Increase your building’s IQ to stay competitive

Office electricity consumption, from Wisconsin-based utility company Madison Gas and Electric’s “Managing Energy Costs in Office Buildings” report.

Stephanie Hughes
Business writer, North American CMBS, DBRS

As automation and smart technologies are taking the economy by storm, it only makes sense that commercial real estate is poised to become a prime adopter of internet of things technology. IoT technology refers to a system of interconnected computing software and mechanical hardware devices that automatically translate data and give orders without the watchful eye of a human systems manager. In the case of commercial real estate, it means that many aspects of property management and tenant interaction can be automated. The technology is becoming a necessity in larger Class A office markets across major cities.

Edward Dittmer
Senior vice president, North American CMBS

Memoori, a technology research firm based in Stockholm, Sweden, found that as of 2017, more than 1.32 billion devices in offices have an integrated IoT computer system, according to the firm’s “The Internet of Things in Smart Commercial Buildings 2018 to 2022” report. By 2022, Memoori predicts that this number could easily reach 3.33 billion in devices across all markets and property types.

So, what does this mean for the growing Colorado office market? It could mean that the market will be more attractive for the millennial workforce, will improve property management roles and will have investors leveraging the features to ask for a higher rent rate.

Downtown Denver’s office market vacancy has been on the decline (currently standing at 15.5 percent, down 56 basis points from the previous quarter) and the asking lease rate has been steadily increasing (currently at $34.94 with a 3.4 percent increase from the previous year), according to CBRE’s second-quarter report. Smart buildings can help these trends accelerate with an increased demand for office space in Denver once they adopt these convenient features.

This may be more important than some realize, as 44 percent of employees surveyed for Dell and Intel’s 2016 Future Workforce Study said that they felt their workplace was not “smart” enough and that efficiency was lacking. For Colorado, an increase in smart buildings can be a talent-attracting trait that brings experienced employees and high-profile companies in from around the country to contribute to a booming economy.

Additionally, these automated buildings can lower operating expenses by lowering natural gas and electricity usage by implementing a computer system and data analytics to determine energy usage, automatic windowshading systems, motion-sensor lights and featuring climate-controlled spaces to maintain set temperatures. As far as energy efficiency goes, smart technologies can greatly reduce a building’s electricity bill using automated sensors and climate stabilization. The average U.S. office building spends nearly 29 percent of its operating expenses on utilities, according to “Managing Energy Costs in Office Buildings” report published by the Wisconsin-based utility company Madison Gas and Electric. The company also reported that the majority of electricity consumption in the average U.S. office is held by lighting (39 percent), followed by heating, ventilating and air-conditioning cooling (14 percent) and other general outputs (13 percent). These costs can be offset using smart technologies. It also can make the property manager’s job much simpler by having automated processes and help to develop a better relationship with the tenant when their needs can be met immediately.

IoT technology is not a one-sizefits-all solution, however. There are some potential challenges in adopting smart building technology, such as the implementation costs for hardware. Buildings magazine cited a $250,000 price tag for an installation in a 100,000-square-foot office building (approximately $2.30 per sf). It also can be initially disruptive to move from a traditional office environment to a high-tech software system. The initial investment is likely going to be worth it for the amount of money the property owner will save in utilities costs down the line. However, as the technology gains footing in national markets, the costs are likely to decrease and a feature that was once considered “nice to have” may quickly become a “have to have” characteristic in order to stay competitive with other Class A office markets.

Denver’s downtown office market has been reporting strong figures in 2018 with a lower vacancy rate, a steadily increasing lease rate, an increased net absorption (175,797 sf as of the second quarter) and a large amount of office properties under construction (1.35 million sf), according to CBRE’s Denver report. Smaller Colorado-based markets like the Colorado Spring office market also have reported solid numbers in CBRE’s analysis, displaying a vacancy rate of 9.4 percent and a lease rate of $12.47 per sf, according to its H1 2018 Colorado Springs Office Marketview report. The analysts at CBRE describe a healthy market outlook in the city with tenant demand being at an all-time high. If property owners and developers choose to install IoT and smart technologies in their current buildings and future constructions, the market could see an acceleration in demand with more high-end tenants and a more talented workforce.

Featured in CREJ’s October 2018 Property Management Quarterly

Edited by the Colorado Real Estate Journal staff.