How to 'Moneyball' Your Way to a Smart Building Platform

 

Most people are familiar with the Moneyball story. Oakland Athletics’ General Manager, Billy Bean, realizes that he cannot compete with the big market teams and decides to take a risk by following the advice of non-scouts who swear certain players are being undervalued. Armed with data, the analysts help the A’s compete at the highest level while spending a fraction of what other teams are.

The landscape in commercial real estate is changing quickly, and the situation Billy Bean’s A’s faced is becoming relatable for some portfolios. In markets across the country, those who can afford it are pushing the boundaries of how much premium rental space can be absorbed. In cities like New York, even bullish professionals have been amazed at the city’s ability to not only absorb, but also pay premium rental rates, for mega projects like the Hudson Yards and the World Trade Center.

Meanwhile, previously desirable assets suddenly have a less competitive offering in the market, causing landlords to make increasingly large investments just to stay in the game. Renovations and tenant improvements are part of it, but so are the ways in which buildings are operated. Tenants now expect a certain level of “smartness” from their building.

Newer developments aimed at attracting premium rents are often built from the ground up with sophisticated building management systems (BMS) designed to control equipment automatically. While there’s no doubt that these systems can manage the indoor environment with impressive precision and generate significant efficiencies (if properly configured), these systems also come with six or seven-figure price tags.

To continue to compete in the big leagues, legacy owners need to figure out how to get 90% of the benefits of cutting-edge smart building technologies into existing assets for 10% of the cost. One answer is to spend smarter, to invest the Moneyball way.

The Strategy

Like Moneyball, the strategy is to take a step back and ask a simple question: what’s the goal?

At the fundamental level, the goal is to maintain a stabilized asset by consistently delivering exactly what tenants expect from their spaces, and to do so for the lowest cost possible.

This may sound obvious but maintaining a consistent goal is more difficult than it would seem. In the process of evaluating technologies, biases and conflicting objectives often veer the rubric for what’s important off course.

For example, take a technology that enables tenants to control the temperature of their individual workspace throughout the day. Few would argue that this would be a value add to the tenant experience; in some circles, “smart” is synonymous with “personalized.” The question is whether it encourages tenant retention for the lowest cost possible. The real question is whether this capability delivers exactly what tenants expect? Maybe, maybe not.

On the other hand, it would be hard to argue against tenant’s expecting that the core functions of the building will work 100% of time. Whether it’s reasonable or not, every tenant expects the elevators, plumbing, air conditioning, and ventilation to work whenever they need it. Equipment uptime isn’t exactly “sexy,” and likely won’t be a selling point during leasing. But for the cost, it has an outsized value on the ultimate goal.

Data is the Great Equalizer

When Billy Bean started implementing the Moneyball philosophy, his underfunded team stood a chance because the big market teams still relied on their scouts’ intuitions, rules of thumb, and snap judgments to make decisions.

There is a direct parallel to commercial real estate here. The largest and most successful portfolios in the industry may be infusing cutting-edge smart building technology into their assets, but many aspects of their operations are stuck in the past.

Go into most mechanical rooms and you’ll still find notes taped to equipment about the last time maintenance was performed or how configurations are supposed to be set. These manual and paper-driven processes on the ground lead to managerial decisions that are, much like the old-school baseball scouts, based on assumptions and opinions.

This has been the status quo for portfolios large and small, which presents an opportunity for those needing an edge against the competition. Low-cost sensors can now quantify the costs of every process required to run a building, regardless of how “smart” the building is to start.

The Value of Data

Billy Bean didn’t collect novel data and then hand reports over to his scouts, they would have thrown them away. Instead, the analysts who collected the data also applied an algorithm to deliver objective insights about which players should be targeted. Once the scouts bought in to the concept, the algorithms enhanced and complimented human intuition.

While data has no value on its own, the analytics unlocked by capturing data offer landlords much needed flexibility in an increasingly competitive market:

  1. Identifying and eliminating waste in the maintenance and equipment operations in a building will lower operating expenses.  This gives the landlord the flexibility to push those savings to the bottom line and increase asset value or, in the context of a competitive marketplace, maintain the same net operating income and offer tenants lower rents.

  2. Maintaining equipment effectively extends the useful life of equipment. Delaying expensive equipment replacements can be used to lower CapEx reserves to increase cash flow or reserves could be kept the same and used to fund tenant improvements

  3. Digitizing and quantifying the cost of workflows across a portfolio enables operations and asset managers to deploy capital and labor resources more intelligently and do more with less.

The bottom line is that leveraging data, which is easier and less expensive than ever before, gives owners and operators more options to navigate a tight market.

Nothing Lasts Forever

Unfortunately for the Oakland Athletics, their ability to compete based on a data advantage was short lived. In due time, every single Major League Baseball team began implementing data-driven strategies into their operations and management. The same can be expected in commercial real estate.

The difference is that baseball has a revenue-sharing agreement where every team gets a cut of the pie. The portfolios that ignore the trend may simply find themselves unable to compete for tenants and investment.

As daunting as this concept may seem, the path forward is relatively straightforward. Begin evaluating and deploying technology while maintaining an unwavering focus on a fundamental goal. Recognize that the status quo can (and will eventually) change. And finally, remember that most of the cost of expensive technologies are for bells and whistles that don’t meaningfully increase value.

Want to see how low-cost sensors coupled with powerful analytics can increase your competitiveness? Schedule a demo of Enertiv’s Platform today!

 
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