As Charles Russell Speechlys reveals the findings of its comprehensive industry research into the rise of the smart building, David Savage and Mark Smith outline what the report has to say about the implications for the property sector over the next decade and the legal challenges raised
The smart revolution is not new. Modern technology has long been transforming the way we live and work. But the pace of technological change is increasing, raising questions about what – and how much – is still to be done if the buildings and infrastructure that surround us are to fully embrace this new reality.
According to our research, “The new real: unlocking new gains through smart buildings”, more than four in five property professionals believe it will be five to 10 years before the challenges around capturing and accessing the data that fuels smart buildings can be resolved.
With a quarter yet to do anything to realise the benefits of high-tech real estate, and only 14% claiming to have taken significant action, most have much to do.
Similarly, the majority have yet to take action against the potential risk of smart buildings to current stock.
Almost 70% of landlords, developers and contractors say that, while there is a danger of obsolescence in their existing developments, they either have no immediate plans to respond to evolving smart trends, or are only at the stage of considering how to respond.
And yet consensus remains that the gains to be made from tech-enabled property will diversify. The next five years are expected to yield benefits in terms of energy savings, workplace efficiencies and employee health, but on a 10-year trajectory, the proportion who believe that one of the most significant gains will be the opening of new revenue streams rises from 25% to 40%.
The findings indicate that we are now on a decade-long road to a truly “smart era”, one fraught with four major obstacles.
As businesses begin to respond, it will be important that they are armed with an understanding of the legal challenges they will encounter, to avoid potential pitfalls and secure an edge over industry peers.
Obstacle 1: Adding up the numbers
One of the critical challenges for smart buildings is to better understand the commercial implications and potential rewards on offer.
Some three in five investors and three in four landlords believe the ability of smart buildings to capture valuable data, and the potential financial gains therein, will be factored into the valuations of the future.
Similarly, almost two-thirds believe that new “public benefit” metrics, such as in relation to people’s health, will be factored into investment decisions.
Yet, while more than 70% see opportunity for revenue growth through the data that smart buildings can provide, half remain unable to quantify it.
Solutions will certainly need to be found. Two in three funders and advisers are predicting the need for more data about a building’s technological capabilities to assess investment and lending risk; and beyond valuation, the commerciality of such buildings remains complex. As occupiers demand ever more flexibility, traditional leasing models will come under even greater pressure than today.
Two in three landlords, occupiers and developers believe all-in-one fees for rent, utilities, business and technology services will grow more popular, and around 70% think new lease agreements should allow tenants to adapt their workplace more freely – a similar proportion to those who believe leases should also allow tenants to co-share with, or sublet to, third parties.
It is not only contractually that greater flexibility is on the cards: 46% think bespoke trophy buildings will become less desirable, including, notably, 54% of occupiers. In keeping with this view, around three-quarters believe new builds should move away from customisation and towards more adaptable spaces to attract future occupiers.
With almost three in five landlords and developers already admitting that they are experiencing challenges in delivering a return on investment from their smart real estate assets, it is clear that the pace of change will be restricted until answers make the numbers add up.
Legal pressure points:
i) Security of tenure for commercial leases looks increasingly obsolete, and the statutory regime under the Landlord and Tenant Act 1954 needs revisiting, perhaps with the creation of exemptions for entire buildings.
ii) Planning law may need to change to reflect more fluid, multi-use requirements for space.
iii) Building owners will look to use industry standard agreements to speed up wayleave agreements and licences to alter.
iv) Asset and rental valuations will need to address the likelihood that owners will create new revenue streams outside of traditional rental income.
v) Investors will be seeking increasingly granular data about buildings’ technology credentials to better assess risk.
Obstacle 2: Friend or foe?
To get to grips with the prospective “smart” benefits on offer, some 56% see a need for new collaborations, with indications that we may also see a significant rise in associated merger and acquisition activity. Half of respondents were of the view that acquiring businesses with “smart”-related skills would be an important part of their growth strategy, while, specifically among those already taking action, some 65% are currently seeking to establish new partnerships with technology providers. Yet this new way of working does not come without its worries.
A vast majority (85%) are concerned about the legal risks of such partnerships, with a similar proportion raising the same concerns about acquiring companies with capabilities in areas that are new to them.
Yet 90% think multinational tech giants, such as Google, will have a disruptive impact on commercial real estate in the next 10 years by taking business away from traditional property businesses. Specifically, they may evolve as the future developers and landlords of very high-tech properties in their own right.
There is a clear juxtaposition between the need to work together and the prospect of new commercial threats. Finding a way through will be a balancing act, but it can be only a matter of time before we see our first major partnership originating from the titans of property and tech.
Legal pressure points:
i) Risks arise from collaborating with suppliers and partners to process and analyse data. Service level agreements (SLAs) will be needed to ensure appropriate performance and delivery standards are in place.
ii) The use of joint ventures and other collaborations to add capabilities in the internet of things (IoT) or data analytics will require new risk and reward models and contractual frameworks.
iii) Where new intellectual property (IP) is developed through partnering with occupiers or other groups, clear rules around IP ownership are needed.
Obstacle 3: Driven by demand
Just as with any development trend, ultimately, the future of the commercial property sector will be shaped by market demand. With 25% of occupiers having already moved to smart buildings, or planning to do so, the signs are clear that significant change will be needed for the sector to keep pace.
That is not to say that prospective tenants are yet resolute on the advantages and risks. Around 60% think it is challenging to quantify aspects such as the prospective financial savings that could be derived from improved employee wellbeing, but more worryingly, 82% are concerned that cyber-security risks related to smart buildings will have an impact on their business, with a quarter citing it as a “significant” threat. Moreover, 93% of landlords are concerned that the use of smart systems in buildings increases their tenants’ risk of being hacked.
Around three in four see opportunities to use data collected within the built environment for financial gain, but information shared between organisations, as well as with public authorities and regulators, needs sensitive handling. What is collected, from whom, who needs access, and for what purpose, are all important considerations. Half believe data protection issues, driven by increased use of smart systems, will be a significant risk for their business in the next five years, rising to around 70% of landlords.
Legal pressure points:
i) The property industry at large must come to fully understand data management and cyber-security.
ii) In realising gains from monitoring employee workspace use patterns, or consumer footfall in retail environments, anonymisation of data and concepts such as “privacy by design” will be crucial.
iii) As the “data owners”, occupiers need to establish clear organisational accountability of those in their supply chain to ensure that privacy and protection measures are in place.
Obstacle 4: Re-use or rethink
Around 70% of landlords and building owners believe changing technology needs will have a greater impact on building obsolescence than energy efficiency requirements, with 63% claiming that pre-21st century office and retail properties will struggle to retain their value.
As the market seeks to develop real estate that is inherently more flexible, new construction techniques, such as off-site fabrication, are seen as crucial by three in four respondents. However, the adoption of building information modelling (BIM) Level 3 will be fundamentally inconsistent with the silo-based, adversarial culture that persists in some areas.
There will be commensurate challenges in terms of contracting and insurance when it comes to documenting issues around collaborative working, BIM process, BIM model ownership and other intellectual property rights. Developing products to meet the needs and expectations of the tenant and investor community will be a priority for commercial developers, but regulatory change will also influence the agenda.
Legal pressure points:
i) More collaborative working will have an impact on construction insurances. The insurance market must innovate, with new insurance provisions in standard-form contracts.
ii) Attention to the transfer of title provisions will be of particular importance as off-site fabrication grows.
iii) As the supply chain becomes more complex, there may be heightened risk of disputes in cases where there is under-delivery to the end-customer. The more that they offer in terms of a smart building, the greater the risk of failure and claims.
The decade ahead
Many of the issues outlined require fundamental and fast change in the way the property industry thinks and operates if we are to reach a new smarter era by 2026. But the benefits for those that do are plentiful and diverse and will provide competitive advantage to those willing to embrace the “new real”.
Mark Smith is head of real estate and David Savage is joint head of the construction, engineering and projects group at Charles Russell Speechlys
Access the full report at: www.charlesrussellspeechlys.com/thenewreal
