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Why Aren’t Smart Buildings Worth More?

We all have a sense that a smarter building is a better building. Much like our phones, TVs, cars, and even refrigerators, buildings are being equipped with the connectivity and software that can help them be more efficient and adapt to their users’ needs. But despite the advantages that smart buildings have, what is still unclear is if they command a price premium over their less intelligent counterparts. Most of the studies around the impact on the value of a building’s technology revolve around energy efficiency. Lowering energy costs can certainly have a direct impact on profitability and therefore property value but there are plenty of smart building features that don’t directly reduce energy consumption. But for other technologies that provide for a better experience there is less evidence of their contribution to property value. It stands to reason that occupiers would be willing to pay more for smart building features, but how much more, and for which features is still unclear. 

One study done by Alfredo Hano for his master’s thesis at MIT examines how three different categories of buildings, connected, green, and smart, perform versus a control group of (for lack of a better term) dumb buildings. He actually did find some evidence of a premium. When it came to rental rates, “smart” properties commanded a 37 percent premium compared to “green” properties which had a 20 percent premium, and “connected” properties which didn’t seem to have any premium at all. The evidence for smart buildings selling for more was a bit less conclusive, which is to be expected since there is less data for building sales than leases. The report said that “only smart, connected, and green show a positive and significant coefficient, transacting at a 44 percent premium.” 

As well-intentioned as this study is, it has a number of problems. The first is the fuzzy definition of what it means for a building to be smart. The study defines it as buildings that “currently have installed one or more smart amenities that go beyond sustainability and aim to improve the occupier experience.” That can mean almost anything. Who knows if a building with little more than an informational digital display in the lobby was grouped into the smart category? For the research to be truly conclusive, it would need to break the different types of smart building features down and study the effect of each on price. The study is also now six years old so it likely doesn’t show the current market conditions, but it is likely that the desire for advanced buildings has only increased since it was written.

Despite the evidence of a “smart premium,” there are still many that doubt that intelligent building systems can significantly increase the value of a building. One of those people is L.D. Salmanson, co-founder of Cherre. He works with real estate companies to harness their data to understand correlations like this. “The buildings with technologies like tenant experience apps tend to be newer, so it is unclear if the premium they get is because of the tech or just because they are just nice, new buildings,” he said. “I have no doubt that technology that can help reduce energy use can add value but for other types of smart building tech, I would need to see evidence showing that a building saw a bump in rental or sales price after they installed new tech.”

The reason Salmanson doesn’t think that many buildings get a premium for their brains is because of what he describes as the Japanese toilet seat dilemma. In many countries, Japanese toilet seats are not expected. Most people wouldn’t pay more for them when considering a home purchase—or even a hotel room stay. But in Japan, where high-tech toilet seats are a standard feature, not having one has a negative impact on the value of a property, both perceived and real. “For smart building features to translate into value we have to get to the point where people are so used to them that they notice when they don’t exist and that just isn’t the case yet with many smart building solutions,” Salmanson said.

Smart building features require an investment in the property, one that might not pay back immediately. This creates a barrier for many property owners, especially those that only plan on owning the building for a short amount of time. Many commercial real estate owners fall into this category because many only plan on holding onto a property for the period of their loan, which is typically between five and ten years. The owners that have been the most aggressive when it comes to installing technology in their buildings are generally ones with a longer investment horizon. One such company is The Durst Organization, a family run NYC ownership group that is over 100 years old. “We have a long-term hold mentality so we usually look at the benefit of an upgrade over twenty years, which is the normal predictable life of a mechanical system,” said Mark Domino, Director of Digital at Durst. 

Domino uses a “triple bottom line” approach to spending for smart building technologies. The first benefit of investing in smart building tech is an improvement in NOI, the second is a better building experience. Technology that makes a building easier to use or more pleasant to occupy can translate to lower turnover, lower vacancy, and therefore a higher profit margin. The last pillar of the strategy is sustainability. “We have our own sustainability ethos about leaving every space better than we found it, but more and more we’re seeing that tenants want to know that their offices are aligning with their own sustainability and carbon reduction goals. We are starting to see them pay more for those types of spaces,” Domino said.

Another reason that smart buildings are worth more to owners with a buy-and-hold strategy is that the data that they collect can be the basis for improvement. The pandemic has already caused an enormous shift in how we use office buildings and it is likely not the last we will see in our lifetimes. Collecting robust data on building performance and occupier preferences makes buildings more resilient against the inevitable changes in market sentiment. 

With so many more ways that smarter buildings can be more useful to owners and occupiers, it is hard to make the argument that they should not be worth more. But right now, when buildings are appraised or underwritten, little value is given to the technology stack that it runs on. For intelligence to one day be a factor in building value, the property industry needs to have a standardized process for calculating the added benefit of different types of technology. The basic attributes of buildings haven’t changed much in the last few thousand years but the technology inside them is vastly different. It is now time for our understanding of property value to evolve along with that technology, especially as the tech becomes increasingly popular with the companies that buy and lease buildings.

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