PATRIZIA: Smart buildings from the customer perspective

With smart building technologies proliferating, Philippe Le Fort and Conan Lauterpacht discuss what investors need to know about the space.

This article is sponsored by PATRIZIA

Smart building technologies have received a lot of coverage as the next-big-thing in building operations, and rightly so. Today’s smart building startups have developed technologies that promise to reduce building energy usage, digitize maintenance and enhance tenant experiences.

What is less well-publicized, however, is the customer perspective. With so many solutions on the market (and more emerging every month), how do customers parse the space and prioritize specific technologies? And what can technology investors learn from this perspective?

To find out, PERE listened in as Philippe Le Fort, an associate director at PATRIZIA who leads the company’s smart building initiatives, and Conan Lauterpacht, a founding partner at Sustainable Future Ventures, discussed what it is that investors need to know.

How are you approaching proptech and smart buildings?

Philippe Le Fort

Philippe Le Fort: The leadership team at PATRIZIA recognized early on that technology will play a key role in creating a competitive roadmap for our real estate business. It also became clear that the diversity of our assets (more than €48 billion, including all major building asset classes and European markets) would make technology implementation a complex endeavor. To tackle this, an internal technology and innovation team was formally launched four years ago.

That team now has 14 full-time employees, including my team of three who are dedicated to smart buildings. To-date, our smart buildings team has piloted dozens of technologies and vetted hundreds more.

Conan Lauterpacht: In addition to founding the technology and innovation team, PATRIZIA has made investments into a number of proptech companies and proptech venture capital firms around the world. While these investments were initially driven by a desire to stay at the forefront of industry innovation, a key learning from the process was that founders and companies place a lot of value on our strategic value-add.

Conan Lauterpacht

As these insights accumulated through investments and internal initiatives, a decision was made to leverage our knowledge and access to technology companies to benefit our clients more broadly. This culminated with the launch of Sustainable Future Ventures, a proptech venture capital firm running third-party capital focused on enabling a more sustainable built environment. The firm has been set up to combine strategic value-add with the financial discipline and investment expertise of a traditional venture capital firm.

Does easier implementation equate to a better smart building technology?

PLF: Not always. Smart building technologies that target building owners are difficult to implement because they require buy-in from so many stakeholders – they seek to fundamentally change the way that a building operates. And while such solutions come with challenging adoption curves, they also bring tremendous benefits.

Some enable buildings to operate with fewer full-time employees, which is hugely valuable in a time when margins are being squeezed and building operations professionals are aging out of the workforce. Others can simultaneously increase building comfort and decrease building energy usage.

Implementing such technologies is the only way that building owners will be able to meet the increasingly stringent demands from their tenants. I mentioned our pilots earlier, and they are an effective way for us to validate the value created by a technology.

Ultimately, our smart buildings program is about futureproofing our assets and making sure that they are world-class not just today, but five and 10 years from now. That means looking beyond the easiest-to-deploy solutions.

As an investor, how do you view smart buildings?

CL: As investors, we start by separating smart building technologies into two buckets – those that are being sold to building owners (like software using AI/ML to optimize building system performance), and those that are being sold to tenants (like sensors that monitor workplace utilization). These two types of smart building solutions have very different sales cycles and business models. Building owners tend to be harder to sell into but stickier after a sale is made, so any benchmarking we do starts with a simple question – who is the customer?

As a customer, how do you view smart buildings?

PLF: On the customer side, it is important for us to distinguish between who is buying the technology and who is using the technology. In the case of smart building solutions for building owners, the customer is typically not the end user. Smart building solutions are almost exclusively deployed by building management teams, but it is asset managers who foot the bill.

When you layer in the time-consuming integrations that go along with building-centric technologies, portfolio-wide deployment becomes a lengthy process. Tenant-centric solutions such as the sensor technologies that Conan mentioned (where the customer and end user are the same) are quite a bit easier to deploy.

CL: We spend a considerable amount of time looking at smart building technologies that come from both “buckets” – building-centric and tenant-centric. As venture investors, we need to build conviction that a business has a plausible path to scale. For tenant-centric solutions, the shorter sales cycles make it easier to judge a business based on its revenues and growth trajectories – does their traction evidence strong product-market fit?

For building-centric solutions, a slightly different approach is required. Long sales cycles might mean that growth is slow right now, but several macro factors (looming emissions standards and increased tenant leverage in the hybrid working era, to name two) suggest that building-level smart building technology adoption is coming. This represents a huge, largely untapped market opportunity.

We are focused on identifying the companies that will emerge as winners in this space, and for that there is nothing better than prospective customer feedback. Some of our dealflow comes directly from Philippe and his team – their successful trials give us a critical data point in our due diligence. It also works in the reverse; we have introduced companies to Philippe so that he can run pilots in parallel to our diligence process.

Bearing in mind everything you have said about speed of adoption versus value-add, what are some specific technologies that you are excited about?

PLF: One thing that we keep coming back to is productivity. There is a frequently cited JLL rule of thumb that an average company will spend $3 per square foot per year on utilities, $30 per square foot per year on rent and $300 per square foot per year on employee salaries. If you, as a landlord, can help a company make their employees 10 percent more efficient and bring the employee number from $300 to $270, your leverage to command rental premiums is enormous. Smart building start-ups that improve air quality or occupant convenience have the potential to do just that.

Really, it all comes back to the occupants. It is easy to get bogged down by the complicated ecosystem of buyers and end users, but all technologies must ultimately be judged by the direct or indirect value that they create for building occupants.

CL: That is completely right. I would add that one of the main drivers of value for occupants in the next 10 years will be sustainability. As corporate office occupiers work towards carbon neutrality, they will demand that the buildings they occupy are aligned with their targets. This means that buildings without a focus on occupant health and carbon neutrality will be impaired and command dramatically lower rents.

In order to move towards carbon neutrality, a huge increase in capex is going to be required, fundamentally changing industry economics. From a technology investor perspective, we are excited to see how these productivity and sustainability drivers enable a wave of smart building technologies to achieve the rapid growth and scale that has been elusive in years past.

How has the pandemic and the shift to hybrid working changed your outlook on smart buildings?

CL: The pandemic has sent shockwaves through the real estate industry and the primary takeaway is a straightforward one: buildings need to get better. Not only has the rise of remote working swung leverage away from building owners and towards tenants, but it has led to increased scrutiny on other global risks such as climate change.

Ultimately, this means that the return on building upgrades has never been higher; the outlook for sustainable, healthy and tenant-centric buildings will continue to be bright, while low rents and occupancy rates await the rest. In response, building owners are turning to technology more than ever before. These factors provide tailwinds not just for smart buildings, but for the larger proptech ecosystem.

PATRIZIA’s leadership team are fully aware of this transformation, as evidenced by the growth of the technology and innovation team and the launch of Sustainable Future Ventures. We are excited to be investing in a time when technology adoption is a must for building owners, rather than a nice-to-have.