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Why your next project should be an Intelligent Building
In addition to being a better building to live, learn, work and play in it can also be a very satisfactory investment for any owner.

Paul Ehrlich, P.E. Building Intelligence Group
Contributing Editor

As published in May Issue
 

Great news! You have been assigned to the team to do concept work and layout on a new project. The new facility will either be a new building coming up out of the ground, or perhaps a major retrofit or repurposing of an existing building. You have been assigned to the team as the expert on building systems. It seems like everywhere you turn you are hearing about the concept of an Intelligent Buildings. So is it the right time to promote this concept to the design team? Will they be receptive to making the added investment to make this an Intelligent Building? The answer to the first question is yes – and the answer to the second question is that you will need the proper tools to justify the investment. Here is how to analyze and calculate the financial benefits to an Intelligent Building.

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Economic Impact:

Any Intelligent Building project must provide a significant financial return. It is not acceptable to consider investing in intelligent attributes of a project, unless you can prove that there will be an acceptable return on investment. So how do you calculate the ROI? The answer to this will depend on the project, ownership structure and a series of assumptions. Lets start by looking at where we will gain returns on making a project intelligent. Intelligent Buildings provide returns to their owners through the following areas:

  1. Lowered Operating Expenses: Adding intelligent features to a building will allow it to operate more efficiently reducing both energy usage and expense. In addition Intelligent Buildings provide tools to optimize the staffing and operations of the building allowing for improved efficiency and a potential reduction in the labor required to operate the building. Reduced operating expenses are fairly easy to estimate and document, and are ongoing expenses that can be reasonably expected to steadily increase into the future. Investments in tools and systems that reduce energy usage, allow for better energy purchasing, and reduce the labor required to run a building have a high degree of certainty in paying off as estimated.

  2. Improved Occupant Experience: The second place that we see a return on incorporating improved building systems and technology is in providing a better experience for the occupant. This means providing a safe, secure, comfortable environment that has the necessary technology to achieve the mission of the facility. Many surveys by groups such as BOMA and IFMA show that over 20% of occupants are not satisfied with the current comfort of their space. Providing improved comfort, both in physical (temperature, lighting, humidity, IAQ) and emotional terms (confidence, convenience, empowerment, assurance) allows occupants to focus on their mission in the building and not spend time focused on the lack of comfort. Improving occupant productivity even a few minutes a day provides for a dramatic return to the employer.

Calculating Economic Impact:

CatNet Systems The ROI obtained for a project also depends on the ownership structure of the building. Buildings that are owner occupied, such as schools, hospitals, corporate and government facilities, directly accrue both the benefits both of reduced operating expenses as well as the improvement in occupant productivity. Calculating the returns are fairly straight forward. Buildings that are owned by a developer and leased out to tenants become a little bit more complicated. In the leased building model the building owner typically accrues the benefits of reduced staff expenses. Energy costs are often passed on as part of the lease to the tenants. Therefore any energy savings is seen by the tenant and not the building owner. Likewise improvements in the occupant experience are gained by the tenant and not directly by the owner. So why would a commercial building developer (or REIT) decide to create an Intelligent Building? The answer is that a building with improved technology, comfort, safety and productive space is more desirable to tenants. The expectation is that when a tenant has to select between similar buildings, that the one that is intelligent will tend to get better occupancy rates and improved rents along with fewer tenant concessions. The net result for the savvy developer is an advantage in buildings with improved occupancy. This coupled with the reduction in operating expenses provides for the ROI to the building owner.

Examples:

Let's look at some examples. In these examples we will analyze a hypothetical 150,000 square foot building. Inputs for this analysis have been gathered from industry sources and are shown in table 1. These inputs include construction cost, energy, operations, etc. They also include the average “employee impact”. This is the average annual fully burdened cost of each employee averaged over the space that they occupy in the building. It is interesting to note that the annual employee impact in this example is equivalent to 80% of the total cost of the building! The anticipated benefits of adding intelligence are shown in table 2.

Construction cost 1

$175 / SF

Energy costs 2

$1.57 / SF

Maintenance and operations3  

$8.00 / SF

Market rate rent

$25 / SF

Capitalization  rate     

5 – 10x (8 x used in this example)

Space per occupant4

369 SF

Average employee costs 
 - Salary cost5 
 - Average benefits6

$52,000 / year
 - $40,000
 - $12,000

Employee impact

$140 / SF / year ($52,000/369)

Investment for  Intelligence7

$4 / SF

Table 1 - Inputs

Sources:
1. “Saylor Commercial Square Foot Costs”; 2004. Numbers are for large urban markets and vary depending on location.
2. “DOE Buildings Energy Data Book”; 2004.
3. “IFMA Benchmarks III Report”, 1999
4. “IFMA Benchmarks VI Report”, 2004
5. US Department of Labor – Bureau of Labor Statistics. 2003 data.
6. Estimated at 30%
7. Authors estimate. Expected range $0 – 6 / SF

 

Result Impact Benefit (per SF/year)
Energy savings  12% $0.19
Operational savings 10% $0.80
Employee productivity improvement 1% $1.40
Rental rate over market 4% $1.00
Occupancy improvement 4% $1.00

Table 2 - Estimated Results:

In our first example (see table 3) we will look at a building that is owner occupied. The initial investment is an increase in first cost of the building of $600,000 ($4/sf). We would anticipate that we would see returns from two different areas. Our energy and operational savings would total approximately $1/sf. Looking at this along provides a simple 4 year payback and an ROI of 95% over 5 years. An adequate return but certainly not earth shattering. If we add in the impact of a 1% improvement in employee productivity then the ROI goes up dramatically.

Energy and operational savings only
- Investment
- Savings
- Simple payback

$600,000 ($4/sf)
$150,000 / year ($1.00/sf)
4.0 years ROI 95% over 5 years
Owner Occupied Building
- Investment
- Operational savings
- Occupant productivity improvement
- Simple payback

$600,000 ($4/sf)
$150,000 / year
$210,000 / year
1.7 years ROI 227% over 5 years

Table 3 - Owner Occupied Building

Our second example is a tenant occupied building (see table 4). In this example we will use the same investment inputs. In this case we will assume that the tenant is paying for energy as part of their lease and we will not take any credit for energy reduction. The return to the building owner comes in being able to have a building with better occupancy and higher rental rates. In our example we have set each of these at 4%. In an actual project we would also see potential savings in reduced tenant turnover and lower tenant improvement expenses. In this case we see a nice ROI. Interestingly for a building developer, an improvement in cash flow will ultimately result in an increased valuation on sale. In our example we used a market capitalization rate of 8. By decreasing expenses and increasing revenue the net result of making this an Intelligent Building is an increase to the annual operating income of $420,000. This improved cash flow will result on sale in a property value increase of $3.4 million ($420,000 * 8) for a net return of 560%. This is a hefty return on investment that is hard to beat!

Investment $600,000 ($4/sf)
Savings $120,000 / year ($.80/sf)
Rent premium $150,000 / year (4%)
Occupancy improvement $150,000 (4%)
Simple payback 1.4 years, ROI 265% at 5 years

Table 4 - Developer Owned Building

Conclusion:

So when you sit down with the team for this next project – take a serious look at making the investment to create an Intelligent Building. In addition to being a better building to live, learn, work and play in it can also be a very satisfactory investment for any owner.

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