How Sensor Data Will Prove Valuable in Due Diligence

The value of IoT technologies are usually focused on the direct returns they can generate by lowering operating expenses. However, as the aggregated data set grows, IoT data is helping shake out risk and compress cap rates during the acquisition and disposition process. In this video, Derek Cedarbaum, Enertiv’s Head of Business Development, explains how sensor data will soon prove valuable in the due diligence process.

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Video Transcript

Hi, I’m Derek Cedarbaum with Enertiv, glad to be back.

Today, we’re going to be talking about how building sensor data is going to contribute to the due diligence process behind the acquisition and disposition of assets in the future.

What we see here is a pro forma for a 300,000 square foot office building. There are three line items that we’re looking at today: maintenance and repairs (which can sometimes be split out), utilities, and capital reserves.

These line items are typically affected by the systems and environments within buildings. What happens over the years affects the costs. But you’ll notice several things about these line items when looking at a typical pro forma when selling a building.

One of the most intriguing things is that those numbers are largely guesses. Sure, there’s a lot of historical data on annual utility costs, annual maintenance costs, and what capital needs have been, but historical data is certainly not an indicator of the future, especially as it pertains to aging systems and aging buildings.

And in a brand-new building, you don’t have historicals to go off of. What do you have? Maybe a crystal ball, maybe a pretty good property condition assessment, or just rules of thumb. As we see here, a flat 3% growth in every line item is applied, like in so many pro forma being put out there today.

Now that’s a problem because it certainly isn’t accurate. And if it’s not accurate, it means it’s just theoretical.

Theoretical risk is almost extra risk. Why? Because it’s based off of insufficient data and you have to add extra margin to handle that uncertainty. With risk, you want to know everything about the thing you’re buying or selling as possible to get rid of the unnecessary costs put towards risk.

Why is that important. By plugging sensors (power, humidity, temperature, etc.) into the systems in buildings that drive utility bills and maintenance & repair costs, you can get a much more transparent and accurate view behind the costs of these systems, both today and into the future.

This large dataset is a good indicator of behavior. Similar to the way Google and Facebook know more about you than your friends and family, immense amounts of equipment data is going to know more about those systems than an engineer or a property condition assessor.

What we’re going to have here is plenty of benefits with applying new sensors and large amounts of sensors to buildings. First, with increased transparency into these numbers, you can artificially compress the cap rate because you’re minimizing risk for a buyer who wants absolute certainty to the greatest degree possible about revenue and expenses.

Similarly, as a seller, you can be much more aggressive, if you can say “look, this is definitely an accurate representation of what these costs are going to be for you projected out into the future.” Why? Because we have an Enertiv building or we have this other company that can apply an immense amount of sensors and analytics to these line items in a way that another seller might not be able to get to.

By doing that, and by shaking out the risk, a seller can get more money out of a deal, a buyer can get a better borrowing rate from institutional lenders that want to minimize risk and know as much about the asset they’re investing in as possible. And in the end, everyone gets to be happier.

So, while it’s very high level, it’s important to start thinking about: “how are sensors, how is this big data play for buildings, going to affect the long term value of my assets, the cash that I’m going to be generating and even how it can maintain increased tenancy and occupancy rates or help me save money so I can lower my tenant rents in an economic downturn so I can remain stable and insanely competitive.”

If you wanted to learn more about how some sensors and equipment monitoring can benefit you on your pro forma, give us a call, shoot us an email, and we’ll be happy to talk. Alright, thanks.