The world is getting smarter: Smart phones, smart cars, smart devices, and smart cards are the new norm. If our buildings don’t become smarter too, they’ll fall behind in today’s technology-driven world. Smart buildings are popping up across the U.S. and the trend is just beginning: Smart building investment is expected to triple from $5.5 billion in 2012 to $18 billion by 2017, according to The Op-Ex Advantage, a recent JLL report.
Smart building technology’s possibilities are endless. For example, entire portfolios of buildings and their automated systems can be linked with remote operations centers where software programs and facilities experts can analyze ongoing data streams from building equipment and optimize each building system’s energy, electricity, and water usage. Facing pressure to manage costs, risks, and energy consumption, commercial building owners and investors are exploring how these evolving technologies can improve their bottom lines.
Although awareness of buildings controlled by automated monitoring systems is increasing, misperceptions about smart building technology still persist. A recent study by the Economist Intelligence Unit found that two-thirds of U.S. respondents overestimated the cost of making energy-efficiency improvements to their buildings. In addition, just one-fifth of respondents had an accurate perception of those costs. These kinds of misperceptions have led many building owners and investors to assume that installing smart building systems is too complex or too expensive. Others incorrectly believe that human error — the failure of employees to comply with smart building measures, for instance — will trump any technological deployment.
These misunderstandings lag behind the realities of the modern smart building universe. Smart building systems with fast break-even on investment are the new reality, and many financial “carrots” are creating new incentives for property owners to convert their building systems to smart technology. Several emerging regulatory and consumer trends may soon serve as incentivizing “sticks.” For smart building pioneers, the deployment of smart building technology is the right strategy for embracing and profiting from trends in the built environment that are here to stay.
Smart Building ROI
Relative to other energy-related building upgrades, smart building technology requires little upfront capital expenditure (cap-ex), while delivering significantly reduced operational expenditures (op-ex). Using automated systems, smart buildings generally cost less to operate than buildings operating solely on legacy systems, therefore offering a long-term op-ex advantage, according to a JLL report. By combining smart building technology and data analytics with facilities management, a smart building management system can detect and resolve building issues before equipment failures and capital expenditures ensue.
Operational and energy savings begin shortly after the smart building management system is implemented. Smart building technology investments typically pay for themselves within one to two years or sooner by delivering energy savings and other operational efficiencies. For example, Procter & Gamble’s building management pilot program in downtown Cincinnati generated a positive return on investment in just three months. Also driving the fast payback is the low cost of automated building technology, which has dropped as adaptation has increased. For example, intelligent lighting components that cost $120 four years ago sell today for just $50.
New local and federal government regulations, including mandatory energy consumption disclosure in some cities, are pushing building owners and investors in the direction of smart buildings. Smart building technology can generate energy savings of 8 percent to 15 percent annually almost immediately after deployment, with the potential for incremental improvements over time. An estimated $289 billion worth of building efficiency investment would produce savings in excess of $1 trillion in the U.S. alone, with every dollar invested in energy efficiency producing $3 of operational savings, according to a 2012 Rockefeller Foundation and Deutsche Bank Group’s DB Climate Change Advisors report.
Redirecting funds spent on energy to building efficiency has allowed some corporate decision-makers to gain the reputational advantages of making environmentally responsible choices while gaining significant performance and productivity improvements. Some owners report greenhouse gas emissions data to multiple benchmarking organizations, such as Greenprint and GRESB, as well as to Ceres and similar third-party reporting organizations, and smart systems can roll up the information from across a portfolio.
Financing Models and Selective Deployment
The near-term outlook suggests promising financial models for smart building technologies that are also scalable. Energy service agreements allow building owners to make energy-efficiency upgrades without using their own capital. They typically are employed in larger projects up to $10 million, and according to a Rockefeller Foundation report, have the most potential to scale up quickly without regulatory or legislative requirements or subsidies.
Commercial property owners and investors have been slow to retrofit older buildings, largely because of misperceptions about ROI when tenants are paying the electric bills. The good news is that adding smart building technology to a facility is not an all-or-nothing scenario. Selective, strategic equipment upgrades can go a long way toward improving building efficiency and connectedness, and affordable wireless sensor technology means hard wiring is not necessary. The cost of wireless sensors has dropped below the $10-per-unit threshold, making installation of a smart building management system much easier and more affordable than in the past. A facilities manager with expertise in smart technologies can survey a property or portfolio to identify and prioritize legacy equipment upgrades that will produce significant ROI and generate data that a smart building management system can use to optimize building performance.
Cloud computing is another advancement that makes smart building management systems financially feasible to a degree not previously possible. A smart building management system can transmit data generated from hundreds of buildings to a single command center where facilities professionals use complex automated algorithms to monitor equipment performance. With today’s affordable high-capacity computing, a company can use one smart building management service to monitor and control hundreds of facilities around the world.
Smart Buildings = Smart Marketing
The competitive advantage of buildings operated with smart systems is becoming increasingly evident. Smart buildings are not only more energy efficient and cheaper to operate than facilities with legacy systems, but they are also ideal for supporting today’s mobile workforce and flexible office layouts, according to JLL’s Op-Ex Advantage report. In the not-too-distant future, one can expect smart building technology and building operating systems to become a standard item in broker-landlord discussions, as they maximize occupant comfort and energy efficiency.
Numerous studies and surveys have demonstrated that tenants and their advisers increasingly expect smart building features such as zoned heating, ventilation, and air-conditioning systems; sophisticated equipment maintenance alert systems; advanced security systems; and green buildings; according to JLL’s 2012 Global Sustainability Perspective. Like a new lobby or elevator bank, an improvement in sustainability makes an office building more desirable to tenants. These benefits can justify collecting higher rent, and can increase the property’s competitive advantage and occupancy rates. LEED buildings, for example, command rents that are 17 percent higher and sales prices that are 8.5 to 25.0 percent higher than legacy buildings, according to the U.S. Green Building Council. Similarly, the premium for Energy Star labeled buildings is approximately 13 percent, according to a 2011 study by Eichholtz, Kok, and Quigley.
Smart Buildings in Action
After committing to the departmental goal of reducing energy usage by 20 percent by 2020, P&G’s Global Business Services looked to every aspect of its operations for efficiency improvements. Working as P&G’s outsourced real estate services provider, JLL proposed that P&G become the first company to pilot JLL’s new smart building management platform, IntelliCommand. The premise was that IntelliCommand’s combination of cloud-based, smart building management technology and JLL’s team of facilities management professionals would provide P&G with around-the-clock, real-time facilities management.
P&G deployed IntelliCommand across 12 buildings totaling 3.2 million square feet of space in diverse facilities. The pilot sites included P&G’s global headquarters campus in Cincinnati; its global healthcare headquarters facilities, including numerous laboratories; a key technical center; and a major mixed-use complex including offices and research and development operations.
With IntelliCommand, building managers were able to identify problems that manual inspections could not detect. For example, IntelliCommand’s data analytics flagged a temperature anomaly indicating that a heater was operating when not needed. Another anomaly revealed room-to-room temperature differences that indicated malfunctioning dampers, triggering unnecessary air conditioning, and, elsewhere, thermostat default settings that needed adjustment.
As P&G learned, one advantage of today’s smart building management technology is that its ability to fine-tune building performance exceeds human capabilities. Even in a facility spanning more than 1 million square feet across eight wings, IntelliCommand pinpointed miscues. Even small changes made an impact: Through IntelliCommand P&G achieved 8 percent savings simply by reducing HVAC activity on nights, weekends, and holidays. At a P&G technical facility, IntelliCommand’s fault detection function enabled staff to identify and repair several recurring problems. Using these findings, the facilities team analyzed comparable data across the entire 12-building pilot portfolio and made strategic adjustments across all properties. Within a year, P&G reduced the pilot facilities’ energy costs by 8 percent to 13 percent, eliminating 4.4 million kilowatts of energy usage simply by optimizing building processes.
P&G isn’t the only company using smart building technology in secondary markets. In Redmond, Wash., Microsoft created its own smart building management platform to manage its sprawling campus headquarters. The system, which manages the property’s 2 million bits of operational data, initially compressed five years of budgeted upgrades into one year using net savings of $1 million. This was possible primarily because the system detected errors that human eyes missed.
In addition, a large, global financial services firm recognized that its branch bank facilities, numbering in the thousands in primary and secondary U.S. markets, generally had very few building automation systems and could not be remotely monitored and controlled. The firm began by installing low-cost wireless sensors and controllers to enable remote monitoring and control of HVAC and lighting systems. The resulting energy savings have averaged 13 percent annually; while savings from fewer maintenance technician visits have added another 5 percent in overall operating expense savings over two years. This initial success has led to a much broader and deeper global roll out for both large and small buildings within the bank’s corporate real estate portfolio.
What’s Next?
Long-term market changes for smart buildings are already in play. The business environment is ripe for the arrival of consistent, widespread regulatory policies addressing energy efficiency. Financing mechanisms already exist that can be scaled up for wider smart building technology deployment for property owners seeking energy retrofits. Moreover, electricity markets and tenant expectations will continue to shift in favor of smart building deployment and ownership. The market evidence suggests that the profound opportunities for savings will, against a backdrop of energy-efficiency imperatives and emerging technology, make smart buildings an agile and powerful asset class that is strategically aligned with shifting business priorities.
By: Dan Probst (Commercial Investment Real Estate)
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