Navigant Research Blog

Rethinking Intelligent Building ROI: Follow the Money to Transactions

Casey Talon — November 14, 2017

The intelligent buildings market has undergone a makeover in recent years that has yet to move the needle on widespread investment. The narrative has shifted in the last 2-3 years from a focus on energy efficiency to business insight. The logic behind the push makes sense when you consider the financial impacts of energy costs relative to employee costs in terms of building ownership (remember the omnipresent JLL 3:30:300 calculator). The problem is, metrics that impact payroll or employee costs are complex and interactive. There is no mutually exclusive measure of productivity—if a workspace has the perfect temperature and lighting, an employee may still fail to meet a deadline because of so many hard-to-measure issues: personal life, management, workplace culture. The healthy building approach has been a pathway many stakeholders are taking to frame workplace conditions and worker productivity, but the reality is the numbers are still soft.

Energy efficiency remains a straightforward way to measure the impact of technology deployment. You invest in controls and automation in your office building, you see a reduction in your energy bill by 10%—that is a defensible measure of ROI. However, energy remains a small overall share of operating costs for many building owners, particularly relative to other business costs, so what can make building energy performance bare real weight in business? It seems a one-two punch of public disclosure and financial due diligence may be the answer.

Public Disclosure and Real Estate Valuation

Many US cities have aimed at building energy use as a lever to tackle greenhouse gas emissions. Public disclosure programs range from voluntary to mandatory but are generally limited to reporting, without mandates for efficiency improvements because of the politicization of climate change in the US. It seems there must be a bottom-line pressure that aligns with the energy performance rating to drive investment in energy efficiency. And now it seems there is.

A recent article in Urban Land explains, “If energy efficiency can be correlated to mortgage default rates, it could have a significant impact on energy disclosure and possibly even mortgage interest rates. Underwriters on new projects may consider requiring energy disclosure before issuing a new loan, or charging a higher interest rate (all else being equal) for energy-intensive properties. Mortgage companies looking to reduce their default risk may also look to engage their current portfolio in strategies to improve their energy efficiency.” This article was based on findings from a 2017 Lawrence Berkeley National Lab study, which aimed to correlate commercial mortgage default rates and energy efficiency. The study concludes that “building-level source energy use intensity (EUI) and the electricity price gap are statistically and economically associated with commercial mortgage defaults. Using building energy simulations, we find that building asset characteristics and operational practices that affect source EUI have very important effects on the likelihood of default.”

So, there it is, a roadmap for quantifying the relationship between building energy performance and real estate asset value. The argument could even go a step further and assert that intelligent building solutions are worthwhile investments to provide a foundation for minimizing EUI and ensuring ongoing energy efficiency gains. The analytics at the center of leading intelligent building solutions will monitor, report, and even predict changes in energy consumption based on space use. This insight can become strategic guideposts for business decisions around real estate. As more data is collected, there will be greater opportunity to tackle the challenge of quantifying those softer, yet significant, employee costs over time. Today, energy efficiency remains paramount in showcasing ROI.

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