In a world of new corporate tax cuts, rising interest rates and a stable economy that may be on a long plateau, real estate investors and managers wonder how property values can continue to increase. Besides reaching into our own noggins, we looked at what industry analysts from Deloitte, Cushman & Wakefield, JLL, Memoori, the European Commission and the U.S. Department of Energy have to say on related topics. According to the European Commission report on Macroeconomic and Other Benefits of Energy Efficiency, a smart, higher-performing building can conservatively add $0.10/sf or as much as 11.8% in lease value. and it can ultimately yield 5% to 35% higher sale values.
Status of the U.S. Commercial Real Estate Market
Property values have been on the rise for the past several years but have plateaued over the last 18 months. Green Street Advisors’ U.S. Commercial Property Price Index (CPPI) shows the peak being reached in the fourth quarter of 2016, and their analysts believe that increasing U.S. Treasury yields are affecting borrowing rates, which may cause a pullback in pricing.
Analysts at the Deloitte Center for Financial Services believe this same factor is a headwind, according to its 2018 Real Estate Outlook Report. However, rent growth was on the rise while vacancy rates continued to drop throughout 2017 in all categories (office, industrial and retail).
Additionally, the net change of the supply of square footage from 2016 through 2017 (net absorption) has fallen while rental rates have risen by 3% to 4% in all three categories across the U.S., according to reports from Cushman & Wakefield and JLL.
However, these recent positives for increasing value may now contribute to stagnation or a reversal in value, as market headwinds become stronger.
What options do you have to retain value, price and tenants?
You have options in lease contracting, tenant improvement (TI), common area maintenance (CAM) investments, changing the intended usage of the property or other methods of decreasing expenses. It’s best to have a strategic plan aligned with market conditions and demands.
Where is the market headed?
Each of the reports referenced incorporate analysis of the explosive growth in building technology that will enable data collection, analysis, communication and actions that lead to exponentially more capable building management systems (BMS). Commercial buildings are forecast to outpace all other categories in smart building investments. Internet of Things (IoT) connected devices are influencing system monitoring, interactions and informed decision making.
Source: Memoori Smart Building Research – The Internet of Things in Smart Commercial Buildings 2016 to 2021
Why Smart Buildings Are Worth Your Investment Dollars
Smart building investments and IoT connected devices boost value better than traditional TI and CAM investments, and payback is often achieved in a range of less than one year to less than four years. When other CRE managers are cutting costs, you can save on energy costs, improve building operations, boost productivity and strengthen tenant relationships.
To be clear, you don’t have to invest in a complete IoT-enabled BMS to reap the value-enhancing benefits of smart building automation. In many cases, there is plenty of low-hanging fruit remaining. In other cases, the low-hanging fruit of lighting retrofits, motion sensors, and water and waste management efficiencies have already been realized (and likely paid for themselves by now). Just like the last step you took, further smart building improvements are ready to enhance the value of your building in the next phase.
The Deloitte Center for Financial Services and Memoori combined resources in 2014 to create this picture of the stages from an individual BMS to partially integrate BMS to fully integrated, IoT-enabled BMS.
As Deloitte advises in its article, “Smart buildings: How IoT technology aims to add value for commercial real estate companies,” leveraging the data collected from an IoT-enabled BMS is where the real value creation resides. Improving building performance and portfolio management creates numerous efficiencies besides differentiating your products in the marketplace.
Building Performance and Differentiation Are Your First Keys to Boosting Value
Enhancing Building Performance
HVAC and lighting alone consume about 50% of energy use in the average commercial building, according to the U.S. Department of Energy (DOE), and smart building automation systems just incorporating HVAC and lighting solutions can decrease energy costs between 30% and 50%. These systems use predictive analytics and real-time data processing to make proactive decisions to improve airflow, thermal comfort and lighting while reducing your energy bill.
Additionally, IoT helps to reduce building and equipment maintenance expenses by finding operational efficiencies in the data and alerting building managers of necessary corrective actions before expensive repairs are necessary and before tenants take notice.
Differentiating in the Sea of CRE
A smart building is an immediate differentiating factor. According to DOE, only 15% of commercial buildings are smart buildings as of 2017. Visibility to building performance data and partial control over some zone settings are becoming more important to tenants. Smart systems and applications empower users and help building owners attract and retain tenants, especially those who value sustainability and triple-bottom line performance indicators.
In a competitive CRE environment (read: always), the smart building is your optimal value enhancement investment for long-lasting building performance, differentiation and operating budget improvements.
One final note for those of you looking to hit a smart building home run: According to the U.S. Green Building Council (USGBC), LEED buildings have faster lease-up rates, may qualify for incentives like tax rebates and zoning allowances, and retain higher property values.
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