Commercial Investment Real Estate

MAY-JUN 2014

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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37 May | June | 2014 CCIM.com of buildings and their automated systems can be linked with remote operations centers where sof ware 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 man- age costs, risks, and energy consumption, commercial build- ing 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-ef ciency improvements to their buildings. In addition, just one-fifth of respondents had an accurate perception of those costs. T ese 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. T ese 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 f nancial "carrots" are creating new incentives for property owners to convert their build- ing 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 prof ting 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 signif cantly reduced operational expenditures (op-ex). Using automated systems, smart buildings generally cost less to operate than buildings operating solely on legacy systems, therefore of ering 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 af er the smart building management system is implemented. Smart building tech- nology investments typically pay for themselves within one to two years or sooner by delivering energy savings and other operational ef ciencies. 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 compo- nents that cost $120 four years ago sell today for just $50. New local and federal government regulations, including man- datory 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 af er deployment, with the potential for incremental improvements over time. An estimated $289 billion worth of building ef ciency investment would produce savings in excess of $1 trillion in the U.S. alone, with every dollar invested in energy ef ciency 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 ef ciency has allowed some corporate decision-makers to gain the reputational advantages of making environmentally responsible choices while gaining signif cant 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 T e near-term outlook suggests promising f nancial models for smart building technologies that are also scalable. Energy ser- vice agreements allow building owners to make energy-ef ciency 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 retrof t older buildings, largely because of misperceptions about ROI when tenants are paying the electric bills. T e good news is that add- ing 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 ef ciency and connectedness, and af ord- able wireless sensor technology means hard wiring is not necessary. T e cost of wireless sensors has dropped below the $10-per-unit threshold, making installation of a smart building management system much easier and more af ordable 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 In the not-too-distant future, one can expect smart building technology to become a standard item in broker-landlord discussions. 3 6 - 3 8 F - S m a r t B u i l d i n g s - P r o b s t . i n d d 3 7 36-38 F-Smart Buildings-Probst.indd 37 4 / 2 9 / 1 4 3 : 0 7 P M 4/29/14 3:07 PM

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