Exploring the Most Transformative Trends in Commercial Real Estate | PROPMODO METATRENDS 2023→
Image credit: DALL-E 2

HVAC Tech Has Made Strides in the Last Decade, But Most Buildings Don’t Know That

We owe a lot to the technology that heats and cools our buildings. After all, it’s what shaped modern life. Cities in otherwise unbearably cold or hot climates boomed when mechanical temperature and humidity control allowed people to live and work in comfort year-round, regardless of the weather outside. The technology woven into HVAC systems (which stands for heating, ventilation, and air conditioning) has advanced to the point that property managers can now use data analytics to make educated judgments on system maintenance, conserve energy, and cut costs. However, most buildings in America don’t seem to have gotten the memo.

HVAC systems work by circulating air throughout a building to control its temperature and humidity. The system typically consists of a furnace or heat pump to generate heat, an air conditioner to cool the air, a system of ducts to distribute air, and vents or registers to disseminate the air throughout the building. The system uses thermostats to control the temperature and monitor the air quality. The HVAC system works by using a refrigerant, a substance that absorbs and releases the heat as it changes from liquid to gas and back again, and circulates it through a closed loop system of coils and a compressor which transfers heat from inside the building to the outside or vice versa depending on the season. 

On a purely mechanical level, the components of HVAC systems—two coils adjacent to a compressor—are nearly exactly the same as they were in the 1940s, but there have been some technological veneers that have been draped over the nearly century-old machinery within the last decade. Sensors have been developed to trigger the HVAC’s vents to keep the space at an optimal temperature, smartphone apps that can turn the system on and off have popped up in the consumer market, and the use of AI and machine learning has advanced far enough that HVAC systems can become all the more efficient. There’s been a slew of shiny new add-ons that can lower passive energy use, and the projected surge in demand for smart building automation is only going to spur more advancements in the coming years. 

In 2022, the market for HVAC controls was estimated to be worth $17.2 billion, but a recent report from the Consumer Technology Association puts the estimated value for 2027 at an eye-gouging $26.7 billion, expanding at a yearly growth rate of 9.2 percent over the course of the 5-year forecast period. The report also says that the commercial application segment would account for the greatest market share, and from a sustainability standpoint, that’s not at all surprising. HVAC systems consume anywhere from 40 to 70 percent of a building’s energy system (depending on the size of the building, the cost of energy in the area, and how up-to-date the ventilation system is), and when we’re talking about, say, a large-scale office building, that energy waste packs a costly punch. 

There are a lot of heating and cooling systems in the U.S. In fact, one report says that there are more HVAC systems in the country than people. However, the amount of smart HVAC technology doesn’t seem to be as widespread. Zachary Denning, Head of Product Sustainability at JLL Technologies (JLLT), told me that while there’s a lot of industry propaganda for the latest and greatest tech swirling around in the echo chamber, only a handful of buildings have imbued that cool tech into their systems. “More than seventy-five percent of technology in the buildings today in commercial real estate is pre-iPhone technology,” Denning said. “No exaggeration.”

As the mastermind behind Hank, an HVAC and energy optimization AI for commercial real estate, Denning is an expert in HVAC systems. In the hundreds of buildings that Denning and his team at JLLT worked on in the past year, only two had HVAC occupancy sensors installed, and “probably only one” had HVAC CO2 sensors. “I hear the tech get pushed all the time,” he said, “but there’s less than ten percent of buildings that are with the digital trends and have cool technology, a lot of them are running on like a penny and one chip. Your iPhone has more horsepower from a technological sense than the system running multimillion-dollar assets in a building.”

Denning told me that the reason that so many commercial HVAC systems are outdated is because there’s no quantifiable value for owners to upgrade right now. “The problem you run into with technology in the industry is that you can’t quantify why, so you’re left with really old technology that never gets updated,” he explained. And according to him, the only time an HVAC gets updated is when the why turns into an insurance policy (which is ironic considering that HVAC systems aren’t really covered by most insurance policies).

Building owners may already be familiar with the intangible value that smart HVAC systems can offer thanks to concerns over a building’s air quality or the myriad of ESG initiatives meant to tamp down carbon emissions. Still, Denning says that in the real estate world, technology moves are made out of necessity, not out of opportunities. So when it comes to most building owners, unless they think that if they don’t update their systems then the entire building will shut down, they have very little incentive to spring for things like master service integrators or IoT. That’s because the economics support sticking with a wheezing, outdated system until the bitter end.

Defining the quantifiable value of HVAC systems to building owners can easily spiral into a complicated math problem as unplanned and reactive maintenance can add steep overhead costs, but that’s where the murky math stops. Energy efficiencies alone can give commercial building owners a huge monetary motivation for a drastically reduced energy bill to adopt a smart HVAC system, and included in that motivation is a cushy tax break. Under Section 179D of the IRS code, owners of commercial building systems can take a deduction if they can establish a reduction in energy use by at least 50 percent through improvements (including retrofits) to things like interior lighting, water temperature, and, you guessed it, HVAC systems. In the past, the deduction had been fairly moderate, reaching as high as $1.80 per square foot for qualifying properties. However, the 2023 tax year has opened the gates for a more substantial level of up to $5.00 per square foot. Plus, placing a focus on occupant health by adding a newer HVAC system has been proven to increase real estate investment returns. 

In any case, Denning and many other HVAC experts may not be seeing a considerable amount of buildings with top-notch HVAC tech already deployed, but the rate of adoption is set to accelerate. It already did in 2020 after the onset of the COVID-19 pandemic cast a spotlight on the role smart HVAC systems play in preventing the spread of airborne viruses. But with the increased need for energy efficiency and cost-savings, which is getting more quantifiable by the day, the smart HVAC market will have its moment in the coming years. Let’s hope more building owners finally realize it.

Image - Design