The Coming Paradigm Shift for Smart, Connected Buildings
Depending on who you ask, 2020 will either be among the most unforgettable years or the easiest to move on from. It also has impacted commercial buildings more directly than past crises. Some could argue that, even with an end in sight to the pandemic, there’s uncertainty ahead for many commercial buildings.
We believe the past year will be viewed as a clear inflection point for real estate and smart building adoption more specifically. One change may be in how we use buildings, which may then change how we value them. There already have been a number of pandemic-induced changes, and we don’t know how permanent, or temporary, they might be: offices are empty, warehouses are in high demand and indirectly capturing customers that previously visited retail spaces, restaurants can function without prime real estate or foot traffic, and homes have replaced a range of retail, restaurant and service locations. Does everything snap back? Or does a new paradigm in the built environment await us?
We believe that technology will play a bigger role than ever in buildings. The fact that “negative pressure room” and “touchless elevator” are now being discussed openly in mainstream media outlets is a win for the industry. Building owners and operators that had made investments in PropTech before the pandemic were able to quickly adopt new solutions in rapid response to COVID. Those who didn’t make investments quickly have a catalyzing event to catch up. And, society has an increased awareness of what a healthy building entails, which should act as a tailwind to drive adoption. In this article, rather than predicting what happens in 2021 and beyond, we instead are highlighting a couple of big ideas and trends that our firm is watching.
Balancing reduced occupancy (and revenue) with demands to upgrade spaces. In a number of major metros, office vacancy rates are unusually high. San Francisco, as of early February 2021, had a 17.8 percent vacancy rate, which is a 16-year high. In New York, the story is the same, with a vacancy rate of 15.1 percent at the end of 2020, the highest since 1989. At the same time, many companies are expanding their footprints to new locations which foreshadows a more distributed workforce that may not return to where it was previously located. There has been some speculation of this trend since mid-2020, when many big city residents began to move to lower cost of living locations. Facebook has expanded its footprint in New York while also planning on hubs in Denver, Atlanta and Dallas. Amazon has identified six new hubs outside of Seattle (this is in addition to HQ2 in the DC area. It’s not only technology firms;Deutsche Bank is speculating that it could move half of its NYC-based workforce to smaller hubs. These changes would then cascade to retail and restaurant vacancies, since a reduction in workers will also lead to less demand in restaurants and cafes, plus a decline in foot traffic.
At the same time, those offices that companies do retain may need to be upgraded. It’s fair to assume that office occupants will want more details on the maintenance history of HVAC systems, including when air filters were last changed. Indoor air quality (IAQ) sensors, which are easy to procure for a home, may become a core data source for tenants. Credit Suisse’s Equities Research team estimates that the US “IAQ pandemic-related upgrade“ market for the US could be in excess of $35B, with an average spend of $72,000 per building. And, there likely will be changes to the physical office space. For one, a focus on in-person collaboration, instead of independent work, will require more audio/visual technology, in addition to solutions to help locate available space, specific colleagues, and deliver a more consistent in-office experience - even if it is your first time in a particular location. These discussions are happening at the highest levels of many organizations and McKinsey has been writing about some of these trends.
So, what gives? Do landlords make accommodations to help their current tenants convert their space? Do some buildings invest in pre-emptive upgrades to lure new tenants? With less revenue but more expected capital investments, what is a commercial real estate firm to do? It’s possible that growth in as-a-service models will help to move traditionally capital-intensive expenses to become operating expenses. Additionally, cost savings, via energy reduction, data-driven operational efficiencies or other means, will become even more appealing. Pre-pandemic, there had been chatter about a move from PropTech 1.0 (cost savings) to 2.0 (revenue generation). But, with this uncertainty, reducing costs is probably a safer move for many real estate assets. We do not think there is one answer to this point: different industries and different regions will have their own expectations about what can be done remotely versus in an office, and this will likely impact what tenants and occupants expect to find in the workplace.
Growth in Mobile Building Interfaces (MBIs). Yes there is a new acronym for our industry. We've seen a rise in tenant amenity apps, which started as ‘nice to have’ tools to provide a digital experience in a built space. Now we have some must-have use cases, some of which were discussed in our January 2021 newsletter. There continue to be product launches and M&A activity in this category. For example, phone-based apps can now support a daily health check for any employee that wants to work from the office. The same kinds of products are being used by schools and preschools, too. Moreover, the requirements of a flexible office mean that use cases such as finding a room to work in for the day or monitoring and controlling your indoor environment make sense on a phone. Beyond the occupant, there are a whole range of building stakeholders that could benefit from more data on a mobile device: operators can benefit from alerts and sensor readings that may identify high-priority maintenance issues. Some multifamily buildings provide self-guided tours of apartments. This also makes sense in office and commercial space. You will be able to interact with your building from your phone. The use cases will expand. The experience will improve. And, the benefits will continue to accrue.
Continued merging of traditional FM and energy/IOT/health data. Historically, these were viewed as separate software categories, with separate vendor landscapes and procurement processes. Now they are merging. As noted above, an increased focus on building performance will require facility management software to integrate with energy management and sensors to monitor the indoor air. Currently, these data sources may be housed in separate solutions. But vendors are making moves to deliver a more integrated data offering, a trend which has accelerated in the past year. Just in the final weeks of 2020, SkyFoundry launched a work order management solution, Dexma (energy management) was acquired by Spacewell (indoor space management) and SPIE and Energisme partnered to integrate energy data sources into facility management services. These are not the only examples of this consolidation, just the recent ones.
The benefits, more visibility of these data sets across more stakeholders in the buildings, are clear. We believe that more and more value will be identified by bringing together siloed data sources, so this is a trend that will continue and perhaps even accelerate. Other research firms also have highlighted some of these trends in great detail, too. In short, purchasing decisions for the smart office are becoming more important.
Job training and tech augmentation. Our industry is in need of an infusion of talent, with IFMA identifying a “critical talent shortfall” as far back as 2017. There are many people out of work, some in industries that may not come back. Moreover, there are serious discussions of a big infrastructure bill. We’ve argued that a “smart building stimulus” would be a compelling way to drive energy reductions and put people to work. This year, we believe that such discussions will continue, at the very least. The recipe for success appears to be assistance to help workers upskill, with a focus on data driven technologies that can drive operational efficiency and energy management (in addition to sensor technologies that raise awareness of ventilation and air filtration, for example). Credit Suisse also has been covering this, especially in Europe (which is already actively pursuing its ‘Renovation Wave’ strategy). Credit Suisse highlights the value of investing in buildings and the significant multiplier effect on jobs: International Energy Agency data indicates that every $1M spent on building retrofits will create 15 jobs, higher job creation than other spending.
Technology’s role in the repositioning of assets. A sea change in how we use real estate is happening now, with offices becoming schools or life sciences research space. There’s also growing demand for warehouses, which may be coming to a suburban mall near you. It will be important for landlords to have better data on their assets, and more flexibility to adapt those buildings.
Moreover, what happens if offices in 2023 look more like offices in 2019? By that point (or around that time), one argument is that many companies will see the pros and cons of office space and may also see more demand from employees to congregate together. It’s a feasible outcome even if it isn’t the most likely. Given the uncertainty, making significant investments to repurpose an asset likely will require good data to justify the capital expenditures. As an analog, a key theme of smart cities deployments is collecting data for better visibility on city services, to be more responsive to citizens. NYC converted old phone booths into hotspots, which also provide data on how many people are in different places at different times. The same could be said for commercial property. Data can be used to understand current usage patterns, and then inform how the space can be employed in the future. If we assume change is the norm, and adaptability is required, then more data may be the differentiator.
We’re excited to see how the year plays out. Specifically, we believe that smart building technology is moving from new and emergent to must-have and widely adopted.
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