Increasing use of automation and smart building technologies can have a meaningful impact in commercial real estate, not only on operating expenses but also on asset quality. As these technologies proliferate, DBRS expects to see more reliance on computers to perform basic functions like temperature control, lighting, air quality, sanitation and even tenant-roster organization through Internet of Things (IoT) technology — a system of connected computing and mechanical devices that automatically transfer data without human interaction.
Smart building IoT platforms, such as Hitachi’s Lumada, Cisco, Honeywell, SMART Building Technologies, IBM’s Watson IoT and Schneider Electric’s StruxureWare, continue to emerge. These platforms provide building automation systems, energy management systems, tenants services metering, critical systems monitoring and smart lighting solutions to companies and real estate firms, which show strong tenant and employee demand for the technology. Memoori, a technology market researcher based in Stockholm, Sweden, recently published a report entitled, The Internet of Things in Smart Commercial Buildings 2018 to 2022, which projected that the combined global market for Internet of Things in Buildings will grow to $84.2 billion in 2022 from $34.8 billion in 2017.
According to Memoori’s report, office properties, particularly Class A properties in densely populated areas, are well ahead of the curve in terms of adopting this technology — 1,319.0 million devices in office buildings had integrated IoT technology as of 2017, surpassing retail (409.0 million devices in 2017), banking and securities (222.0 million devices in 2017) and hospitality (72.0 million devices in 2017). In fact, Memoori estimates that the number of devices with IoT adoption in office buildings will rise to 3,331.0 million across all markets by 2022 (an increase of about 153.0% over a five-year period), an unsurprising projection given the many benefits of incorporating IoT technologies in buildings. As the technology evolves and cost benefits become more evident, smaller office markets and other property types may also increase their use of IoT as it becomes less of a luxury and more of a necessity in building management.
IoT and Office Properties
Operating expenses across office properties can add up over time. According to the Managing Energy Costs in Office Buildings report by Madison Gas and Electric, a Wisconsin-based utility, the average U.S. office building spends nearly 29.0% of operating expenses on utilities. The U.S. Energy Information Administration accumulated data on electricity and natural gas use (refer to Exhibits 1 and 2), which show that building functions such as cooling, lighting and ventilation take up 62.0% of electricity use and space heating takes up 86.0% of natural gas use in 2010.
Automated building management can implement lighting control with a motion sensor that shuts off lights in empty rooms; regulate HVAC units with smart thermostats to avoid overconsumption; install automatic window shading systems; and use data analytics for energy efficiency, engineering reports, occupant complaint reports, etc. According to a study by the American Council for an Energy-Efficient Economy (ACEEE) entitled Smart Buildings: Using Smart Technology to Save Energy in Existing Buildings, an office building with a floor area of about 50,000 square feet (sf ) that consumes roughly 850,000 kilowatt hours (kWh) per year can save about 200,000 kWh per year — approximately 23.0% in energy savings — using lighting controls and remote HVAC control systems.
IoT Extending to Other Property Types
While office properties dominate the demand for smart technologies, they are not the sole adopters; hotels, research and development labs, education and health-care properties are also using new technology to reduce costs and shrink their carbon footprint. According to ACEEE’s report, labs could realize energy savings of 40.0% with air-quality and occupancy sensors as well as real-time ventilation controllers, followed by health care at 18.0%, schools at 11.0% and hotels at 6.0%. Industrial buildings could potentially benefit from smart climate-controlled systems, facility operations, water meters, pumps and heating.
In addition to reducing costs, hotels are using software to improve the guest experience, allowing room access and climate control with smartphones. The hospitality industry is expected to spend over $500.0 million on connected software equipment and over $2.2 billion in guest-room renovations to accommodate these changes, according to IHS Markit Ltd. Commercial property owners and managers are also using new technologies to manage space more efficiently. Memoori found that, when it came to smart building analytics and location-based services within a building, software was most often used to optimize space (refer to Exhibit 3) to increase revenue and make the most of rental costs per sf. Other uses include indoor mapping as well as people counting and tracking for occupancy purposes.
DBRS expects that tenants will also seek out buildings with smart technology when renting new space. Dell and Intel’s 2016 Future Workforce Study found that 44.0% of surveyed employees worldwide believe that their office is not “smart” enough with their current working situations lacking in functional efficiency and expect to be working in a smart office within the next five years. Tenant and employee demand may force building owners to adopt these technologies even if cost savings is marginal.
Challenges Facing Larger IoT Adoption
Despite its many benefits, there are still obstacles to large-scale adoption of smart building technology. Security may be a concern for a traditional property owner who is reluctant to entrust a building’s function to a single computerized system, whether the concern relates to possible system malfunctions or cybersecurity risks. There are also potential privacy concerns about data collection, tracking and a lack of familiarity with the technology that the industry still needs to overcome. And, while there is a cost to adopting this new technology, we do not consider the costs to be onerous. According to Buildings magazine,1 the average cost of implementing a building management system to convert a regular building into a smart building is about $2.30/sf or $250,000 for a 100,000-sf building, which is a steep initial investment. However, when a property owner chooses an IoT, the cost can range between $5,000 to $50,000 for installation, which is much more reasonable. As the industry gains scale, we expect costs to decrease, making the technology more affordable for more building owners.
Adoption of smart building technology continues to gain momentum, which will likely make it more affordable and more accessible than ever before. With benefits such as cost savings, improved space utilization and more compelling guest experiences, buildings that feature this technology may find increased value as property investors increasingly look to acquire properties already using this new technology and reaping the benefits. A feature that was once “nice to have” may soon become a “have to have.”
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