28 / 07 / 22 - 1 minute read
To tackle some of the world’s biggest challenges, we need to demand more from our assets. With buildings linked to around 40 percent of global energy consumption, efforts to decarbonise the real estate sector are essential.
Smart Buildings are on the front line of these efforts - with the market forecast to be worth over $120bn by 2026. But smart technology isn’t just helping us reach sustainability goals, it improves all aspects of the way a building functions, allowing us to monitor, optimise and predict to a much greater level.
In this episode we find out what a smart building is, the mega trends driving their demand, and learn about the technology that powers a truly smart building. We examine the real estate sector’s own digitalization journey. And we look to the future, learning about some of the exciting innovations coming down the line.
Your host is Ed Whittaker, and on the panel we have:
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Ep 6 Smart Buildings
Ed Whittaker: What we demand from our buildings is changing. Cheaper to run, more energy efficient and a greater tenant experience. That is the promise of the smart building. But how exactly are we using technology to create intelligent assets that deliver better outcomes for business people and planet?
Colin Ma: People can't really see how much energy is being used or how inefficient a building is.
You really need data to tell that story. It is shocking how much more you can know about buildings, just with kind of that initial data set.
Ed: I'm Ed Whittaker and a warm welcome to the PAT Cast, the podcast from PATRIZIA, the leading investment manager and partner in global real assets. In this podcast we offer you insights on a range of hot topics from the real assets industry, from important sector trends to key business developments and strategic decisions.
Today, we're taking a look inside smart buildings and discussing how technology is helping the real estate sector respond to some of the biggest challenges around decarbonization and digitalization.
Colin: Hi, my name is Colin. I'm the CEO of Fabriq, and we offer a SaaS platform for those who are committed to making buildings more sustainable.
Ed: That's Colin Ma. The innovative software his company provides tracks a whole host of data points within smart buildings, offering tenants and landlords a one stop shop for understanding exactly how sustainable their building is. He joins our panel alongside Philippe Le Fort, who leads the smart buildings team at PATRIZIA.
Philippe Le Fort: We've just launched a new business line where we help fund managers, asset managers, real estate developers, improve their building, decarbonize their building and digitize the building to help them bring their, their assets to a point where they are future proofed and ready to tackle on, you know, climate change and also increasing expectations from tenants.
Ed: Collectively, our buildings are responsible for around 40% of global energy consumption and around 33% of greenhouse gas emissions. Although unsurprising, the figures illustrate the impact of our industry on the planet. That's why efforts to decarbonize the built environment are absolutely essential, if we are to meet the Paris Climate Agreement as a global community. Smart buildings are on the front line of these efforts and are critical in ensuring we have a thriving, prosperous real estate sector of tomorrow.
So let's kick off our discussion, exploring exactly what a smart building is and taking a look at some of the megatrends that are driving the demand for smart building technology around the world. Here's Philippe.
Philippe: It's about monitoring, it's about optimizing and it's about predicting. And a smart building is building that can do all of these three things.
Now, then what we do, once we look at technology stack into buildings, that we connect those buildings with best technologies in the market, and this is where the likes of, uh, Fabriq and Colin's team came into place to help us basically meet those objectives.
Colin: And from the way we see it, and again, with those in real estate, things can move in stages, so to speak.
So usually the first stage is just getting some good information, if you want to interrogate a building for example. And if it's smart enough and you have enough data to know a bit more about it, that's a good first step. But again, like the functions and the services that a building's expected to provide, if we can automate these functions with smart buildings and those technologies, I think that's kind of the ultimate goal.
So yeah, it's kind of a stage approach, I think, to make buildings smarter.
Ed: And do you know how long the, the kind of the concept of smart buildings has been around for? Obviously technology's been around for a while now, but is the term smart buildings kind of relatively new or has it actually been, been used for a while, and is just becoming more prominent now?
Philippe: I think it's on and off. I think the first time it was coined was late eighties or early nineties. And I think it had to do with the advance of microchips and essentially being able to put, you know, small computers into control elements into buildings, right.
And then it's one of these words that's being, I would say, already used by professionals, and I would say non-professionals because again, there's not a clear definition. But by and large, you know, it's about putting technology into buildings so that they can respond to decarbonization and digitization and, and very.
You know, we do respond to both those megatrends when we put technology into buildings.
Ed: And Colin, is it data that's at the very heart of what Fabriq do?
Colin: Yeah, I mean, I think that's a very important part of our clients' and our partners' journeys. And most of them, again, come to us with the remit to decarbonize their real estate portfolios, and to comply with ESG standards.
So again, a lot of these things cannot be made possible without a very solid and meaningful data set. And with our platform, it was really designed to be data source agnostic so that we can understand how building services are delivered within a building, how it's being used, and of course, more importantly, what is the carbon footprint of a building?
What are the other ESG measures that are becoming increasingly important?
Ed: So I think, you both mentioned it already, kind of ESG is one of the megatrends that is kind of driving the demand for smart buildings. Are there any other kind of global macrotrends that are pushing the demand and driving the demand for smart building technology?
Philippe: Yeah, definitely. Yeah, I mean, I see one and it's been basically the low interest rate environment. In real estate, the prices and the interest rates, or the yields, move in opposite direction. So the lower the interest rate, the higher the price, and when the, when the interest rates hit, you know, zero or close to zero, it, you know, basically, you cannot really go any further.
What that means is that we've been living in an environment with very high prices in real estate and that the value creation, which is basically our fiduciary UTS as investment managers, has to come from, you know, different sources or ways or practices.
And a lot of the times it comes down to operational and the best way to improve operation is to digitize them. And what we do with Fabriq, part of what we do with Fabriq is also digitizing the data collection process, and also the reporting part of the data, because we can press a button and basically publish our data into GRESB, which is one of the leading industry benchmarks or dealing in industry benchmarks.
So these technologies, but especially, you know, Fabriq, helps us basically be more efficient and more cost efficient for our investors. And that's a very big one.
Colin: And I think, especially with clients based in Europe, there is really a drive to make more use of technologies, to deliver better services within buildings.
And on top of that, again, to really use data as the foundation for the ESG conversation. I think previously many in the industry probably just thought this is just something small that they need to look after on a more reactive basis, but it's now much more proactive conversation that we're talking about when it comes to making buildings smarter, delivering better services to clients and then occupants, as well as the decarbonization conversation.
So it's a really exciting time for all of us I think.
Philippe: One of the other megatrends that's also pushing for, for what we do, is the case of data. We are increasingly relying on data to make decisions and we will always, I mean, we'll increasingly rely more on data to make good decisions. And when it comes to real estate investments, I'm a strong believer that in the future, you will get a data set when you buy an asset to understand how good it's been performing and whether, you know, the consumption is as good as what it says on the, you know, APC label or so on and so forth.
So having a good data set is gonna be, you know, a key part of the asset value when one wants to transact. And being able to prove that, you know, the building is monitored well, it's optimized and it's working well, is going to be extremely important.
Ed: And as digitally native users, such as generation Z and millennials, kind of come into the workforce, what impacts do you think that's going to have on the smart building opportunities?
Philippe: The millennials are going to be 75% of the workforce by 2025. And they are the largest and most powerful consumer group worldwide. And they're very tech savvy, and they're also very energy conscious. So we will expect technology to be more integrated into the buildings and we'd expect this population to want always more ESG driven buildings, right? And when it comes to generation Z, those trends, those characteristics are even stronger. Now what's interesting is that we already see evidence of that in the market. For instance, CBRE recently released a report where they analysed the added value of certification on leasing transactions.
And they looked at 22,000 leasing transactions across multiple European markets. And they found out that on average, the premium paid for a certified building is 21% and that's over a five year period. And other large firms such as TLL have also come to similar conclusions, both highlighting significant premiums in rental and sales.
And that goes across asset classes. You know, it's residential and commercial alike, but basically what JLS says is there's about seven and a half percent premium for a certified building on the sale, and that's again, that's very, very significant in today's world.
Colin: Yeah and I think we're seeing that within our end user base as well, a lot of the system administrators, or a lot of end users that we engage with, they're of that kind of millennial and kind of that next generation.
And it's really great because, as Philippe said, they're used to using technology. They believe in this ESG conversation. It's not just something that they feel like is a small compliance exercise that just needs to be dealt with. People actually want to make something happen.
So I think it's upon us as technology providers to, to make sure that, that we do offer something that's fit for purpose and that, and that we can get meaningful engagement from these end users who are increasingly tech savy.
Ed: There's clearly a strong business case for smart building technology and the appetite for evolving our buildings into intelligent assets continues to grow by the day.
According to the latest forecasts, by 2026 the global smart building market is estimated to be worth over $120 billion. Up from around 72 billion in 2021. But how far along the digitalization journey is the real estate sector, and is it ready to keep pace?
Philippe: We are still at the beginning of the journey. We are at the point where we see isolated cases or, or markets where buildings are more advanced than others.
So Amsterdam is a good example of that, you know, with the Edge building specifically, or London has very good buildings, and some of them are probably the smartest in the world. But what's going to be really important is to lift the entire, you know, mass of buildings and to really improve the stock. Not every building needs to be the smartest building in the world, but buildings need to be more efficient and need to become more efficient.
And we see already regulation changing massively across Europe and also in the UK. Just to give you an example, here by 2025, it won't be possible anymore to let a building which is an EPC below C. And that's going to have a big impact on how people perceive buildings and how people value buildings, and also on what kind of technology people put into buildings.
Colin: Yeah, I feel like we, we've still got a lot of work to do. And, I mean, I think I've been in the enterprise software industry covering the sustainability topic for over 10 years now, and in the other sectors, in software like what Fabriq offers, has been around for quite some time. I remember the first time I started engaging clients in the real estate sector in particular, I remember doing a demo of our software.
And then I said, you must have seen something like this already, right? And they're like, no, no, we've just been using Excel the entire time. This is, I didn't even know that there is something like this out there. So, uh, so I think, you know, that just goes to show that yeah, there is a lot more work to be done and that's why it's so exciting I think for all of us. Because this is only the beginning, and I think timing is right for technology to be adopted much more readily because there's a very strong business case to actually use PropTech for something useful. And it's not just deploying technology for the sake of it.
Ed: And Philippe, I know you work closely with PATRIZIA's asset management, fund management and transactions teams.
And I guess, you know, working with those guys, you are really trying to help them futureproof the assets that we have within our portfolio. In simple terms, how would you say that smart building technology does this? How does it futureproof an asset?
Philippe: So we look at the value creation through two lenses.
The first lens is the point of view of the owner. And the second one is obviously from the occupier's standpoint. So starting with the owner or the investors. Obviously it's about, it's about creating value. It's about ensuring that, you know, technology will help the buildings be more effective in operations.
So essentially be more cost effective. But if you have a building that is cost effective to run, it's quite attractive. So that's going to also suddenly shorten, you know, leasing campaign, or avoid, and potentially also increase the value prospective buyers are willing to pay. We mentioned before the fact that the population that is in our buildings is increasingly younger, so millennial and gen Z.
You know, those generations are more tech savvy and more ESG conscious. And so we see the trend in what they need in terms of, and what they demand in terms of technology, being more around, you know, health and wellbeing, productivity, and convenience. And that translates into, you know, them knowing how much energy is being consumed that translates into them, you know, having potentially apps or quality sensors that can then be, sort of, shared in terms of data so that they understand what's going on and how that's impacting their health.
And if that's the case, people are more willing to come into, you know, into buildings whether it's residential or commercial. And we also see that there is a willingness to pay for premium products like this. So it's in the end, everybody, everybody wins.
Ed: And Colin is your tech, is your software more geared towards the tenants or the landlords?
Colin: I think we, our go has always been to have a single platform that can, that can connect these different stakeholders along the value chain so to speak. A little bit of something for, for everybody, because again, for a conversation like the one that we want to have about decarbonization and ESG and making buildings more optimised and smarter, you really need to connect everyone.
So if data can be kind of the common denominator, if you will, and that can help everyone have the same conversation and make the right decisions, that's really our goal. So yeah, we always, with our software, we want to get it into hands of as many end users as possible. So that's reflected in our, in our pricing model.
So again, it's unlimited number of seats that we offer to our client. So I think it's important to get everyone engaged whenever possible.
Ed: And Philippe, can you just talk a bit about how PATRIZIA's smart buildings platform kind of runs health checks on buildings?
Philippe: Let's take an analogy, right? It's something like me willing to go and climb Mount Eiger in Switzerland, which is the toughest you know, mountain in Europe, in Switzerland sorry. And before I, before I go and get ready, I need to, I need to understand how fit I am and how fit I need to get. And that's basically me getting a health check about, you know, where I stand today and that's exactly what we do with buildings. But we don't stop there because, you know, once you know how fit you are, you know, you need to get some practice and you need to get the gear to be able to progress.
And that's also what we do by basically providing solutions that can, you know, basically plug the gaps. We identify, you know, diagnostic tool and then we help fund managers, asset managers through this transformation process.
So in very simple terms, we do basically four things. We health check buildings, we uncover small opportunities. We select the best technologies and we steer transformation.
Ed: So Philippe, you mentioned earlier about creating a technology stack that's bespoke for buildings. Can you talk about just some of the other elements that go within that technology stack?
Philippe: I mean, we've been around for, you know, about 18 months and we have rolled out technology in about 50,000 square metres of buildings.
One of the examples that comes to mind is how we essentially plug AI or artificial intelligence onto the building management system so that it can be steered automatically, essentially being like an auto pilot tracking the weather, so that there's no more manual action needed to turn it off and on and off.
And that basically, you know, helps us lower the HVAC system consumption by 20 to 30%. Another technology we've rolled out into our own offices are air quality sensors. And the reason we've done that is that there is data and research that shows that above, 600 PPM CO2, our brains productivity start to decrease.
So tracking CO2 levels in the air in an office environment becomes extremely important to ensure that people, you know, when they come to the office, are productive. It's also a good proxy for comfort. And then when it comes to comfort, it's also a good proxy for health and wellbeing. So it basically close the loop of ensuring that people are healthy and happy into buildings.
And when we have smart metres installed, we can go much further into analysing the data. We can look at trends. We can look at how close the building we track, you know, the temperature and the weather. And it also then becomes a proxy for good management. So we know whether or not people are actually working well into our buildings, and that becomes very, very useful data.
Ed: And I guess then that has a real commercial benefit for building owners and tenants, because then that can start impacting their bottom line if they know that they can kind of reduce their costs as well as their carbon footprint of a building?
Philippe: It absolutely impacts the bottom line, 100%, yeah, absolutely. Everybody right? The tenants would be affected because they do pay for these costs normally. But again, for the owner, it shows that the building is well managed, potentially well maintained, and that therefore it has value even when it needs to get let or get transacted.
Ed: And that can obviously increase the rental value then for the owner?
Philippe: Yeah, absolutely. So, you know, by and large tenants don't usually care about, you know, whether they're gooing to pay that much rent, that much rates, that much service charge and so on and so forth. It's an all in occupational cost. So, you know, the rule of thumb is if you can save like 20 in service charge, maybe you can charge, you know, the difference in rent and that translates immediately into better cash flow and added value in exit.
Ed: So smart building technology is like a fitness tracker for your building. And just like our wearables, smartphones, and tablets, the smart buildings of today look very different to those from five years ago. The technology is constantly evolving. The data sets are becoming increasingly sophisticated. And new innovations are coming to market quicker.
Here's Colin on why now is such an exciting time for the whole industry.
Colin: We just recently joined forces with deepki, another player in the space. So for us in the short term it's really focusing on working with our new partners, and deliver better services and more complete services, as well as technologies to our partners and clients.
So you see a lot of new features being developed and then new solutions as well. You know, I think, I feel like that Europe again is a really exciting playground for innovations. So with the deepki Fabriq partnership we feel like we have the right team to really become the leader in Europe. And then again, we want to actually look outside of Europe in due course as well to see if we can help others in different markets.
And on the technology side, I think again, going back to data, there's still a lot of work to be done there to make that process more straightforward. Again, you know, rubbish in, rubbish out, you know, that's the old saying, and that definitely holds true for what we want to do for our clients.
So I think there's gonna be a lot more enhancements in getting a hold of data and more complete data sets. And then the outputs, again, every week or every month, there seems to be a new reporting and disclosure framework that's out there. So again, making sure that our platform is future proof so that our end users can have something that they can, they can use and to stay on top of things when it comes to the ESG conversation. Those are things that we're looking forward to.
Ed: Philippe do you think there'll be closer synergies between smart buildings and smart cities? Because obviously PATRIZIA we invest in smart cities as well, and that's all to do with kind of the connectivity and reducing kind of congestion within cities. Do you think there's going to be kind of a closer tie up between the two?
Philippe: Absolutely. I think buildings are essentially the building block of the, of a smart city, and for us it's not about, you know, moving the needle of just one or two, you know, buildings, and have one or two very smart buildings.
It's about being able to increase the smartness of the entire portfolio. And that will really tie into the smart city themes. From a smart building point of view, a building is an infrastructure. And we want to make this infrastructure basically intelligent so that it can be more efficient, so that it can take decisions on its own.
And so that it can also start interacting with other infrastructures around. And to give you a couple of examples of that, you know, you could see that in energy storage, you can see that with batteries for, to store electricity, whether it's from the grid or whether it's from PV production, you can see that with demand response.
So basically building, uh, reacting to, not just from the grid operator, to either increase or decrease the consumption. And you see that with mobility, which you've mentioned, we will see that with EV a lot. So it's definitely part of the same theme, and that makes it super interesting, because once you add, you know, a lot of different small things together in buildings, you know, the sum of the whole is greater than the individual parts. And I think that's where we'll see with smart buildings and smart cities.
Ed: And do you think, what kind of new technologies do you think are kind of are coming down the line that can be, or will be integrated into smart buildings, kind of, you know, in 5, 10, 15 years time?
Philippe: So I think the big one we see is the building operating system.
Today we have mostly building management systems, so it's essentially the brain of the building, but it's only focused on the heating, cooling and ventilation, or HVAC system. What we're going to see more and more is, is supervisory systems that can sort of aggregate all the data sets within a building and then plug apps on top of that so that the buildings can be optimised by companies or third party developers. That I think is going to be a big needle mover.
But also I think that, going back to what Colin was saying, the regulatory framework is changing very quickly. So we are going to see evolution at the building level. We're going to see evolution at the corporate level as well. And basically those evolutions, they still go in line with the megatrends we talked about earlier on today, which is basically digitization and decarbonization.
And the more technology we can have, the better our processes can be digitized, the more effective we will be, you know, the better we will be for investors, for our tenants. It's really the game of the 2020s for the entire world, I would say, but it's especially true for real estate because we are facing decarbonization more than others.
And as an industry, we're probably not as digitized as others. So there's a lot of work to be done.
Ed: Do you think there's a danger of kind of stranded asset risk if asset managers and investment managers this decade don't start investing in kind of digitizing their buildings? When do you think that kind of risk will really start kind of come to a head?
Philippe: I think it's already happening now, and regulatory changes will increase those risks going forward because it may not be economically feasible or sustainable to refurbish and renovate certain buildings. And I think, especially in the UK, which is going to have to meet these new EPC regulations from 2025. And some of the buildings in this country are actually very poorly insulated and they're not really airtight. And so making those more futureproofed is going to be very expensive. So you're going to see, you're going to have to see a massive price drop in order for, you know, investors or, you know, prospective buyers to pick it up and do the works.
Ed: Thank you to our guests, Colin Ma and Philippe Le Fort, and thank you for listening. I'm Ed Whittaker and you've been listening to the PAT Cast from PATRIZIA. You can subscribe to the show on Apple Podcasts and Spotify, or wherever you listen to your podcasts. And don't forget to head over to our website patrizia.ag to find out more.
Stay safe and healthy until next time.