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Reasserting the Net Present Value of a Smart Building: From a Cost Item to a Value-creating Platform

The decision-making related to buildings has been based on investment costs, rather than life-cycle costs or net present value calculations. As smart service opportunities increase, the decision-making and attitudes associated with buildings should also change.

2.9.2020

Traditionally, buildings have been formed of closed and separately controlled systems. The decision-making related to buildings has been based on investment costs rather than life-cycle costs or net present value calculations. As smart service opportunities increase, the decision-making and attitudes associated with buildings should also change, which will enable real estate to play a more active role in value creation and increase turnover.

The Multidimensional Impact of Real Estate

Real estate is by far the most significant asset class in the world; with a value almost three times the world’s annual GDP. In addition, real estate incurs the second highest cost of modern business.  Real estate is often considered a necessary, static and fixed cost, which is particularly evident in the optimization of resource consumption, especially energy. With the new opportunities created by smart services, the impact of real estate on the bottom line should be reassessed and related decisions radically changed. Considering wages and benefits averaging around 85% of a modern business’ cost, even a small improvement on productivity, health and well-being can have significant financial benefits.

For example, Attema et al. (2018) have found in their study that companies could have a 2.83% annual profit increase due to 5%  annual increase in employee retention and a 0.45% annual profit increase due to 30% absenteeism reduction with improved health and wellness in high-performing building focusing on user experience. Key Performance Indicators (KPIs) should really take better account human-centric aspects and contribution between people and business.

I’d like to point out three perspectives for reassessing the net present value (NPV) of the Smart Building:

 

1. Enabling Higher Employee Productivity

Indoor Environment Quality (IEQ) has been found to have a dramatic effect on our brains, potentially doubling our results in cognitive tests (incl. strategic thinking, information usage and crisis response), when compared with average air quality.

Indoor conditions can determine up to 25% of an individual’s overall productivity. Improving indoor conditions reduces absenteeism, respiratory diseases and even stress. For example, doubling the outdoor supply rate of a building can reduce sick leave prevalence by 10%. The increase in working hours is enough to offset the entire cost of ventilating the building.  Combining the high wage cost item with the  fact that we spend around 87% of our time indoors – living and working in buildings that were not designed to support our well-being, the well-being of our planet or even the long-term benefits of the building owner – our decision-making process just to optimize costs sounds absurd.

 

2.  Increasing the Space Efficiency and Strengthening Innovation Capability

Second important aspect in improving productivity is the development of optimal facilities from a business perspective. According to studies, the average occupancy rate of workstations was only 54% in 2019. The trend in recent years has been to increase space efficiency. This has increased the popularity of open-plan offices. However, 66% of the work was individual work where concentration, with low noise – visual and voice – levels, would be important.

A key challenge in the NPV perspective is to design a space that at the same time allows collaborating, chilling, communicating, and concentrating. This kind of human-centric design means that employees can be available when they feel it is possible. On the other hand, because innovation rarely takes place in a meeting room, it would make sense for an employer to support people-to-people interaction, collaboration, informal discussions, and tacit information sharing within the organization.  For this reason, the importance of natural encounters between employees should not be underestimated. However, if the facilities do not provide an opportunity for concentration, it is natural for people to prioritize their home offices. Thus, the space utilization should be considered through flexibility. When annoyance and wasted working time are gone, people can focus their thoughts and energy on more important aspects.

 

3. From a Consumer of Resources to a Sustainable Brand Ambassador

Like employees, buildings are also a kind of business cards for their stakeholders. Buildings consume a significant amount of final energy and produce around 36% of CO2 emissions in the EU. Combining these facts with the significant role of real estate as a business asset, it is logical to emphasize their role in corporate sustainability targets.

Real estate contains a significant amount of unredeemed potential, especially in the economic and social sustainability areas. For example, if a company could safely rent its office to others for use outside office hours, their revenue increase and sustainable brand image (i.e. goodwill) would improve. At the same time, it would provide citizens with new places to organize leisure activities, which would reduce the need for new buildings.

Impact of sustainability on the selling price of office buildings has been measured at +31–35%. In additional, some researchers have found that tenants are willing to pay up to 25% more for sustainable and user-friendly buildings. Thus, smart buildings using sustainable energy sources are low-emission and low-waste, healthy and safe for users, and perform optimally according to user needs, also generating higher NPV.

Because accurate assessment of NPV is challenging or even impossible to measure, it can also be viewed in reverse. What happens if we do nothing? How many talents can we lose? How much competitive advantage are we willing to give to other players in the market? By answering these questions, we can find reliable value for smart, high-performing and sustainable buildings and the associated cash flow.

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Tuomo Härkönen

Vice President, Head of Digital Solutions, Caverion