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Nuveen on why tech is enabling better ESG performance

Nuveen Real Estate’s Abigail Dean and Jack Sibley discuss the potential for tech innovation to reduce emissions, increase energy efficiency and provide a better working environment with Helena Olin of AP2.

This article was sponsored by Nuveen Real Estate. It appeared in the Sustainable Investing supplement alongside the October 2019 issue of PERE magazine.

Abigail Dean

Across the real estate sector, technological innovation is changing the way buildings operate, improving the construction process and developing properties that can contribute to protecting the environment for the future. Although the sector has traditionally lagged behind others when it comes to harnessing the benefits of technology, change is afoot. But do the benefits of having greener buildings outweigh the considerable costs of implementing the tech changes required to stay ahead of the game when it comes to delivering on sustainability? Nuveen Real Estate thinks so. The firm has committed to reducing the energy intensity of its portfolio by 30 percent by 2030 and will achieve that, in part, by implementing technological improvements. PERE’s Rhiannon Curry went along to find out more from the firm’s real estate head of sustainability, Abigail Dean, technology and innovation strategist, Jack Sibley, and Helena Olin of the Swedish national pension fund AP2.

Pace of change

Helena Olin

Helena Olin, AP2: The sustainability agenda has increased significantly in the last few years, and enlightened investors are more concerned with encouraging their managers to implement green changes. From our perspective, the driver is environmental. In the Nordics, it is particularly high on the agenda for both the government and the public. There is growing public awareness of climate change issues. And we are now seeing the increasing use of technology to monitor sustainability performance in property assets.

There has also been a greater concern with well-being in properties, as companies seek to improve the working environment through air quality, for example.

Abigail Dean: Improving user experience for building occupants, with a focus on both sustainability and technological innovation, will drive returns for investors. At the very least it reduces the operating costs of buildings. Tenants expect to see this technology in prime property assets. This might include LED lighting and more sophisticated building management systems, which allow tenants to manage the temperature of buildings. But we are at the point where there is still some way to go and more exciting technology is on the horizon. The next few years are going to be really critical as we pilot more of those innovations and the industry starts to realize their value.

Jack Sibley: Investment into the sector is driving the pace of change. The amount of venture capital funding going into technologies and proptech as a whole, of which environmental sustainability tech targeting real estate is a subset, has grown exponentially over the last three years or so. Sustainability is probably one of the areas of proptech which is more mature than others.

HO: And the financial benefits of improving the sustainability of buildings are beginning to emerge. We think sustainable buildings are going to give us a better return going forward. Our properties that are more sustainable than others are getting higher rent, less vacancy, a better return, and the cost of operating them is lower. Alongside cost, improving the green credentials of buildings builds a more resilient portfolio and helps meet wider corporate goals. Adopting these changes takes planning over a number of years.

AD: Other parts of the real estate industry have been slower at embracing change. Real estate is quite an illiquid asset class with a long hold period and this can mean things change a lot less quickly. Also lease lengths can be quite long and so opportunities to upgrade between tenancies can be quite limited. Although REITS, listed companies and vehicles owned by institutions or pension funds are generally motivated to make changes to improve sustainability, many private owners are not. Tenants are not always explicitly demanding sustainable spaces, so the drive to change simply does not exist. I do think that kind of complacency will ultimately trip up those taking that approach, and it is important to differentiate and find out what will make our buildings better and our tenants happier, and that goes hand in hand with sustainability and technology.

More innovation to come

AD: One of the most exciting areas for me is around smart buildings and predictive maintenance. At the moment, a lot of buildings have technology that monitors when energy is being used and for what purpose, and can report that back to the managers of that building any areas that require improvement, such as lights being left on overnight or the heating kicking in too early. Where that is going to go over the next five years is, I think, being more proactive, using the data to maintain pieces of equipment in advance and work out when they might go wrong.

Effectively, buildings will manage themselves. Rather than someone having to go and turn off the air conditioning or increase the heating, the building will adjust its own programs to meet the optimum working environment using artificial intelligence. This has the added benefit of delivering buildings which are not only more energy efficient, but ones where the replacement or maintenance of equipment is optimized. This has savings for embodied carbon, and money savings as well.

Jack Sibley

JS: From that, digital twins, which model the real-life workings of a building, could help develop a more intelligent management system.

At the moment, we have lots of systems in buildings, but they are not all necessarily linked together, in terms of the building having a brain. That is certainly something we are beginning to see. This could be as simple as an IoT sensor, which measures the carbon dioxide and temperature in a particular meeting room, which after an hour triggers a higher airflow or lowers the temperature. Or it could be a system to monitor which desks are occupied and could be linked to the lift system to maximize efficiencies.

HO: AP2 is considering the use of renewables, such as solar panels on roofs, or battery storage, to improve buildings’ performance. We are probably going to go from centralized electricity to a distributed network. Battery use has the potential to stop emissions at source, and to enable energy to be produced more locally. There is potential to link these innovations with work being done on electric vehicles, where in the future the building might be able to take energy from car batteries, as well as charge them.

AD: The reality is, as we move toward a low carbon future, electricity becomes more and more important.

Data part of the equation

AD: Big data also has the potential to boost returns and safeguard investment. Assessing future climate change risk is still a relatively new concept for the property industry, but is becoming increasingly common. Although we have been very good as an industry at looking back, for example at areas which have flooded in the past, now we are looking to the future.

Analyzing data helps us to understand not only if certain areas are more risky to invest in than others, but what expectations we need to have for buildings in terms of what wind speed they can withstand, if we need better guttering or new facades, for example.

JS: In the future, this is likely to encompass the wider environment and not just the building itself. There is a growing realization that buildings do not exist in isolation, and that a threat to the city infrastructure represents a threat to the investment. It is going to be about understanding what the dependencies of these assets are. That could be whether the electricity generator is located on a flood plain or how the broadband reaches the building.

AD: Although technology offers some solutions, it is by no means the only way to make properties more sustainable. With existing buildings, you can use technology to optimize what’s there, and to make sure it is working as efficiently as possible. But when you are designing a building from scratch, if you want to develop a building to be low carbon and energy efficient, the passive features are just as important as the technological features.

And technological developments can only be implemented successfully if the skills contained in the industry keep up with the pace of change.

JS: Technology is only as good as the people using it. The next five years are about making technology as user-friendly as possible.

AD: Used the right way, the benefits are clear. Improving buildings with technology future proofs their value in the years to come.

Case study: 40 Holborn Viaduct

Nuveen Real Estate’s London-based property is a prime example of how activating a portfolio with smart alpha can enhance occupier experience, drive energy savings and optimize maintenance

The company partnered with Verco Advisory Services, and a smart proptech provider, Demand Logic. Described as the “FitBit for buildings,” Demand Logic transforms a ‘basic’ building of bricks and mortar into a living digital asset where energy data drives energy performance.

Nuveen developed a commercial model where the energy savings from the Demand Logic solution were guaranteed, underwritten by Verco Advisory Services. This de-risked the investment and ensured that its customers received the benefit of lower energy bills.

The project, first implemented in 2017, is on track to drive a 20 percent reduction in energy use over a four-year period.

Nuveen also worked with Arbnco to trial the use of temperature and indoor air quality sensors in the building.