Smart building solutions have been in place for many years and are making a big impact in resident experience and in property operations. In the residential market, smart building technology has been accelerated through products developed by Nest, Ring and other consumer technology companies. Nest was an early smart device company that helped smart building devices move into the mainstream back in 2011 following the launch of their 1st generation smart thermostat. Since then, Nest and a host of other consumer product companies have launched products that enable advanced smart home capabilities in the residential market. One key enabler of these products is that they take advantage of residential WiFi that most homes have, giving the last-mile internet connectivity that is required for true smart building applications.
Rentals and Multifamily properties have lagged in the adoption of smart building technology primarily because of the last mile internet connection challenge. Many rental properties lack a landlord-supplied WiFi connection, which makes the use of traditional residential smart home devices very difficult because tenant WiFi networks are typically not accessible to the landlord. The tenant can take advantage of the smart technology, but the landlord cannot. An additional downside is when the tenant moves out, the internet connection is lost. Managed building WiFi solutions are becoming increasingly popular in new large multifamily developments, but smaller buildings typically cannot support the cost associated with these managed networks. This has slowed down the adoption of smart building technology in this overall segment. Now, due to ubiquitous internet connectivity through cellular, 5G, LoRa and other choices, smart building technology has moved into the mainstream in the multifamily rental world.
ePropertyCare and other smart building platform providers have targeted the rental market with solutions that combine the best of residential smart devices with a cellular backend and integrated software platforms to make them accessible for multifamily, commercial, retail and hospitality applications. Broadly speaking, smart building solutions cover a few key modalities across all of these segments:
- Access control: Remote control of building and unit doors. This can take the form of pin codes, mobile App control, biometric credentials, key fobs and more. This eliminates the need to give out traditional keys, which improves security, safety and convenience for all, and lowers cost.
- HVAC monitoring: Remote control and monitoring of HVAC systems and temperature through the use of sensors and connected thermostats. This reduces energy bills, helps protect assets from damage, and gives convenience to the owners and tenants. ESG is becoming an increasingly important part of building operations and management, and controlling energy costs is becoming a very higher priority for most building owners. HVAC can account for over 35% of a buildings energy consumption
- Water leak protection: Detection of water leaks, burst pipes, running toilets and other water events that can lead to property damage and wasted water. These can take the form of water sensors, electronic water shut off valves and water flow monitors. This also contributes to ESG by reducing water usage.
- Lighting control: Controlling and automating common area and unit lights to reduce energy costs, while also creating a safer and more convenient environment. Modern systems are also utilizing occupancy detection to tie into lighting controls. These also have a very big ESG application because lighting can account for over 20% of building energy costs.
- Video: Video monitoring has been around for a very long time with CCTV and analog cameras. New generation IP cameras lower costs, provide better remote connectivity and utilize analytics and rules to not just record footage, but trigger smart alerts and actions that can help the building owner take action. There are even virtual guarding applications that allow remote call centers to monitor remote footage and take real-time action.
- Security / Fire Protection: Monitored alarm systems to detect fire, unauthorized entry and other dangerous building conditions have also been around for a long time. Modern systems have transitioned away from landline approaches to cellular, which reduce cost and increase reliability.
One goal of smart building technology for multifamily is boosting Net Operating Income (NOI). This is defined as building revenues minus expenses for a building, and is a key determinant of the underlying assets value. A building with a higher NOI will sell at a higher price than the same building with lower NOI. Without a clear path to cost-savings (time and/or money) or higher revenue it would be challenging for building owners to justify the investment in technology. We see four areas where smart building technology can impact NOI to make it an attractive investment for building owners.
- Increase rent
Smart Building Technology is a desired amenity, especially in Class A and Class B properties. The amenity-oriented portions of smart building technology, such as keyless entry, smart thermostats and lighting controls can help landlords achieve higher rents. We’ve seen anecdotal examples of landlords getting 5-10% higher rents as well as longer leasing cycles. The reason for this is once residents get used to the convenience of not carrying around keys and being able to have instant control of their apartment it is hard to go back to the old way of doing things so they are willing to pay more and increase renewals.
An analogy I like to draw is the transition from traditional keys for automobiles (that are inserted into an ignition), to wireless key fobs that can sit in your pocket and allow you to push a button to start a car. Once you get used to the new way of doing things it is very hard to go back to the old way. I think smart access control for apartments will be the same. Once tenants get comfortable they will stay longer in their leases, pay more, and expect this amenity in future apartments.
- Decrease utility expenses
Smart HVAC, lighting and water solutions can reduce utility expenses for owners by giving real-time awareness of consumption and employ automations to automatically reduce usage through smart rules. For example, imagine a unit that was recently vacated by a tenant and the AC was left set to 65 degrees in the middle of a Texas summer. This would run until someone was in the unit and noticed that the AC was set too low. Think about the wasted energy a landlord would have to pay for potentially weeks, when a smart automation with the property management software system could automatically detect a vacant unit and set the thermostat to AWAY mode. These savings can extend to water and sewer bills by detecting running toilets and leaks instantly rather than waiting for a big water bill to hit to know something was wrong. They also extend to lights being left on in vacant units and common areas, which can also be triggered to go off by knowing the unit is vacant. These are some of the ways Smart Building technology can impact utility expenses for both an owner and a tenant.
- Reduce repairs & maintenance expenses
By having real-time awareness of issues a landlord can now instantly take action to protect a property before damage can occur. Consider the example shared earlier of a heating failure. By getting real-time awareness of an HVAC failure the landlord can more efficiently service it and reduce after-hour emergency calls. Take the example of a water leak. By catching this instantly and being able to shut off the water to the unit through smart building technology, a landlord can prevent water damage and even worse, an insurance claim. There are also benefits to keyless entry for saving time during work orders for maintenance personnel because they don’t have to spend time picking up and dropping off keys.
- Reduce insurance expenses and claims
More insurance carriers are providing policy discounts to create incentives for the adoption of smart water protection. Water claims are a $2.5B annual problem for insurance carriers in the US along, but with new-generation PropTech solutions this can be mitigated or eliminated. Take the example of the deep freeze that Texas experienced in the winter of 2021. There was an incredible amount of water damage due to burst frozen pipes, some of which could have been prevented had smart solutions been employed that could detect the burst and proactively shut off the water.
Overall, increasing revenues and decreasing expenses boosts net operating income for an owner which leads to an increase in equity value for the underlying investment. Equity value = Annual NOI divided by Cap Rate, so with a higher NOI through Smart Building technology a return on investment with a defined payback period can now be shown. In addition to the tangible financial benefits there are also some intangible benefits such as improving tenant / landlord relations. By having a streamlined flow of information that allows landlords to quickly respond to problems or even better, eliminate problems in advance, late-night emergency calls that are disruptive for both the tenant and the landlord can be greatly reduced or eliminated.
