Technology makes our buildings smarter. That increased intelligence drives operational efficiency, health and safety, comfort and productivity, as well as many other benefits for building owners, tenants, and occupants. By adopting smart technology, building owners are essentially seeking to increase the value of their building, so they can demand higher rent or sale price, but how much does smart technology really increase a building’s hard financial value? How can owners optimize smart investments for rental or sale value increase? And, what impact have pandemic and remote working trends had on the value of smart tech in commercial real estate?
“Many efforts have been made to classify and demonstrate the operational performance of the new technology systems that make our buildings smarter. However, relatively little information has been gathered on the possible impact that smart buildings may have on rent and transaction premiums or how institutional investors are incorporating these technologies into their portfolios in the first place,” reads an MIT research paper by Alfredo Keitaro Bando Hano. “The results of the analysis find that smart buildings achieve a 37% premium in rents and 44% premium in transaction prices, relative to non-smart buildings in the same neighborhood, over the same period.”
Simply confirming that smart buildings increase rental and sale value is enough to prove that intelligent building innovation is being rewarded, that the hype is real, but the considerable scale of the increase goes even further. This roughly 40% increase in real estate value is enough to justify building owners going “all in” on smart technology, knowing they are unlikely to spend anywhere near that percentage of their property value on smart upgrades. While the results of the MIT study may be at the higher end of the spectrum, this EU study suggests an 11.8% rental value increase for example, the range of studies on the topic are enough to see that smart building investments provide reliable and significant increases on building rental and sale value.
The increased rent comes from the increasing demand for smart technology from tenants and occupants. In addition to cost saving benefits, smart workplaces have demonstrated their ability to increase productivity, retain staff, and attract better talent. A recent WiredScore survey found that 79% of workers want to work in a technologically advanced office, and 90% say that technology has significantly improved their work-life. Sustainability has also become a priority for many workers, with 63% who consider working in an environmentally sustainable space to be very important, and 18% stating they would refuse to work in a building that is not sustainable. These trends will only increase as younger, tech-savvy workers dominate the workforce.
“Millennials will make up 75% of the workforce by 2025, whilst Generation Z will begin to enter the workforce from 2018. These are generations that have grown up with digital and connected technology, and they will prioritize smartly designed and technology-rich workplaces when choosing between employment options,” our Future Workplace report states. “They will place great importance on companies and workplaces that promote health through lighting and environmental control systems, for example, as well as those who offer them the time and facilities to engage in healthier living.”
Healthier living has taken center stage in the last two years as the pandemic has drastically changed our relationship with commercial buildings. Talk of consolidation is rife in discussions on the future of work, as remote and hybrid work strategies are adopted by companies and supported by governments around the world. This will undoubtedly change the relationship between smart technology adoption and building rental value. In the short-term, smart tech has proved useful, if not essential, in reducing and tracking virus transmission, giving a boost in demand for the limited number of virus-smart buildings. In the longer-term, the growth in the number of smart buildings to meet that demand could quickly outweigh the rapidly decreasing need for office space, driving rent down as consolidations take shape over the next decade.
“The pandemic will eventually abate and so will concerns about virus transmission. However, tenants and employees will still seek safe, healthy and personalized environments that enhance the workplace experience. Landlords will still aim for cost savings, energy efficiency and tenant retention. That’s why smart building technologies are going to stick around post-COVID,” says Val Loh is senior principal at Syska Hennessy Group Inc. “Owners who want to optimize their portfolios and attain a high return on investment know what they have to do — get smarter.”
The future office market looks smaller and smarter. We can expect many fully remote firms booking temporary spaces for their in-person needs, and much fewer fully office-based firms as employees exercise their right to remote work. Most workforces will fall in between, operating a reduced office, in terms of size, but optimally designed with smart technology for its role in a hybrid work system. Workplaces will be green and efficient to reduce costs, attract talent, and improve brand image. They will be human-centric to drive health, productivity, and collaboration in this challenging new environment. And, smart buildings will no longer be a nice-to-have but a must-have for companies looking to thrive in the exciting but uncertain future of hybrid work.