Real estate managers who are considering embarking on a smart building program frequently ask us “what is the ROI?” (return on investment). This is an understandable question. It’s hard to allocate budget without ROI. But, the notion that there is “an ROI,” like there’s one number out there lurking in the forest ready to be slain by the arrow of technology, is too simplistic. The answer is much more nuanced and complex than a number or range of saving. This is precisely what we will examine in this new blog series.
First let’s start with our simple definition of Smart Buildings.
Smart Buildings (n): A program enacted by an organization responsible for a property portfolio that is enabled by technology and data to improve the management, operations and capital efficiency of its physical assets.
Let’s break that down:
And we can’t forget “physical assets.” Smart buildings is about the actual physical things an organization controls. While there are numerous technologies out there to help with leasing, transactions, etc., they are not the direct focus here (though they might be integrated). Typically, smart buildings refers to the operations and capital efficiency of the buildings themselves.
When talking with customers and the property industry about smart buildings, we focus on the business aspects of a program and avoid diving right into the technology. The technology is an enabler, but since some people (especially in the Bay Area) tend to gravitate toward data (input) before value (output), let’s briefly discuss the tech.
Smart buildings, as a concept, is about the basics. Anyone who tells you they have an ADVANCED MACHINE LEARNING ALGORITHM for buildings may have a slick pitch, but they’re missing the point (and the biggest opportunity). What many players outside commercial or corporate real estate do not understand is that generally speaking, while there are exceptions, real estate as an industry and buildings as an asset class are behind in IT. Buildings, industry professionals and real estate executives need basic information. The most common and valuable data sources collected and integrated in a smart buildings program are straightforward. They’ve simply not been available to the people that need them.
Combine these basic data sources with metadata—important characteristics of assets, systems, equipment or data points that provide a data structure, promote scale and enable meaningful use of data—and a user-friendly presentation layer on which to view data and, voila, you get a completely new way of managing a real estate operation. For other parts of a company, or other sectors of the economy, this has been standard for years or decades. We’ll talk more about the specific benefits of a smart building program in a later post.
Bringing us back to the topic of ROI, what is the value of all this information? For something to have ROI, it must generate value for the business, i.e. it must provide benefits in excess of its cost in a timely fashion (and ideally adjusted for risk).
The truth is, in isolation, information has no inherent value. Like money, information is simply a lubricant and catalyst. Information is only valuable to the extent it helps enterprises add and capture value in the real economy.
But, in the context of a 21st century economy—where organizations are aggressively competing for customers (tenants) and resources, and are struggling to manage large, complex groups of employees, supplier networks and customer relationships—information becomes essential and invaluable. Increasingly, businesses succeed and fail on the quality and timeliness of their information. In some ways this has been a slower transition for real estate organizations, especially the building operations side of the business, when compared with other industries or functional groups within the average large corporation. But, that is increasingly changing as the leaders in the property industry start to significantly improve their operations utilizing data, analytics, reporting and central command & control. For example, increasing occupant satisfaction and decreasing TCO (total cost of ownership) hugely improves their portfolio’s NOI (net operating income). Those who do so command a competitive advantage and gain leverage over their suppliers and vendors, who for too long have provided services and products with limited oversight. All of that is driven by information.
So, in reality information is incredibly valuable. In fact, for many property organizations the current lack of visibility and control makes the ROI of accessing better, faster, cheaper information substantially higher than any other capital investment opportunity available. Data is a strategic asset to the enterprise!
So, let’s summarize where we are. Smart buildings programs unlock data; data in the right hands becomes information; information will lead to targeted decisions and actions; and those decisions and actions drive the ROI of the original smart buildings program.
This can feel complex, and the reality is it takes time and some facets are hard to measure. So in this series of posts we’ll break down each of the components of ROI. First we’ll start by discussing the value of information. Then we’ll move into dissecting the components of ROI itself: benefits, costs, time and risk. From there we’ll tie it all together. All of this is based on the accumulated experience of our fantastic team, and, where possible, we’ll try to be specific about actual numbers from smart buildings programs we’ve seen. So stay tuned!