

Transcribed by Rev.com