by Dom Beveridge | Aug 4, 2020 12:00:00 AM
Over the last year or so, as proptech has exploded, showering the multifamily industry with new and exciting technology, it has become harder to understand the return on technology implementations. As we wrote earlier this year in our 20 for ‘20 white paper, an ever-growing vendor population is competing to deliver ostensibly the same benefits to multifamily communities and companies. To make good decisions, operators have had to sharpen their ability to estimate financial benefits.
The problem gets harder still when a technology offers numerous sources of potential upside. Smart home technology is just such a case, with the combination of access control, thermostats and leak detection providing numerous ways to improve operations and customer experience. The challenge is to identify a credible and measurable source of upside, and figure out whether or not the investment makes sense.
How to think about smart home tech investments
We recently published new research on smart home technology, where we used insights from individual operators to characterize the different ways that companies are attacking this problem. As we came to understand the differing circumstances and objectives of each of the companies that we interviewed, five different rationales emerged that companies are using to underwrite their smart building investments. We have summarized each below (full details for each case can be found in the white paper):
1. The Win-Win
We recently wrote on this blog about common misconceptions in the way that the industry thinks about smart home technology. One was the misapprehension that smart home tech appeals mostly to affluent prospects and residents in the urban core. This overlooks the attractive opportunity offered by workforce housing. The energy savings alone that accrue from smart thermostats can be passed off to residents and make a modest rent increase affordable.
In our example, we identify a $40/month utility saving to the resident in exchange for a $20 rent premium, leaving them $20/month better off. In the case of a workforce housing community, the saving to the resident is material, and for the operator, the investment pays for itself within three years.
2. The Lifestyle Upgrade
In the 2017 NMHC-Kingsley report, a survey of 250,000 apartment residents, respondents indicated that they would pay $30 per month for some smart devices. For a portfolio of A-class properties in markets like San Jose, Seattle and San Francisco, we modeled the economics of a smart home implementation with a $25 average rent increase. Even with this relatively modest rent expectation (anecdotal evidence suggests the numbers are often much higher), the project would achieve payback in under four years, but the benefits did not end there.
In tech-hungry markets, the technology bolsters a property’s brand. As part of a property tour, the technology becomes an important selling point with prospects. With curb-to-couch access control, issuing prospects with codes for the property and the unit in real-time, the prospect experiences the seamless way in which guests and service providers get access. Leasing agents enjoy using the technology on tours, leading to improved conversions and the impression of a tech-friendly living environment, run by a forward-thinking operator.
3. The Insurance Policy
Leak sensors may not have the same glamorous appeal as access control, but their impact on operating costs and customer experience is significant. Highrise portfolios, for example, suffer occasional but serious damage to its buildings resulting from water leaks. The costs of repairing the damage can be extreme, so anything a company can do to detect leaks more quickly can result in considerable savings.
By introducing leak sensors and keyless entry, maintenance staff can be alerted and deployed immediately to address a leak, stopping water intrusion before it affects additional apartments. Our analysis showed that if a major leak could be stopped before it affected the floors below, $50,000 per year could be saved for every 250 units, covering all implementation costs in a little over four years. And that was before taking into account other “soft” costs like the time site and corporate staff spent managing resident communications, service and rehab projects.
4. The Deal-Maker
The above methodologies focus on the impact of the technology on operating margins. But there is an interesting use case on the “deal-side” of the industry: where the inclusion of smart building technology in a value-add project can be the difference that makes a deal viable. By building a pro forma that includes the predicted rent increase from the new technology, the acquiring company can hit their internal cap rate, while also allowing the seller to hit theirs.
This approach is similar to the customary “value-add” play, but there are some important differences with smart home investments. The execution risk of a smart home implementation is significantly lower than for a renovation. The speed with which the technology can be deployed also reduces the risk of cap rate fluctuation between the time of the deal and the time of the completion of renovations.
5. The Visionary
Finally, readers of this blog will be familiar with our views on the industry’s march towards automated leasing and the prospect of breaking the “1/100 paradigm,” which sets a floor of one member of site staff per 100 units. Self-show (another major benefit of curb-to-couch access control), in concert with either a call center or an AI leasing agent, creates the opportunity to change property staffing models.
Another way, therefore, to underwrite the cost of the smart home implementation is by the FTE reductions at individual properties. As our analysis shows, an average reduction of one agent per property would pay for an entire smart home implementation in a little over three years. This approach makes more sense than ever, thanks to COVID-19, as a growing number of prospects expect to purchase goods and services in a self-serve environment.
The five examples above emerged as the main methodologies that companies are employing to underwrite their smart home technology investments. It is important to understand that while it is good practice to choose a source of benefit to justify the investment, users generally benefit from this technology in multiple ways.
It is relatively easy, for example, to measure the reductions in utility costs resulting from the introduction of smart thermostats. It is harder to quantify the benefit to a community’s reputation of being more energy-efficient, but that benefit clearly exists.
In the white paper, we discuss the breadth of sources of benefit in detail while providing numerical case studies of each of the five underwriting scenarios above. Download your copy, and please let us know what you think!
Photo by Sebastian Scholz (Nuki) on Unsplash