FINANCIAL STRATEGIES: Get Smart

Alec J. Pacella

Growing up in a small town in western Pennsylvania meant that I wasn’t necessarily on the cutting edge of technology. Any new electronics took months if not years to trickle down and even then would usually mean a trip to bigger cities such as Youngstown or Pittsburgh to track down. A great example is the LED watch. It was initially developed in 1971 and became widely available by the mid-1970s. But it wasn’t until Darrell Knight showed up sporting one on his wrist right after Christmas break of 1978 that I actually saw one, live and in person.

The use of technology in real estate seems to follow a similar path, with innovations taking months, if not years, to be integrated into the industry. This month, we are going to discuss some ways, specifically in the area of smart buildings, that technology has finally begun to make a big impact.

Air quality

While certain sectors, such as medical and clean manufacturing, have been driving advances in clean air filtration and monitoring, the advent of COVID- 19 has placed a spotlight on this topic. The result is a whole ecosystem of products and strategies known as IAQ, or indoor air quality. The most common IAQ technologies revolve around higher-efficiency filters. Humidification and dehumidification systems have also become much more advanced, helping to control dust and mold while maintaining comfort. More advanced systems assist with heat and energy recovery ventilators to offset the increasingly “air- tight” nature of modern construction, as well as UV purifiers to neutralize airborne bacteria and viruses.

Voice-and touch-activated tech

Again, this type of technology received a huge boost in the wake of COVID-19. If you have ever used systems such as Alexa, Siri or Google, you are already well aware of the power and convenience voice-activation can offer. And while touch-activated technologies have been around for decades, the overwhelming popularity of smartphones and apps are leading to more advanced applications. In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing this type of technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone. And don’t look now but many larger commercial property owners are beginning to integrate these same technologies, offering them to their tenants as a standard building amenity.

Smart parking

This may seem like something reserved for only big cities such as New York, Chicago and Los Angeles.

In the commercial real estate sector, it’s no surprise that the hotel sector has taken the lead implementing [voice activation] technology, ranging from speaking to control lights, temperature and entertainment to accessing the room and ordering room service from your smartphone.

And these cities certainly began adopting technologies years ago, with the advent of apps such as SpotHero and ParkWhiz, which allow parking operators to maxi- mize their occupancy through digital notification, reservation and even sub- leasing processes. But if you’ve ever parked in the decks at Hopkins airport, you’ve probably seen another, even sim- pler example that uses a small green or red light above each space, allowing potential parkers to quickly differentiate vacant spots from occupied spots

Energy efficient systems

This can fall into two categories:

1) systems that optimize energy via continual monitoring and 2) clean or renewable energy features. The former is the real heavyweight when it comes to smart building design and is mainly based on the autonomic cycle of data analysis tasks (ACODAT) concept. Basically, the HVAC systems have a central processor that continually monitors usage, time of day, outside air temperature, building occupancy and a host of other factors to not only be reactive in running the HVAC system at peak efficiency but also be predictive by learning patterns over days, weeks and months. The latter includes a host of advances in technologies such as heat pumps and geothermal systems as well as solar- and wind-enabled sources.

The most common acknowledgement of building technology is a certification known as Leadership in Energy and Environmental Design (LEED), through the U.S. Green Building Council. A similar certification is known as the Building Research Establishment Environmental Assessment Methodology (BREEAM) rating. Both of these involve achieving points related to set standards that address carbon, energy, water, waste, transportation, materials, health and indoor environmental quality. There are many examples of LEED-certified buildings in Northeast Ohio, including the Maltz Performing Arts Center at Case Western Reserve University, UH Avon Health Center and the Children’s Museum of Cleveland, among hundreds of others.

And there have been many noteworthy projects worldwide, including the following high-achieving facilities.

Oakland City Center (Oakland, CA)

Developed by Siemens, the build- ing contains a variety of dynamic and artificial intelligence to power its operation. A noteworthy feature is an advanced air volume system that can put the entire building into “green mode,” which is a setting that uses aggregated historical data to optimize humidity, air pressure and temperature. It also has a decontamination mode that raises the temperature to acceler- ate the decay of airborne virus particles.

Cisco Systems Canada HQ (Toronto)

This was the first building in Toronto to be rated as a LEED Core and Shell Platinum building. It links up Cisco’s business operations and helps to power Cisco’s Internet of Everything (IoE) while also streamlining all building data into a single network.

Mitie (London)

Arguably the most striking example of the IoE in smart buildings, the Mitie building uses automated alarms, remote systems management, machine learn- ing and data analytics to achieve a 95% accuracy rate for predictive main- tenance calls and a 3% improvement of energy usage by clients.

By the time we hit high school, Darrell Knight’s simple, push-button, red-hued LED watch had been eclipsed by a series of LCD watches that integrated features like alarms (with music, no less), stop watches and the ability to track multiple time zones. And while today’s smart buildings have shown great advances over the last two decades, the pace of technology promises to have an even greater impact on this sector.

Article from September 2022 Properties Magazine

Top Tech partner: Apollo Energies

Those keeping track of our ongoing Top Tech series will know that this regular blog is aimed at highlighting some of NAI’s key tech partners and the game-changing solutions they bring to the commercial real estate (CRE) space. These are not sponsored blogs, but rather a way for us to share tools, technology, and ideas that are changing CRE for the better and streamlining and improving the services we offer.

This month’s partner is Apollo Energies. Below we discuss their approach to creating carbon-free properties and helping clients hit ambitious Environmental, Social, and Governance (ESG) goals.

What does Apollo Energies do?

The starting point for Apollo’s commercial services is typically an energy audit that helps clients determine the best way to streamline their building’s operations and bump up energy efficiency. Apollo also advises clients on how to meet safety, health, and wellbeing requirements in line with today’s ESG standards.

Essential ESG

In recent years, there’s been an increasing push for corporate entities to meet sustainability commitments and to be able to show their progress. ESG criteria, which detail the goals these companies must meet, are also being used by investors and the public to evaluate the impact that company has on society and the environment.

With a focus on the ‘E’ of ESG, Apollo aims to help its partners meet the right goals, and lower their own energy spend in a clearly documented and reportable way. Their approach includes evaluating carbon emissions from a company’s operations, reducing carbon tied to power use, and assessing the carbon impact of the enterprise’s supply chains.

They also work with clients to meet benchmarks for Energy Star® certification, identifying their buildings as top performers in energy efficiency and ESG accountability.

Tangible results

The results of this focus and dedication are certainly impressive, and one of the reasons Apollo are a top choice among NAI brokerages across the country. At time of writing, the company has improved some 52 million square feet of building space and saved nearly 7.5 million kilowatt-hours (kWh) of energy across their client base.

For a breakdown of their approach to ESG, have a look at their article here, or visit their commercial energy audits page for details on the Apollo approach to carbon-free CRE.

SOCIAL: With the demand for energy-efficient real estate on the rise, what tools or consultants are your go-to when planning energy-smart initiatives?

Flowers & Roots

Alec J. Pacella

I’m always pleased to see comments from loyal readers. Most of the time, these are complimentary. But as a wise Yoda once told me, “Compliments grow flowers, but criticisms grow roots.” And while one of the comments I received in response to last month’s column wasn’t a criticism, it was insightful.

The gist was a historically limited viewpoint from the lender’s perspective. The comment wasn’t wrong; prior to the concept of 365/360 loan amortization covered last month, it had been a few years since anything related to the lender’s perspective was considered. And make no mistake – lenders are a dominant part of the commercial real estate landscape. Last year, nearly $4 trillion of capital invested in commercial real estate came from lenders, as compared to $2.7 trillion of equity. Given the significant role that lenders play, this month will be a bit of a ‘two-fer’ and follow up on some basic metrics that a lender uses to determine the appropriate level of participation in an investment.

One of the most common (and easy to understand) metrics used by a lender is the loan-to-value (or LTV) ratio. This approach considers the underlying value of the real estate as compared to a ratio established by the lender. For example, the lender determines a property to have a value of $1 million and has established a 75% LTV ratio.

In this instance, the lender would be willing to provide a maximum loan of $750,000 ($1,000,000 x .75). Another metric related to LTV but less common is the leveraged ratio. It measures the amount of equity as compared to the total investment. In the example above, the leveraged ratio would be 4:1, which means that every dollar of equity equates to four dollars of total value ($1,000,000 divided by $250,000). LTV and leveraged ratio are both focused on the underlying value of the real estate, but a lender will also look at the income characteristics of the asset. A primary measure with this focus is known as the debt service coverage ratio (or DSCR), which helps to ensure the property has sufficient cash flow to make the loan payments. LTV and leveraged ratio are simple and only require one step. DSCR is a bit more involved and requires two steps. The first step is to determine the maximum annual debt service given the property’s income, as represented by net operating income (NOI) and the DCSR established by the lender.

This ensures there is not just enough but more than enough income to service the debt. Assume a property has a NOI of $80,000 and the lender establishes a DCSR of 1.25. In this instance, the maximum annual debt service would be $64,000 ($80,000 divided by 1.25). This ensures a measure of safety for the lender, as the NOI could fall by up to

Another metric that has risen in popularity over the last decade is known as debt yield, which represents the percent of NOI as compared to the original loan amount. This is a helpful measure of risk for a lender as it illustrates the yield that a lender would realize if they were to come into a direct ownership position due to a default by the borrower. It is also a valuable metric as it helps to ensure the loan amount is not inflated by low cap rates, low interest rates or a long amortization period. Calculating this is straight-for- ward: dividing NOI by the loan amount. Again, using our example and assuming a $750,000 loan, the debt yield would be $80,000 divided by $750,000 = 9.375%.

The last metric I would like to discuss is also one that has been around the longest  the venerable loan constant. It measures the annual debt service, including principal and interest, as compared to the original loan amount. Using our example and again assuming a $750,000 loan, the loan constant would be $61,910 divided by $750,000 = 8.255%. At the risk of sounding like the kid that had to walk to school and back uphill and in two feet of snow, a loan constant was used to calculate loan payments in the days before financial calculators. The cutting-edge real estate tool back then was a little book with a red cover entitled “The Ellwood Tables.” It was filled with pages upon pages of tables with eight-digit numbers.

At the risk of sounding like the kid that had to walk to school and backup hill and in two feet of snow, a loan constant was used to calculate loan payments in the days before financial calculators. The cutting- edge real estate tool back then was a little book with a red cover entitled “The Ellwood Tables.”

To use it, you would match up the columns for the lender’s nominal interest rate and loan amortization period. Once the corresponding eight-digit number was found, you multiplied it by the initial loan amount and, shazam, the annual debt service would be known. In the example above, matching up the column for a 20-year loan amortization with the row for 5.5% interest would result in a factor of .08254667.

Upon reviewing a sampling of past articles, the topics associated with mortgages and the debt market are indeed far and few between. And if it wasn’t for some- one taking the time to point this out, this month’s article would likely have been centered around internal rate of return, net present value or cap rates.

Keep those comments coming, gang! AP

Published in Properties Magazine July 2022

Can a mortgage be issued for virtual land? Apparently, it can in the metaverse

In a recent NAI article, we looked at the advent of the metaverse[SR1]  and what this new tech might mean for commercial real estate (CRE). Though we concluded that the answer to how the metaverse might impact the real world remains uncertain, since then, there have been some interesting virtual developments.

In particular, tech company TerraZero has started issuing “mortgages” for virtual real estate, and there’s very real money changing hands for entirely virtual properties.

A slice of (online) paradise?

To be clear, the “mortgages” in this case are funded entirely by TerraZero itself, rather than an external financial institution, but employ a system of down payment and instalments, much like the real thing. The first one was issued for a piece of land on a platform called Decentraland, where users can own, and sell, virtual assets. And as strange as this all sounds from a real estate perspective, there have recently been several big players setting up shop in the virtual world.

Perhaps the biggest, from a credibility point of view, is global financial leaders JPMorgan who recently launched a “virtual bank”, though at the moment it’s only being used for marketing purposes. In tandem with the purchase, JPMorgan issued a report, where they discuss their expectations for the metaverse’s development, saying:

“The success of building and scaling in the metaverse is dependent on having a robust and flexible financial ecosystem that will allow users to seamlessly connect between the physical and virtual worlds.”

They added that, in just the last six months of 2021, the average price for a virtual plot of land jumped from $6,000 to $12,000.

Hedging bets

Despite this apparent endorsement from one of the world’s leading financiers, there are still plenty of metaverse critics urging caution. One of the main points raised is that, unlike physical real estate, metaverse purchases can’t satisfy both property value fundamentals: namely scarcity and location.

Or as Louis Rosenberg, CEO of Unanimous AI and a veteran Augmented Reality (AR) developer, puts it:

“We don’t even know which platforms are [going to] be popular, let alone which locations… so it’s like somebody buying a piece of land anywhere in America and hoping that it becomes San Francisco or New York.”

For many companies though, hedging bets is taking the form of securing their own piece of the virtual pie. The Wall Street Journal reports that accounting firms PricewaterhouseCoopers and Prager Metis have also recently snapped up virtual sites, with the latter spending $35,000 on its purchase of a virtual HQ.

Is the metaverse here to stay?

Though it’s still early days, and impossible to say how the virtual property trend might play out, the recent developments in the space suggest it’s certainly worth keeping an eye on. At the very least, the metaverse poses an interesting proposition, and one a lot of people seem to be willing to speculate on.

SOCIAL: Do you think there’s a future for metaverse property? And if so, how do you see it unfolding?


Seamless site management: Drones and smart tech for CRE inspection

Over the past few years, the use of drone technology in the commercial sector has seen massive growth, with drones being used for everything from agriculture to law enforcement.

In the commercial real estate (CRE) context, the value of drone technology is also rapidly becoming apparent. Drones deployed for site inspections can save time and money, in addition to keeping personnel out of harm’s way. In the event of disasters and damage to premises, drone photography provides accurate images for insurance purposes and a detailed catalog of damage.

In this latest blog in our ongoing tech series, we explore these applications in more detail, along with other smart technologies that are changing how we approach real estate development and management.

Drone detection

One of the main areas where drones add value is by enabling fast and accurate building inspections. Processes that would normally take a long time for a human team, such as surveying rooftops, can be completed in a single programmed flyover. There is also potential for the technology to be deployed for façade inspections and other critical, but time-intensive, maintenance operations.

The advantage of using drones for these tasks is that they can access areas that are difficult, or even dangerous for human crews. And they do it in a fraction of the time.

When equipped with the appropriate hardware, like thermal imaging cameras, drones can also check on a building’s heat loss profile, potential gas leaks, and even expedite operations during construction, all while making the overall project more sustainable.

Easing insurance and investment

Drone surveys can also add value during dealmaking, with detailed drone imagery that lowers investment risk when properties are changing hands. With a flyover, it becomes a matter of a few minutes to figure out whether a property shows signs of external structural issues. The task of valuation also becomes easier, allowing property sales to proceed smoothly.

As a recent Wall Street Journal article points out, there’s also been wide-scale adoption of drone technology in the insurance industry. The use case here is rapid assessment of claims and the ability to respond to critical situations, such as assessing property damage after a natural disaster.

Quoted in the article, Travelers Insurance VP, Jim Wucherpfennig, puts it like this:

“The technology allows us to write damage estimates more quickly for our customers, pay them more quickly, so that they can begin the repairs to their property and get back on their feet.”

As with maintenance inspections, he adds that deploying drones to these sites ensures that claims professionals are kept out of harm’s way in potentially dangerous areas.

Smart glasses and CRE

A second technology that is gaining traction for site inspections is Augmented Reality (AR) “smart glasses”. In essence, smart glasses allow the user to combine what they are seeing in the real world with superimposed virtual tools, making it easier to measure and quantify key parameters during construction and development.

As an example, on a building site, an inspector equipped with smart glasses could take measurements just by looking at a doorframe or window and then compare their findings to virtual plans. They would also be able to photograph, record and stream what they’re seeing, ensuring no details are missed during an inspection.

Like drones, smart glasses also enhance on-site safety. In this case by ensuring personnel can focus on what’s in front of them, rather than the tablet or smartphone in their hand.

Though it’s still early days for this technology, the market appetite for smart glasses is increasing across a range of commercial applications, and advances in this area are certainly worth keeping an eye on.

Human expertise

What’s important to bear in mind is that these technologies don’t negate the need for human intervention. Rather, they shift the human element to the controller’s seat.

The photographic surveys undertaken by drones, for example, still need to be interpreted by human experts. Similarly, the video feed from a pair of smart glasses still streams back to the team at the office, who are then enabled to support decision-making processes at the site. So instead of replacing human expertise, these technologies supplement it, providing the means to optimize routine operations.

For CRE professionals, these technologies offer another tool to add to the toolbox. And some extra options for making deal negotiations as smooth and seamless as possible.

Social: Are smart tech and drones already part of your CRE environment? And how do you see this space developing?