Navigant Research Blog

IoT – A New Source of Competitive Advantage in Commercial Real Estate

— August 29, 2017

Whatever business you are operating inside a commercial building, if you aren’t collecting, storing, using, and learning from data, then you are not doing your job. That is the sentiment in today’s intelligent buildings market. Commercial real estate faces this reality as the effective use of data, analytics, and Internet of Things (IoT) becomes a competitive advantage. The use of all these tools can maximize occupancy, amplify tenant satisfaction, and even attract and retain employees.

Intelligent building solutions entered the market as tools to improve specific facility systems—HVAC, lighting, and physical security—and it started with connecting devices. Once the devices were connected, the next step was collecting data and analyzing it to be communicated visually. These intelligent building technologies improved the operations of equipment and demonstrated value through the lens of energy efficiency. What makes IoT unique is the ability to unify and process data at the enterprise level, which has been the vision of the intelligent buildings market. IoT enables more cost-effective data acquisition, aggregation, communication, analysis, and ultimately, performance improvement.

Capitalizing on IoT for Fully Occupied, High Value Commercial Real Estate

Journalist Oliver Burkeman wrote in 2009, “Without most of us quite noticing when it happened, the web went from being a strange new curiosity to a background condition of everyday life.” Today, we are entering the next era in which uninterrupted access to data from our mobile phones and wearables to legacy building systems can create a seamless data profile of an enterprise portfolio of facilities to redefine the occupant’s experience, create new productivity for operations and service providers, and create more value for building owners. A holistic, data-driven approach to real estate management is critical as we look into the future of workspaces.

The US Bureau of Labor Statistics estimates that today’s students will have 8-10 jobs by the time they are 38. Furthermore, the agency estimates that by 2020, 50% of the workforce in the United States will consist of freelancers. What this means is that the demand and use of commercial office space will look completely different than it does today. Technology and an IoT approach to facility optimization can help real estate owners differentiate their buildings to win the competition for tenants and even employees.

What is the process to move the real estate industry toward the digital office of the future? How can IoT deliver cost savings, sustainability, and customer satisfaction? Join us on September 12 at 2 p.m. EDT for an Intel-sponsored Navigant Research webinar. We’ll explore how Rudin Management is working with Intel and Prescriptive Data to demonstrate how IoT can optimize the occupant experience in the commercial office.

 

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 Real Estate Services Shopping Spree

— June 12, 2015

You would be forgiven for thinking that CBRE stands for Can’t Buy Rapidly Enough. The company (which actually stands for Coldwell Banker Richard Ellis as a result of an interesting history of spinoffs, mergers, and acquisitions) is the world’s largest commercial real estate service and has been on a recent acquisition binge. In March, CBRE announced a definitive agreement to acquire the Global Workplace Solutions business that Johnson Controls, Inc. announced it would divest last year. Two weeks later, CBRE announced the purchase of Environmental Systems, Inc. (ESI), an energy management and systems integration provider.

Global Workplace Solutions offers services that help companies operate facilities more efficiently, optimizing real estate performance and employee productivity, particularly in the industrial, life sciences, and technology sectors. These services include everything from site selection and design, planning, and construction management to standardizing maintenance procedures and performing inventory management.

ESI, on the other hand, designs, installs, manages, and supports integrated building automation systems and building energy management systems. In 2012, ESI was selected by IBM to manage the energy use of the 50 largest federal government buildings, linking the automation systems of the buildings together on a cloud-based platform to provide enterprise-level management.

The Complete Package

Both acquisitions highlight how providing a complete portfolio of services for corporate clients is becoming increasingly important for CBRE and the commercial real estate service industry as a whole. With growing demand for green-certified commercial office space, as well as increasing awareness of the benefits of energy efficiency in reducing operating expenses, commercial real estate service providers are moving to expand their capabilities with clients. Indeed, DTZ and CoreNet Global announced a partnership that incorporates CoreNet Global’s benchmarking service into DTZ’s commercial real estate services portfolio.

Real estate services companies have historically played a less central role in energy efficiency decision-making, energy management, and energy benchmarking than other infrastructure-focused players such as energy service companies (ESCOs) and HVAC contractors. But, that seems to be changing, as corporate clients are beginning to view energy information to be as important as the other information typically provided by real estate service companies. Though CBRE’s shopping spree may be over for now, we will likely see more acquisitions by real estate services companies to fill out their service portfolios.

 

Yieldcos for Renewable Energy: “Now Is the Time”

— March 8, 2015

Enel Green Power is forming a yieldco with its renewable assets in the United States, joining a trend that started about 2 years ago and accelerated in 2014.

The idea behind yieldcos is not new. It involves the creation of a company to buy and retain operational infrastructure projects and pass the majority of cash flows from those assets to investors in the form of dividends. Structurally, yieldcos are very similar to real estate investment trusts (REITs). They are also almost ideal for renewable energy projects such as wind farms.

A crucial aspect of yieldcos is that they are not exposed to development or construction risk—this is borne by either the parent company or a third-party developer. Yieldcos simply acquire infrastructure projects that are or have recently become operational. They fund the acquisitions by issuing shares (normally debt is only used at the project level), which they can do at a lower cost of capital (the return on the investment that shareholders want to invest in the company) than their parent companies or developers because they’re shielded from development and construction risks.

Squeezing Out Risk

Another key aspect of yieldcos is that their assets produce fairly predictable cash flows that can be paid to shareholders as dividends. That’s why renewable energy projects such as wind farms are perfectly suited for them. Wind farms and solar power projects are not significantly exposed to changes in the market. On the upstream side, they depend on free resources—wind and light—while on the downstream, they are protected by regulations (feed-in tariffs, long-term power purchase agreements, Renewable Portfolio Standards, and so on).

For developers, yieldcos offer a quick way to sell maturing assets and redeploy capital into early-stage developments that offer higher returns. From an investor point of view, yieldcos offer an investment option with very little risk—which is a testament to how far the investment community’s understanding of wind and solar technologies has come.

New Era or Fad?

The emergence of yieldcos has been driven by a strong initial public offering (IPO) market in the United States and Europe over the last few years, as well as the impact of quantitative easing (QE) policies around the world that resulted in lower interest rates and returns from conventional financial products (i.e., bonds and equities). As a result, the 6%–7% dividend yield of listed green infrastructure funds looks attractive to investors, compared to 4% interest rates on 10-year corporate bonds and even less for government paper.

Still, yieldcos might turn out to be a short-lived fad. As the economic recovery accelerates, and talk of interest rate hikes in the United States fills the financial media, investment vehicles like yieldcos could lose some of their appeal. So if you have solar or wind assets lying around, you may want to take some fashion advice from Enel’s CEO Francesco Starace (an Italian, after all): “Now is the time to do this.”

 

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