Great news! You have been assigned to the team to do concept work and layout on a new project. The new facility will either be a new building coming up out of the ground, or perhaps a major retrofit or repurposing of an existing building. You have been assigned to the team as the expert on building systems. It seems like everywhere you turn, you are hearing about the concept of intelligent buildings.
So is it the right time to promote this concept to the design team? Will they be receptive to making the added investment to make this an intelligent building? The answer to the first question is yes — and the answer to the second question is that you will need the proper tools to justify the investment. Here is how to analyze and calculate the financial benefits of an intelligent building.
Any intelligent building project must provide a significant financial return. It is not acceptable to consider investing in intelligent attributes of a project, unless you can prove that there will be an acceptable return on investment. So how do you calculate the ROI? The answer to this will depend on the project, ownership structure, and a series of assumptions. Let’s start by looking at where we will gain returns on making a project intelligent. Intelligent buildings provide returns to their owners through the following areas:
- Lowered operating expenses. Adding intelligent features to a building will allow it to operate more efficiently, reducing both energy usage and expense. In addition, intelligent buildings provide tools to optimize the staffing and operations of the building, allowing for improved efficiency and a potential reduction in the labor required to operate the building. Reduced operating expenses are fairly easy to estimate and document, and these ongoing expenses can be reasonably expected to steadily increase into the future. Investments in tools and systems that reduce energy usage allow for better energy purchasing, reduce the labor required to run a building, and have a high degree of certainty in paying off as estimated.
- Improved occupant experience. The second area that we see a return on incorporating improved building systems and technology is in providing a better experience for the occupant. This means providing a safe, secure, comfortable environment that has the necessary technology to achieve the mission of the facility. Many surveys by groups such as BOMA and IFMA show that over 20% of occupants are not satisfied with the current comfort of their space. Providing improved comfort, both in physical (temperature, lighting, humidity, IAQ) and emotional terms (confidence, convenience, empowerment, assurance) allows occupants to focus on their mission in the building and not spend time focused on the lack of comfort. Improving occupant productivity even a few minutes a day provides a dramatic return to the employer.
The ROI obtained for a project also depends on the ownership structure of the building. Buildings that are owner occupied, such as schools, hospitals, corporate, and government facilities, directly accrue the benefits of reduced operating expenses as well as the improvement in occupant productivity.
Calculating the returns is fairly straightforward. Buildings that are owned by a developer and leased out to tenants become a little bit more complicated. In the leased building model, the building owner typically accrues the benefits of reduced staff expenses. Energy costs are often passed on as part of the lease to the tenants. Therefore any energy savings is seen by the tenant and not the building owner.
Likewise, improvements in the occupant experience are gained by the tenant and not directly by the owner. So why would a commercial building developer or real estate investment trust (REIT) decide to create an intelligent building? The answer is that a building with improved technology, comfort, safety, and productive space is more desirable to tenants. The expectation is that when a tenant has to select between similar buildings, the one that is intelligent will tend to get better occupancy rates and improved rents along with fewer tenant concessions. The net result for the savvy developer is an advantage in buildings with improved occupancy. This, coupled with the reduction in operating expenses, provides for the ROI to the building owner.
Let’s look at some examples. In these examples, we will analyze a hypothetical 150,000-sq-ft building. Inputs for this analysis have been gathered from industry sources and are shown in Table 1. These inputs include construction cost, energy, operations, etc. They also include the average “employee impact.” This is the average annual fully burdened cost of each employee averaged over the space that they occupy in the building. It is interesting to note that the annual employee impact in this example is equivalent to 80% of the total cost of the building! The anticipated benefits of adding intelligence are shown in Table 2.
In our first example (Table 3), we will look at a building that is owner-occupied. The initial investment is an increase in first cost of the building of $600,000 ($4/sq ft). We would anticipate that we would see returns from two different areas. Our energy and operational savings would total approximately $1/sq ft. Looking at this alone provides a simple 4-yr payback and an ROI of 95% over five years. An adequate return, but certainly not earthshattering. If we add in the impact of a 1% improvement in employee productivity, then the ROI goes up dramatically.
Our second example is a tenant-occupied building (Table 4). In this example, we will use the same investment inputs. We will assume that the tenant is paying for energy as part of their lease, and we will not take any credit for energy reduction. The return to the building owner comes in being able to have a building with better occupancy and higher rental rates. In our example, we have set each of these at 4%. In an actual project, we would also see potential savings in reduced tenant turnover and lower tenant improvement expenses.
In this case, we see a nice ROI. Interestingly for a building developer, an improvement in cash flow will ultimately result in an increased valuation on sale. In our example, we used a market capitalization rate of eight. By decreasing expenses and increasing revenue, the net result of making this an intelligent building is an increase to the annual operating income of $420,000. Upon the sale of the building, this improved cash flow will increase $3.4 million ($420,000 multiplied by 8) for a net return of 560%. This is a hefty return on investment that is hard to beat!
So when you sit down with the team for this next project, take a serious look at making the investment to create an intelligent building. In addition to creating a better building to live, learn, work, and play in, it can also be a very satisfactory investment for any owner.