Navigant Research Blog

The Coming Storm for Commercial Real Estate

— July 6, 2016

Intelligent BuildingTo many, the world appears on the brink of financial distress. Of course, to some, the world always appears on the brink of financial distress. But recent events—including Brexit, emerging market malaise, and a slowdown in China—have rattled some investors. According to Pimco, one of the world’s largest bond-holders, another challenge is on the horizon.

In a report titled U.S. Real Estate: A Storm Is Brewing, Pimco highlights the confluence of factors that may lower commercial real estate prices by as much as 5% over the next 12 months. Part of the challenge is the current valuation of commercial real estate. Rather than being driven by fundamentals, it has been driven by capital flows as investors bought commercial real estate as an asset. Since the fourth quarter of 2009, office rents have risen by about 15%, yet overall office prices have doubled—those capital inflows are growing unstable and may even reverse. Acquisitions by real estate investment trusts (REITs) have already dropped, and many REITs may shift from net buyers to net sellers.

Moreover, post-financial crisis regulation (such as Dodd-Frank) makes it more expensive for banks to hold commercial mortgage-backed securities (CMBSs). Banks have traditionally served as market makers for CMBSs, and a reduction in their holdings can cause problems with liquidity in the market, translating to higher borrowing costs for landlords. Moreover, more than $200 billion of CMBS loans will mature over the next 3 years, which will likely prompt more selling. Altogether, valuations for commercial real estate in the United States are under threat.

A Very Efficient Storm

So, what can owners of commercial real estate do in the face of falling valuations? Improving the energy performance of their buildings is a good start. A report by the Energy Efficient Buildings Hub found that buildings with LEED (Leadership in Energy and Environmental Design) or ENERGY STAR labels commanded premiums of 6% for rents and 15% for prices. Beyond better valuations, better energy efficiency also results in better net operating income. Energy savings lower utility builds, reducing operating expenses.

Performing energy efficiency retrofits can be an effective hedge against the risk of falling valuations. In its recent Energy Efficiency Retrofits for Commercial and Public Buildings report, Navigant Research highlights the market for the technologies enabling better efficiency in existing buildings. Despite the benefits, though, energy efficiency has stubbornly ranked as one of the lowest motivations for performing retrofits overall. Building owners have prioritized maintaining operations and minimizing labor costs. However, the coming commercial real estate storm may bring winds of change to energy efficient retrofits.

 

The Human Benefit Potential of LED Lighting

— July 1, 2016

LEDsHumans are visual creatures. Accordingly, the type of light we are exposed to can affect human behavior. Unfortunately, though, the extent to which light affects the brain is not well-known. Indeed, we understand very little about the brain overall, but the extent to which light affects the brain has until recently been largely unstudied. The emergence of LED lighting has enabled scientists to design experiments to ascertain what links exist between light and behavior. LEDs have immense controllability; they can be turned on and off rapidly (even faster than the human eye can perceive) and their color and brightness can be easily tuned. As scientific studies establish the myriad connection between light and behavior, lighting is expected to become an increasingly important part of business strategy, and not just the purview of a facilities manager.

Do You Want Fries With That?

A recent study published in the Journal of Marketing Research quantified the impact that lighting in restaurants has on what and how people eat. The researchers found that brightly lit rooms prompted diners to be more alert, increasing the likelihood of ordering healthy foods by 16%-24% over orders in dimly lit rooms. The study attributed the difference to alertness through comparison of results to follow-up studies that increased diners’ alertness through the use of a caffeine placebo or by prompting diners to be alert.

The human responses to lighting are not limited to inside buildings, either. The American Medical Association issued guidelines for communities to select LED lighting options to minimize potential harmful effects. LEDs emit more blue light than conventional lighting. Though the blue light appears white to the naked eye, it can worsen nighttime glare and decrease visual acuity. Additionally, blue-rich light adversely suppresses melatonin and can potentially lead to reduced sleep times, dissatisfaction with sleep quality, excessive sleepiness, impaired daytime functioning, and obesity. The effects are not limited to humans—outdoor LED lighting can disorient some bird, insect, turtle, and fish species.

The Future Is Bright

Lighting is ubiquitous in the built environment, and as such, the potential to modify human behavior is immense. In the future LED utopia, it will be easier to wake up in the morning, eat healthily, be more productive at work, and be a better person. Beyond personal implications, lighting presents opportunities to businesses as well. Whether it is attracting top talent or increasing sales, many of the challenges businesses face may be addressed by lighting. As we better understand the impact of light on behavior, savvy businesses will be able to translate this effect into better performance.

 

Retrofits Are Key to an Energy Efficient Building Stock

— April 12, 2016

modern square and skyscrapersEven if all new buildings from today on were built to be net zero energy, it would take several decades for the change to have an appreciable effect on overall building energy consumption. Indeed, 50% of commercial buildings in the United States were built before 1980. Moreover, older buildings adhere to outdated standards—if they adhere to any standards at all—and often have higher energy intensities than new construction. Retrofitting these older buildings is the only path toward substantially reducing the energy footprint of the existing building stock.

Efficiency through Retrofits

In the world of retrofits, installing energy efficient heating, ventilation, and air conditioning (HVAC) systems; LED lighting; and building controls can help building managers lower the levels of energy consumption of building systems. For example, the 85-year-old Liberty Tower in Dayton, Ohio is using each of these strategies to improve energy efficiency. All interior and exterior lights in the 114,000-square-foot facility are being replaced with LEDs, the building’s existing steam boiler is being replaced with two vertical fire tube boilers, and the building controls are being replaced and upgraded to provide advanced programming measures.

Switching to LED lighting provides a substantial savings opportunity in existing buildings. In the case of Liberty Tower, the new lighting system is expected to use 60% less energy than the system it’s replacing. However, more savings are possible in LED retrofits through the addition of controls. Because LEDs provide better dimmability than fluorescent lights, they are better suited to controls. Even though the reduced energy consumption of LEDs reduces the amount of energy available to be saved, controls can allow an additional way of fine-tuning the amount of energy being used, thus providing more savings.

Lights can be dimmed when natural light is present or when a space is unoccupied to provide more savings. However, the level of light output during normal operation can also be adjusted based on feedback of occupants so that energy is not wasted providing more lighting than is needed. Additionally, LED lamps fail differently than incandescent or fluorescent lamps—they gradually grow dimmer at the end of their lifespan. As a result, using lighting controls to initially provide less than the entire output of the LED and steadily increasing output as the lamp fails could decrease the frequency at which lamps need to be replaced. This provides operational savings in addition to energy savings.

Upfront Costs

Though savings from retrofits can be substantial, so too can the costs. For the Liberty Tower retrofit project, the total cost is estimated to be $870,000 and provide annual utility cost savings of $99,000, generating a payback period of 8 years. The payback period, for better or for worse, is considered by many in the industry as an easy shorthand for determining whether or not a given energy efficiency retrofit project or technology will be viable for a particular installation. Most building owners require a payback of 3 years or less, though this depends on the ownership and use of the building.

Liberty Savings Bank owns the Liberty Tower and occupies about 10% of the total floorspace, with the remainder leased to tenants. Because the company is family-owned and occupies part of the building, it can accept a larger payback. However, only about 60% of commercial floorspace in the United States is occupied by its owner. Consequently, larger ticket upgrades, such as deep building envelope or HVAC system upgrades, remain difficult to sell within the retrofit market.

Moreover, because retrofits are prioritized by their payback period and generally have a long lifespan, opportunities with unattractive longer payback periods are the ones that remain. Without either a change in technology or an outside force, the energy savings potential of these opportunities may go unrealized. In the case of Liberty Tower, the project is expected to generate more than $70,000 in utility rebates, making the economic case more practical. With commercial buildings accounting for more than a third of total U.S. energy consumption, regulations and incentives will be the key to reducing the energy footprint of the existing building stock.

Join Benjamin Freas at the Navigant Research’s Retrofits for Commercial Buildings: Moving the Needle on Energy Efficiency in Existing Buildings webinar on Tuesday, April 19, 2016 at 2:00 pm EDT to learn more about energy efficiency in buildings.

 

Drones or Data for Facilities Management?

— March 7, 2016

Luftbild einer Windkraftanlage mit Drohne Rotorblatt Wartung InspektionThe potential benefits of unmanned aerial vehicles, commonly known as drones, have received a lot of attention as more and more applications have been identified. In addition to their continued use in warfare, drones are emerging as a useful tool for everything from wind turbine inspection to stopping poachers and spotting sharks. The seemingly infinite possibilities for drones have now extended to commercial buildings, where they can be used to provide visual inspections of hard-to-access spaces.

The use of drones by facilities managers seems like a smart move. Technicians no longer need dangerous ladders or expensive scaffolding to inspect the conditions of their facilities. However, drones are not the transformative change that facilities management needs. Physical inspection is the old way of thinking—it has been a necessity driven by technological limitations. Though drones now present the opportunity to enhance the process, the process itself is fundamentally flawed. While not as flashy, advances in building energy management systems (BEMSs) create the promise of technology’s ability to change the maintenance paradigm.

Data, Not Drones

The problem is not in drones, but rather, in a management strategy that relies on periodic visual inspection. Facilities managers will only find problems if they are looking for them, but that’s not a guarantee that these problems will be found before they affect operations. The inspector needs to know what to look for, the problem has to have symptoms that can be seen visually, and the inspections need to occur regularly.

Even if the manual process of drone inspection does properly identify problems, maintenance to address those problems still needs to be scheduled. The more sophisticated solution is to rely on building data. By understanding how a building operates and monitoring for deviations from that baseline, problems can be automatically identified. Moreover, fault detection from building data can be directly integrated into workforce management software so that the labor needed to address problems is actually performed.

Vendor Challenges

The challenge for vendors of building systems is that building owners and operators don’t have much of an appetite for reducing operating costs through capital investment. After all, paying for the installation and integration of sensors now may provide cost savings in the future. On the other hand, those savings might never be realized. Or that conversation could never happen because investment is focused on business operations to grow revenue rather than to cut the cost of operating the building.

As a result, the idea of inspections with a drone are promising because they do not require capital investment, yet produce some operational savings. They are also flashy new pieces of technology with lots of buzz. However, investment in BEMSs provides a meaningful alternative strategy to the management of operations and maintenance. What’s more, unlike drones, BEMSs have the ability to shift operations and maintenance procedures from a reactive process to proactive approach.

 

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