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The return on investment of intelligent buildings

Far more than merely an Internet of Things, the new building management system is programmed to automatically allocate resources, under changing conditions, at the highest level of efficiency, limited by individualized management rules.

Michael Leahey
Managing director, PACE Equity, Denver

The commercial property of the future, like its residential cousins, will be a building with which you can have a two-way conversation, incorporating each subsystem of a whole building system. A simple analogy to this is Alexa, the best-known brand in “smart home” consumer system, designed to integrate and manage all of a home’s systems. Within the next few years you may find yourself asking some version of, “Alexa – what’s our return on investment?”

Imagine a building owner who had someone on staff who knew everything going on in your buildings – down to the level of energy usage, foot traffic, maintenance requests, etc. – and had the authority to make real-time, cost-saving decisions and recommendations of future opportunities to owners and managers – instantly. Most building owners would hire that person in a second. As you may have guessed, this all-knowing staff member isn’t human, but is intelligent – artificial intelligence has come to commercial real estate and is poised to create major changes in the way we do business.

On the commercial side, building management systems have existed for decades – I started my career in 1999 helping design them – but the new wave of intelligent buildings will be different. Not simply “smart” (by which we mean internet enabled), they are guided by artificial intelligence, with each building system connected to the cloud and to each other through applications, along with dozens of sensors providing unprecedented amounts of data, and machine-learning algorithms to gather and analyze it all.

Far more than merely an Internet of Things, the new BMS is programmed to automatically allocate resources, under changing conditions, at the highest level of efficiency, limited by individualized management rules – such as the tradeoff between cost and comfort. Commercial building systems that have, or will have, intelligent building applications include heating, ventilating and air-conditioning systems, lighting, windows, appliances, locks, electronic vehicle chargers, rainwater recycling, as well as other energy-saving subsystems such as energy storage devices.

There are three important takeaways for building owners and property managers:

Invest in building your company’s IQ in this space. Building managers must understand the changing technology environment and the economics well enough to hire the right teams to plan, budget and manage the project, while identifying the costs and benefits that need to be transcribed into financial pro formas in a way that demonstrates a return on investment. Extra work will be required to help investors and lenders alike understand the importance of BMS and its economic returns.

Tenants will become more engaged and will demand more individualization of services. Much of the data captured and analyzed by smart buildings will be tenant generated, and this is where intelligent buildings really differentiate themselves from merely energy-efficient buildings. If the offices, hotel rooms, apartments and leased spaces were always gathering information on your tenants – with their consent and active participation – owners would have a fountain of valuable intel providing tenants additional services for a fee.

It will be easier to identify and take advantage of low-hanging fruit energy savings, because automated and optimized systems will make it so. The U.S. consumes over $1 trillion in energy and over 40 percent is used by buildings. Of that amount, up to half is wasted – an opportunity worth up to $100 billion annually. Intelligent buildings, with the efficiency of each subsystem being used in the right way at the right time, delivers a level of savings beyond utility expense. This will free up owners to think about next-level investments, such as on-site solar power generation.

Ultimately, what is the return on investment for smart buildings? Set up costs are not insignificant. Estimates range from 75 cents to $1 per square foot (versus up to $2.50 per sf for traditional, noncloud-based BMS), not including the cost of adding a building engineer or outsourcing to a services firm. Of course, this cost will vary by complexity and level of service.

Savings then come in two flavors. The most essential are energy costs reduced or avoided, estimated to be in the 25 cents to 50 cents per sf range annually (up to $1 per sf in some high-demand parts of the county), for a payoff period of 1.5 to 4 years. Note that this is a quick analysis based on recent (and not peer reviewed) research, and further analysis is called for.

Other returns include savings from process efficiency, enhancing brand equity, stabilizing future revenues through higher customer engagement, decreased payroll and maintenance costs from automated functions, and environmental benefits such as air quality and reduction of a building’s overall carbon footprint.

For most building owners, while the benefits are real, the cost now may yet be too high. I recommend starting with one smart system – HVAC, for example, and build on interoperability, system by system. Several companies are developing a commercial ‘Alexa’ to be the conductor, but it’s too early for me to tell who will take the lead. I advise taking advantage of a cloud platform offered by third parties versus building out your own. Innovative financing options – such as those provided by Commercial Property Assessed Clean Energy financing – can cover 100 percent of the cost of a control system added to a building, helping to match the investment’s cash outflows to its future benefits.

Building management soon will be a two-way conversation with you and your BMS. As futuristic as it all sounds, who would have thought 10 years ago that our phones would come to dominate our lives the way they have? Those who prepare for that conversation today will be well positioned for the future – and the future is coming on fast.

Featured in the January 2018 issue of Property Management Quarterly. 

Edited by the Colorado Real Estate Journal staff.