What proptech means for ESG

Property technology is growing fast, with total global investment in proptech businesses reaching $24 billion in 2021, according to market data firm Statista. The term covers an enormous range of innovations from platforms for buying, selling, leasing and valuing assets, to ‘smart buildings’ that utilize digital tech to manage the use of space, energy and other resources.

With such investment and innovation, the natural question is whether tech can help in the environmental challenge. The short answer from the proptech sector is an emphatic yes.

“It should be part of the answer,” says Greg Smithies, partner and co-head of climate tech at New York-based Fifth Wall, the world’s largest proptech-focused venture capital firm.

“There are $326 trillion of buildings out there. They produce about 40 percent of the world’s CO2 and consume about 40 percent of the world’s energy. But the vast majority have no building management system or anything that would make them more efficient and good for the planet. So, the penetration of this tech is off by two orders of magnitude, and this is the largest part of the CO2 problem for the planet,” he says.

But Smithies recognizes that money talks. Energy efficient buildings will improve the bottom line for real estate investors. “If you are doing less heating and cooling, the building becomes more profitable and that flows straight through the value of your building, right? Clean green buildings have lower vacancy rates and higher per square foot rates, and that flows straight through the building asset value.”

“Assessment is the place where, right now, we are seeing some of the widest adoption of technologies, and we are working with a number of different tools in the market”

Clelia Warburg Peters
Era Ventures

When it comes to digital energy efficiency technology, the market is highly fragmented with a huge range of businesses, platforms and applications, which come in three forms. The first and most obvious are the technologies of alternative energy: wind, solar or heat pump installations. But there is also a more specifically digital dimension in measurements and assessment of energy efficiency and in more sophisticated AI-based tools to create smarter buildings.

Clelia Warburg Peters, managing partner at New York-based venture capital firm Era Ventures, says this first stage of reporting is where the market is most advanced. “Assessment is the place where, right now, we are seeing some of the widest adoption of technologies, and we are working with a number of different tools in the market. Measurabl is probably the tool that has received the most funding and there are a few others, including some early-stage companies,” she says.

Measurabl – and systems like it – aims to provide a straightforward dashboard for asset owners, showing space utilization, waste and carbon output and energy consumption. The goal is to provide the granular reporting that will be required for real estate asset owners to report to regulators, investors and potential tenants.

Even at this basic function of reporting, it is important that asset owners do not get carried away with bells and whistles, says Sophie Taysom, founder of consultancy Keyah Consulting. “It is a really, really competitive environment and there is a vast number of companies all jockeying for position. And there are lots of big issues.”

Nikhil Daftary, executive vice-president at Carbon Lighthouse, a US-based environmental group, notes that while there are many useful data points, they are only useful because they feed into one final data point: energy use.

“You can think about dollar savings by understanding what the actual utility rates are, what the tariff structures are, but none of that really matters – your basic unit is kilowatt hours. Now there are variables that impact that, such as space utilization, tenant variability, weather changes, equipment malfunctions, equipment optimization. But the atomic unit is still kilowatt hours consumed,” says Daftary.

Understanding how much energy is being used by each real estate asset – and when that energy use is highest – is an essential step and one that will help real estate meet ever-rising reporting standards. The next and more advanced application of technology, however, is to build dynamic systems, in which the measuring and assessment tools can be brought to bear on how the assets are managed.

Dynamic technology

The idea of smart buildings has been around for a long time. According to Smithies, the earliest versions of building management systems – now decades old – may have accidentally put real estate investors off altogether.

“A lot of people think of a building management system as a $50,000 piece of equipment that comes with $100,000 per year management and maintenance fee. No one knows how to use them and so they are a nightmare. That is not where we should be and that is why 95 percent of all buildings have no management system at all,” he says.

“Instead, you should think about the systems that we could build now – things a bit like a smart thermostat. We are talking about a $100 piece of equipment and all it is doing is really watching whether there is anybody in this room. If yes, keep the lights on. If not, turn them off. About 80 percent of the value is just doing that.”

Beyond the basics, many proptech companies are looking for a far more sophisticated approach. Warburg Peters at Era Ventures cites one of her own firm’s investments: Passive Logic.

“Passive Logic is building [its] own full ecosystem of tools, where [it] can plug into the existing mechanical and electrical system. It has an application programming interface that can speak to whatever’s already there and start to use AI and deep tech to understand what is happening in the building. The building can respond dynamically,” she says.

“A very simple example would be to understand how many people are in the building at any given moment and to understand what the weather is going to be. Or it can know from prior usage history that no one is going to be on floor 11 on a Monday, but floors six through 10 are generally full.

“One of the major reasons why we have such high net-carbon consumption in the built world is because the way we use electrical systems, in particular in buildings, is really, for lack of a better term, ‘dumb.’”

The potential for technology to improve energy efficiency in real estate is significant, but the excitement over digital proptech comes with two caveats. The first is not to get carried away with the digital at the expense of the mechanical. While Smithies at Fifth Wall agrees digital solutions will play a role, he emphasizes that the most basic solutions remain improving insulation and moving to heat pumps.

The second is while the potential is great, the market for digital proptech is highly competitive and fragmented and solutions may lack interoperability. Warburg Peters believes that in the near future, the market will shake out and some clear winners and standard solutions will emerge.

At the same time, real estate does not need to wait for or agonize over choosing the smartest, most complete solution. As everyone agrees, most real estate assets are currently very dumb.

Initial steps such as intelligent measuring of basic data points or just getting the lights to automatically turn off might make the biggest difference.