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The Case for a Smart-Building Stimulus

As the country begins its recovery from the Coronavirus pandemic, it’s becoming clear that the federal government will initiate additional economic stimulus plans. There are plenty of ideas about where this money can be best applied, but what if we had a smart building-focused stimulus plan? One that includes investment in sensors, data, and analytics, coupled with traditional operational systems, to reduce costs and improve health and wellness? This investment in building technology would upgrade our buildings to do things like enable heating and cooling systems to run based on occupancy by floor and even by room. This would help individuals in those spaces be productive and healthy as well as greatly reduce our buildings’ carbon footprints, save energy, and reduce maintenance expenditure. In light of the airborne transmission risks of coronavirus, such an approach also would enable many businesses to return to some sense of normalcy.

Directing federal investment towards commercial buildings would accelerate the adoption of critical technologies and generate a large number of jobs. Similar stimulus plans are being developed in Europe, which is working on a green stimulus plan that includes a focus on building energy efficiency. But the opportunity is much larger than just energy reductions. For example, the Government Accountability Office (GAO) reports that there is a great need to upgrade many of the operational systems and infrastructure in public school districts (including HVAC, lighting, roofing, etc). Nearly 36,000 school districts require HVAC upgrades and 24,000 are in need of lighting upgrades. Why not embed motion and air quality sensors in LED lights to optimize the ventilation in these buildings? 

Many smart building technologies are commercially available, but are at the front end of the adoption curve. Industry observers have noted that the adoption of these technologies is inevitable, as owners and operators of buildings will need to convince workers, students, and shoppers to come back and feel safe. But do all these enterprises have the money they need to make these improvements? Government funding would solve the health challenge and deliver long-term economic benefits by catalyzing the smart building technology landscape. 

Why is this a good way to jumpstart the recovery while benefiting society? Buildings are a significant part of our economy and society at large. We spend 90 percent of our time indoors. Employment in commercial real estate, a subset of all buildings that could adopt smart technologies, in 2019 contributed 9.2 million jobs, $1.14 trillion in GDP (of a total U.S. GDP of $21 trillion), and $396.4 billion in wages, according to the NAIOP Research Foundation. More specifically, the NAIOP report estimates that there are 26 million jobs supported by construction of all types of buildings and infrastructure. And, NAIOP estimates that there are another 4.45 million jobs that indirectly support the ongoing operations of existing buildings. Together, this makes up about 20 percent of all jobs in the U.S. And, NAIOP also has reported that real estate as a category accounts for 13 percent of total U.S. GDP.

These estimates don’t include upstream and downstream economic impacts. Many OEMs supply equipment and services to buildings. In HVAC alone, according to the Bureau of Labor Statistics, there are nearly 368,000 mechanic and installer jobs, a segment that already was expected to grow significantly in the years ahead. Electricians, a comparable role in buildings for different equipment and systems, number over 700,000 jobs, with significant expected growth. These roles are among the most critical to support the ongoing maintenance of buildings. Government funding to improve these buildings would increase demand for these jobs. 

Specific opportunities for federal funding in buildings

What form does a smart building stimulus take? What programs and initiatives are included? How should the money be spent to have the largest impact? A smart building stimulus could be focused on a range of activities. The goal is to upgrade and improve many buildings so that they are healthier, less costly to operate, and prepared to deliver work and living environment of the future. There should be a policy discussion about the specific proposals and initiatives, but here are some initial opportunities: 

Performance contracting would provide capital-light retrofits that are paid back with energy savings 

This is an effective and common model in which building upgrades are financed by a vendor or installer. A portion of the ongoing energy savings is used to pay back the upfront capital. The rest flows directly to the building owner. Performance contracting is heavily used by the federal government, and the model could be expanded to focus on health benefits (improved ventilation, for example). The health benefits would be harder to quantify directly, though they would help businesses get back to a state of normalcy. The performance contracting model is common among public organizations (school districts, governments, universities) which tend to occupy their buildings for decades (or longer). But, private businesses, especially smaller ones, will not enter into a 20 to 30 year long contract. The government could back a retrofit program for private organizations that provides upfront capital in exchange for an ongoing share of the energy savings.  

The stimulus could offer a Payroll Protection Program (PPP) type of incentive: The upfront capital that is provided by the federal government is forgiven as long as the building owner does reduce energy spend and applies a portion of this savings to ongoing building equipment maintenance and measurement and verification to validate the savings. The energy efficiency opportunity is significant. Research from the Rockefeller Foundation and Deutsche Bank research indicates that nearly $300 billion could be invested in energy efficiency in buildings. The benefits of such an investment are profound: $1 trillion in energy savings over ten years and 3.3 million jobs created. 

More innovation in smart building technology will drive increased adoption and support new market entrants

All nations want to be leaders in industries of the future, and next generation building technologies should be a focus area, especially given the increases in population and urbanization occurring in many nations. Building technologies and innovation should be viewed as a strategic imperative, pandemic or no pandemic. The playbook has been used before: Many innovations in buildings over the past 100 years happened in America, such as the elevator and the thermostat.

For example, a recent Fast Company article noted that elevators can add touch-free technology, enabling each passenger to enter a destination floor on a personal mobile phone. But, the technology costs $150,000, which is relatively expensive compared to the cost of the elevator. More competition and innovation in the industry likely would drive the costs down for some of these novel smart building technologies. Some centers of innovation already have proposed stimulus packages focused specifically on infrastructure, with dedicated funding to startups and pilot projects. Funding more centers of innovation, which can partner with small and large firms, identify new technologies, and pilot them, is a proven model. The U.S. General Services Administration operates a Proving Ground program that tests and documents use of a range of building technologies. The program could be scaled significantly, offering more funding for more technology types and use cases, across a wider range of buildings. Today, the program is focused on U.S. federal government properties, but could be extended to a range of other asset classes: public buildings, small businesses, and other mission critical spaces such as hospitals and educational facilities. 

The industry expects a severe talent shortage in the years ahead, driving the need for new training and career development programs

A number of key building vendors are investing in job training programs due to the expected shortage of facility management talent.  The International Facility Management Association made a call to action in 2017 and noted that there is a “critical talent shortfall” and the industry “desperately needs [an] influx of new blood”. The average age of facility managers is almost 52 years old. It is difficult to attract young talent to building operation-focused roles. It’s known in the building industry that younger talent seeks to work at more modern and technologically-robust  buildings. This author wrote an article a few years ago exploring the problem and potential solutions, but modernizing technology in these buildings is certainly one approach.

There are other efforts to draw recent graduates into building and facility management. Stacks and Joules is a growing training program targeted at high school age students. It has a curriculum developed in concert with MIT and Rose-Hulman Institute of Technology and has relationships with firms that provide graduates with internships and full-time jobs. This program and its successful playbook could be scaled with more support. Similarly, Johnson Controls partnered with Lincoln Tech in 2018 to help graduates find jobs with the building technology firm, which was driven by the expected talent shortage. In addition, jobs created in building management, and the associated value chain, are unlikely to be offshored since the buildings will remain in our cities and there’s significant infrastructure located in America to support the industry. In addition, the technology developed by leading HVAC, controls, and industrial automation firms would be exportable overseas. Many of those firms already are based in the U.S. or have significant manufacturing and research and development facilities here.

Coronavirus: A call to action?

Buildings are a vital part of our recovery amid the coronavirus pandemic. While research on coronavirus continues to adjust our understanding, and this author is not a scientist or epidemiologist, a focus on mitigation of virus transmission in buildings is a priority. A range of studies note that the risks of transmission are higher indoors. And, it does appear that airflow and ventilation can mitigate the impacts of viruses such as SARS CoV-2. ASHRAE, the American Society of Heating, Refrigerating and Air-Conditioning Engineers, has stated that “Ventilation and filtration provided by heating, ventilating, and air-conditioning systems can reduce the airborne concentration of SARS-CoV-2 and thus the risk of transmission through the air.“ Current CDC guidance includes two suggestions about HVAC: increasing ventilation rates and adding more outside air to the system. There is some research indicating that better air flow may have an impact on reducing the number of aerosols in the air. HVAC systems can be effective at increasing airflow in indoor spaces. Moreover, technology in buildings can be used to measure occupancy, which can help encourage social distancing, and direct cleaning crews to indoor areas most used (while spending less time on those areas that have not been used). 

The concerns associated with transmission of SARS CoV-2, especially indoors, led many governments to shut down their economies, which has had significant ramifications. McKinsey estimates that 1/3 of all workers in the U.S., Europe, and other nations may be at risk of “reduced income, furloughs, or layoffs as a result of the crisis.“ Of course, many of these people work inside buildings, and they likely won’t return at full capacity until it is safe to do so. Fifth Wall, a real estate venture capital firm, has a good summary of why a retail stimulus is important. The article is focused on a recovery that focuses on retail, which was hit the hardest. However, the Fifth Wall write up doesn’t mention that the buildings containing these retailers and restaurants may require retrofits to ensure that they are safe for occupants (at least filled at a “pre-covid” capacity).

For a business that has just been closed for a few months, reducing costs with upgraded operational systems can help the firm get back on its feet. Reducing energy use is a proven approach, but would require either new equipment or new technologies to improve operational patterns. Many businesses, especially small enterprises, cannot afford these significant upfront capital costs and won’t be able to pay for these necessary upgrades. Aligning a public health crisis with an existing talent shortage would be an effective approach to catalyzing economic growth. It also would get some people back to work and others back to shopping and spending money.

Others also see the value in investing in infrastructure. Alphabet portfolio company Sidewalk Labs recently spun off its infrastructure unit, Sidewalk Infrastructure Partners, which raised $400M and seeks to rebuild and “future proof” our infrastructure. Future proofing may be a synonym for “make technology-enabled,” since upgrading software is far less complicated than ripping and replacing physical things. Venture capitalist Marc Andreessen’s recent blog post “It’s time to build” even notes: “We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?“ 

The economic case

The goal of a government stimulus package is to generate economic growth. Other benefits are important, but economic benefits are paramount. Investing in smart technologies deployed throughout buildings is a good starting point. As noted above, there are going to be a large number of jobs available in building management in the coming years, mainly due to retirement. Supporting training programs will put people to work in high-demand industries. 

Many buildings are old and are in need of repair/renovation. The GAO report cited above found that nearly 41 percent of K-12 schools are in need of an HVAC update. Primary and secondary schools represent just a fraction of commercial buildings in the U.S. Individual real estate owners will benefit from incentives to invest in technology to efficiently operate their buildings. This will reduce operating costs, enabling more investment in the assets. It also serves as a good response should vacancy rise and rental income decline. The lost rent would make it difficult for buildings to make the upgrades to their buildings and also would likely lead to reduced employment in the industry—part of a second wave of economic contraction. There are some warning signs, with the American Council for an Energy-Efficient Economy (ACEEE) noting that many of the 2.4 million jobs in energy efficiency are at risk due to the pandemic.

Moreover, Deloitte’s 2020 Commercial Real Estate Outlook surveyed the industry, finding that, in the event of an economic slowdown, 42 percent of respondents would slightly increase technology investments, while only 25 percent would slightly slow them. About a quarter anticipated no change, five percent thought investments would significantly increase, and three percent of respondents thought investments would significantly decrease. Many commercial real estate leaders are starting to understand the value of investing in technology and a stimulus can accelerate this adoption.

The innovation case 

Many industry observers, including the U.S. Department of Energy National Labs, would argue that smart building technology has been on the cusp of crossing the chasm for years. While moving in the right direction, more government support would accelerate this trend. Additionally, many investments made by the government could serve as enablers to entrepreneurs and other innovators, unlocking new revenue and helping to create even more jobs. There will continue to be increased demand for air conditioning and conditioned indoor spaces, due to rising temperatures, in addition to demand for better airflow, ventilation, and filtration for health/wellness. And, especially in developing economies, general trends around urbanization will lead to more building construction. There is a bright future for technologies and innovations supported with a smart building stimulus. 

But despite the advances, construction and real estate typically invest only a small portion of revenue on research and development. The Building Energy Data Book, which has not been updated since 2011, reports that the construction industry spends just 1.2 percent of sales on R&D, while private industry in general spends 3.2 percent (manufacturing and the service industry spend 3.1 and 3.3 percent, respectively). In addition, of all private R&D in the U.S., the share spent on energy related advances is less than many other developed nations. This article from 2014 highlights this issue, which remains true today. This stimulus would create a bigger market for these research advancements.

How can a stimulus accelerate innovation? For example, many buildings still have older, proprietary protocol-based controls that are hard to connect to. This means that any new innovative firm needs to invest additional time and money to deploy its technology in each building. A stimulus could encourage the use of open protocols such as BACnet or data architecture standards such as Haystack and Brick. These foundational steps will make it easier for small and innovative firms to deploy their technologies in buildings, lowering a barrier to entry for new entrants. More competition will drive innovation and improve outcomes for many buildings. Additionally, it has the potential to reduce implementation costs to building owners and operators, which will make them more likely to adopt advanced technologies. 

Additionally, buildings have increasingly been used by occupying businesses to support innovation, though not focused on building technology advanced specifically. JLL, a major real estate services firm, cited this as the number one reason for in-office work. A recent article about post-pandemic office use notes: “This episode has proven that many people can work independently from home, but true innovation often requires people in a room together solving a problem.“ The office is important to many businesses, so we must invest in making it safe to return.

The sustainability case

Just like investment in renewable energy, a smart building stimulus has a strong sustainability story. Buildings consume about 40 percent of all energy in the U.S. and generate about a third of all carbon emissions. More Americans work in real estate than in clean energy. As noted above, commercial buildings account for about 9.2 million jobs (this does not include construction or operations of public buildings such as universities, hospitals, and government buildings) while clean energy generates 2.6 million jobs. Renewables benefited significantly during the last recession, due to government support. But, a building focus may be more beneficial, because it would reduce overall energy consumption, reducing the total supply of renewables required, while also shifting demand, so there is less need for ‘peaker” energy resources to support the hottest days and when the grid is under the most stress. One could argue that the grid and renewables are the foundation, but a buildings-focused effort would reduce the overall scope and demand of that base. And, stimulus funds directed towards renewables and smart buildings are not mutually exclusive, with some calls to invest in renewables also highlighting building efficiency as a related opportunity.

Additionally, these energy efficiency investments also reduce carbon emissions from one of the biggest sources of CO2. While retrofits and other hardware investments can deliver significant energy and carbon benefits, smart building technologies can ensure that these savings persist, which is a significant challenge when running large, complex buildings. Monitoring performance, over time and using granular data, is a core benefit of next generation smart building technologies. 

Research from the U.S. Department of Energy Labs notes that technology for energy management can save 10-20 percent of total consumption. Some specific buildings will save more, and some technology packages will be more effective. Moreover, technology can improve the productivity of occupants: Individual control of temperature and light levels, improved indoor air quality, and even office design that encourages more “collisions,” or unplanned encounters that may happen more often in hotel desk space, all drive increased productivity. While it is difficult to quantify this benefit at scale, a stimulus investment in smart buildings would create a flywheel effect in which more data on productivity becomes available, pushing more building owners and operators to make subsequent investments.

The political case

Another important aspect of a smart building stimulus is its ability to attract political support. While this article is not meant to be political in nature, support from lawmakers is critical. A building-focused initiative has aspects and benefits that can be supported on both sides of the aisle. The energy aspects of the stimulus will reduce operating costs, carbon emissions and generally fit in with broader sustainability and climate change goals. A recent survey from Data for Progress found that among all voters, 68 percent support energy efficiency grants for small businesses. Only 18 percent of voters strongly or moderately oppose such an initiative. Moreover, in early July, the House of Representatives passed the Moving Forward Act, which provides $1.5T in spending for a range of infrastructure and environmental related activities, including more energy efficiency for homes, schools, and public buildings. One could argue that this funding could be expanded to small businesses and also support health-related expenditures related to coronavirus mitigation.

This stimulus also will create high-paying and hard-to-offshore jobs in the U.S. Two key building components that can benefit from smart technology, for example, are air conditioning systems and elevators. These still are manufactured in the U.S. at a large scale. Goodman, owned by Japan-based Daikin, still manufactures all of its HVAC equipment in the U.S., employing thousands in Texas. Daikin also has started manufacturing some of its own variable refrigerant flow (VRF) technology at this site, bringing this intellectual property from Japan. Key U.S. based HVAC firms Carrier, Trane, Johnson Controls (York), and Lennox all have manufacturing plants in the U.S., especially for the more efficient high-end and commercial equipment. Other firms also operate U.S. based manufacturing and some foreign companies, like Carel, which in 2019 invested in U.S. based manufacturing and significantly expanded a plant that provides air conditioning controls and humidification systems. Survey data indicates that customers in the U.S. prefer to buy “made in USA” HVAC equipment, with just over 50 percent saying that they would pay more for such equipment. And, Otis, a U.S. elevator manufacturer, still manufactures here and even brought jobs back from Mexico to be closer to its demand in the U.S. Peers Kone (based in Finland), Schindler (based in Switzerland), and ThyssenKrupp (based in Germany) all have maintained manufacturing in the U.S. for decades.

Additionally, there are benefits to small and large businesses. Small businesses, such as local restaurants and retailers, will benefit from a clear path to reopening at full capacity and without concerns for guest wellness. Startups and other technology innovators also will see increased demand for their services. Politically, many elected officials in both parties talk about improving and rebuilding infrastructure as a smart investment. While they usually point to airports, port facilities, and other high profile facilities, investments across other buildings will pay similar benefits, especially when part of our health and economic-focused pandemic response. And, stimulus investments should be focused on the future, not just rebuilding static, “hard” infrastructure assets.

The regulatory case 

Over the past few decades, regulations and building codes generally have driven more energy efficiency and other occupant-facing benefits. For example, ASHRAE published a position document on energy efficiency in buildings in 2019, noting, “additional energy use efficiency improvements are not only achievable but often the most cost-effective strategies in both new and existing buildings to achieve a more sustainable world.” A few dozen municipalities now require larger commercial buildings to provide their Energy Star scores each year, to benchmark overall energy performance. (See here for Energy Star’s interactive map of specific programs.) 

Moreover, the New York State Energy and Research Development Authority (NYSERDA) has launched a program that funds the deployment of real-time energy monitoring solutions in buildings. The program, which is part of New York’s ambitious Reforming the Energy Vision (REV) plan, funds the upfront deployment and some ongoing costs for software solutions. Overall, these programs have been successful and they can provide a roadmap for other, federal government-led initiatives. Utility incentives are another source of ideas and tools that could drive smart building adoption. Regulation and policy tools focused on energy efficiency and building retrofits are not new, so a smart building stimulus would have many real world case studies and initiatives that would provide examples. 

The way forward 

A smart building stimulus is just one potential way forward for our economy and our built environment. More discussions must occur among policymakers and other stakeholders. A smart building stimulus would be politically unifying. The job growth opportunities are impressive. The result would be more advanced buildings, something that would be tangible to many Americans across the country. But, investing in smart technologies in buildings appears to be a winner to catalyze economic growth, respond to the pandemic, and set America up to remain a leader in building and facility technology for the future. Stimulus investments should be bipartisan, and in this case should also improve public health and wellness and get Americans back to work. It is the author’s hope that this article will raise awareness of these opportunities and advance the discussion of these opportunities. 

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