Niche properties
Intelligent Investments
Smart building technology yields measurable ROI.
By Dan Probst |
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.
Dan Probst is chairman of
energy and sustainability services for JLL in Chicago. Contact him at Dan.Probst@am.jll.com.