Like any solution sale, smart building vendors typically create detailed business cases to convince building owners and operators to make a purchase. In the past, these business cases were based primarily on energy savings. Over the past few years, there has been some push to quantify other bottom-line savings opportunities, such as reduced maintenance costs and avoided equipment replacement.
At the same time, some research shows that green buildings (which share some features with smart buildings) drive top-line benefits such as higher rents and property value. In general, the top-line benefits are more compelling to an enterprise, but they may be less understood or “believable," given that the hard data is research-based and may not be as tangible to individual building owners.
Energy Star and other sustainability protocols like the Global Real Estate Sustainability Benchmarks (GRESB) provide some standardization for green building performance, which is part of the smart building value proposition. These standards may help make some of these top-line benefits more compelling. But the energy savings is likely to be just a fraction of the total value of smart building technologies. A smart building business case based solely on energy savings will leave money on the table.
In fact, there are many ways that smart building technology can add value to buildings, and even more ways to measure this value. But just as the market for the solutions is fragmented and opaque, so are the metrics to understand the value proposition of these technologies. Some vendors attempt to define their own smart building metrics. In addition to being self-serving, this just adds to the confusion.
The standard financial metrics used in real estate may indirectly help to quantify smart building technologies. However, metrics such as rents, asset value, and occupancy rate (and the changes to these metrics after smart building technologies have been installed) are likely to be indirect and lagging. Additionally, factors like location have a significant impact on real estate financial metrics.
Comparing the value of smart building technologies in New York vs. Nashville will be difficult, since the property values themselves are so divergent. Additionally, each city has different key industries, and some of these industries may value smart building technologies more than others. For example, high tech corporations on the West Coast may place more value on smart building technologies.
In addition, depending on the type of building, there are going to be different metrics that matter. For example, a marquee office building downtown may use smart building technologies for competitive differentiation, or an anchor tenant may request specific features. Smaller buildings, such as restaurants and retail spaces, may look at the operational efficiencies that are enabled with modern building operations technology.
Two things are needed. First, we need research on the value of smart building technologies, much like the research on green buildings. Second, the development of standards on what technologies are considered smart would add clarity to the market and help buyers procure technologies without as much friction. But these developments are years away. Until that time, here is some guidance on the four categories of metrics that should be considered by building owners and operators.
These are the traditional real estate metrics like rent per square foot and occupancy rate. Smart building technology, especially space utilization solutions, will help building owners better utilize their space (driving up rent per square foot) and identify underutilized spaces that could be repurposed for higher rent.
While the traditional financial metrics may be lagging indicators of the impact of smart building technologies, in the future, there may be a clearer top-line financial benefit as more tenants are able to rent smaller but high-functioning offices. For the time being, prospective buyers should ask vendors about how they have improved the financial metrics of buildings that have implemented their technology.
This encompasses a broad category of metrics. Depending on the level of instrumentation and specific systems in each building, the key operational metrics will vary. In the past few years, vendors have focused on non-energy operational metrics to prove out the value of their offerings. This includes a reduction in hot/cold calls, which saves staff time.
Other examples include a reduction in faulty equipment or extended equipment life. There is great value to solutions focused on operational efficiency, though in most cases there is a services component of the offering that building owners must purchase with their software licenses. This can increase the cost significantly.
Alternatively, building owners must dedicate their own staff time to address the operational issues that are identified by the smart building solutions. Today, the relevant operational metrics focus on facility and energy costs per square foot, the number of work orders, and the average time to close them. In the future, predictive analytics may help avoid issues entirely (a metric such as “avoided work orders” may become relevant). Today, facility managers considering smart building technology should understand which metrics each vendor uses to build its business case and compare them to the metrics that the organization itself tracks.
This is an emerging area of interest because the occupant-focused aspects of a smart building solution have top-line benefits. Enabling increased productivity and higher occupant desirability will drive up rents and make tenants want to stay in a space longer.
Historically, occupant-based metrics included site location (access to transportation, restaurants and other attractions) and the existing amenities in the facility (such as a gym, dry cleaner, cafes and restaurants). Now, building owners are looking at how technology can help them better utilize their space and how it can inform changes to specific uses within buildings.
For example, while most conference rooms are designed for multiple people (four, six or even eight occupants), many meetings have just two participants. With real data on conference room use, a building could convert larger conference rooms into more small two-person rooms. This will increase the utilization of the space and increase satisfaction because there will be more supply of conference rooms. The most exciting future developments in smart buildings will be how they improve the occupant experience. This will directly improve the financial performance of the building.
For now, only a subset of vendors talk about how their products impact occupants, but it is worth discussing with any prospective vendors.
Safety and security
Fire safety within buildings is highly regulated. Security systems are found in any modern office space. Some office buildings may have very advanced security systems to attract specific clientele. Smart building solutions do improve the fire and security systems within buildings in a few ways.
First, tracking occupants within a space can be used by the fire department in the event of an emergency. And the same data can be used to enhance security: Instead of tracking entrances and exits into a space, actual locations of occupants can be tracked too. The value proposition to most prospective tenants will center around risk mitigation and/or brand value. In some cases, specific fire and security features will enable buildings to attract specific tenants that may pay more per square foot, but only if there is demand for this kind of space in the first place.
Putting it all together
A lack of common standards and metrics to quantify the value of smart buildings does make it more difficult for these technologies to scale. It also adds to buyer confusion during procurement cycles. But given the nascent nature of many of these technologies and the vendors delivering them, some market maturation needs to occur before the industry can agree on standardization.
For now, building owners and operators can do their own due diligence by asking prospective vendors detailed questions about how their solutions impact property values, operations, occupants and building safety/security. Many vendors should be able to cite similar buildings that have implemented smart building technologies. These examples should show some improvement in these four categories of metrics.
Specifically, building owners should consider the bottom-line improvements based on operational efficiency and the top-line benefits from occupant-centric features and capabilities. This will help establish a more robust business case for smart building investments.
Joseph Aamidor is a senior product management consultant focused on smart buildings, IOT and energy. He helps startups and established industry players understand the smart buildings market, develop competitive strategy and forge partnerships. He previously served in senior product management roles at Lucid and Johnson Controls.