3 Steps to Modernize Your Portfolio for Long-Term CRE Resilience

By Matt Ganser, EVP of Engineering and Technology, Carbon Lighthouse
Originally published in NAREIM Dialogues, Fall 2020

October 27, 2020

The Covid-19 pandemic has created a crisis unlike any commercial real estate executive has faced before — but here’s how AI in real estate can give you an advantage. 

In addition to the standard features of a downcycle, office lease rates have fallen as companies mandate work-from-home policies. Business and leisure travel ceased, leading hotels to close or drop to single-digit occupancy. As many as 8,000 hotels may close for good by October. Additionally, consumer fear coupled with shelter-in-place mandates may lead to as many as 25,000 retail stores closing by the end of the year

The financial repercussions cannot be understated, and the ongoing uncertainty is exacerbating the problem — this, unfortunately, is the new normal. 

The pandemic and the ensuing economic crisis have highlighted what those who work closely with commercial buildings have long known. Many buildings in the US were built before the end of the Cold War and are long overdue for equipment and technology upgrades. These buildings often are unable to make the quick changes needed to meet the requirements of planned business disruptions, much less unexpected external disruptions such as a pandemic or a natural disaster. 

Simply put, US commercial real estate is in need of modernization.

On-site teams managing low- to zero-occupancy buildings are challenged with numerous technological limitations. Notably, these teams struggle with a lack of visibility into HVAC operations and don’t have a means of establishing remote building access — which is crucial for implementing measures amidst Covid-19 shelter-in-place restrictions. 

Even before the pandemic, buildings suffered from operational inefficiencies caused by deferred maintenance and lacked important updates needed to accommodate higher or varied occupancy. 

CRE portfolios are not well-positioned to navigate the uncertainties that lie ahead, but portfolio and asset managers can take three important steps to prepare their portfolios for long-term resilience: 

  1. Gain strategic insights by collecting and leveraging artificial intelligence (AI)-based systems and data
  2. Modernize building equipment
  3. Build and maintain a resilient partner ecosystem

1. Gain strategic insights with data.

Commercial assets are in some ways like human beings — they have unique characteristics and should be approached on an individual basis. 

Discerning, optimizing and monitoring the operational signature of each asset requires the collection of actionable data. Investing in advanced controls, sensors and AI-enabled data analytics can inform operational inefficiencies and optimization strategies across the portfolio. 

The first step in data collection is to evaluate each asset’s building management system (BMS): Is it modernized for AI in real estate? Can it provide the data needed to ensure adaptability to future systems or constraints? 

There is a very clear distinction between having a BMS and equipment that merely work — and a system that is optimized to function together.

Optimization allows for adaptation to any fluctuations in occupancy or health and safety regulations as efficiently as possible. Many BMS and dashboard systems provide superficial data that does not provide a holistic view of the building. 

Often, building data is not stored or collected in a uniform manner, with varying levels of accuracy, inconsistent naming conventions, and lacking useful metadata and descriptions. This makes the data impossible to process in a standardized way. 

Further, many a BMS relies on interval meter data provided by the utility company, which doesn’t truly capture the many factors — like outside air temperature, humidity, occupancy— impacting how a building operates throughout the day. 

Data analytics, after all, are only as good as the data being collected.

Building data facilities managers need beyond the BMS

Advanced sensors can capture a much deeper set of real-time data to better inform how the building systems should respond throughout the day to these dynamic shifts. 

Once the data is in hand, advanced analytics can help uncover hidden inefficiencies and start working on behalf of building operators. AI-driven analytics translate data points into actionable recommendations for operators who can then focus more time on tenant needs. 

For example, using AI technology at the Montage Beverly Hills Hotel’s central plant led to the optimization of its chilled water plant and implementation of sequences to make its three cooling towers work in sync.

The Montage optimization resulted in significant first-year savings, improved NOI — and was later acquired for a record-breaking per-key price.

Instead of just collecting data about how a piece of equipment performed or flagging issues, the right AI-enabled technologies can help determine why the issue occurred, how to fix it, and can even predict or prevent similar issues in the future. 

AI in real estate not only provides asset-level granularity, but if rolled out across the portfolio, can also have significant operational and financial benefits for investors — and the investment can be even more meaningful if the value is capped at disposition, creating millions of dollars in new revenue for sellers.

Energy savings of $0.30 per square foot across a portfolio of 1 million square feet can quickly turn into $300,000 a year in savings. 

Analyzing each asset’s energy usage data and establishing baselines are important steps to take in order to position the building for modernization. Implementing energy efficiency measures can also offset the cost of any capital expenditures related to building modernization, which is the next step towards positioning a portfolio for long-term resilience. 

2. Modernize your equipment.

Seize the opportunity that lower occupancy provides to address deferred maintenance and necessary upgrades. 

Rather than running through a regular checklist, asset managers should:

• Use the data they’ve collected to guide smart upgrades that provide asset- and portfolio-level returns

• Work with property teams to clarify the status of previously deferred projects and equipment replacements

• Determine what key tenants are demanding from a health and safety perspective

• Plan for any carbon emissions regulations coming into effect in the next few years, such as New York’s Local Law 97

Leveraging AI in real estate can help with overall optimization and prioritization in terms of identifying shortcomings, the solutions to address them, and then cost-reduction measures to help finance any heavy capital expenditures. 

One system to pay close attention to is the HVAC, the bedrock of a building’s energy system. 

An inefficient HVAC system can drive up utility costs significantly. That’s true in standard operating times, and in the age of Covid-19, with so much focus on the safety of indoor spaces, it’s even more critical. 

Government and industry bodies like the CDC and ASHRAE have issued highly conservative guidance on outside air and HVAC filters. These measures could increase energy spend by one to three times for a single building. 

Portfolio and asset managers should work with their operators to consider whether implementing industry guidelines make sense for their buildings — such as running outside air into the building 24/7. 

If following all the CDC guidance and ASHRAE recommendations, a more modernized building equipment system can, to an extent, help offset the resulting increase in energy usage. In fact, by our calculations, taking a ‘kitchen sink’ approach to implementing all of the CDC and ASHRAE measures could cause energy bills to spike by 70%. One approach would be to leverage the data to identify the smartest HVAC strategies that do not jeopardize occupant safety. These may include: 

  • Setting HVAC systems to circulate two to four air changes per hour, which provides the same health benefits as 24/7 ventilation. 
  • Replace MERV 8 air filters with MERV 13 filters, the same kind used in hospitals and other healthcare facilities. Using HEPA and MERV 16 filters together is not necessary as the virus particles are small. However, the particles they transmit on are generally larger, so the MERV 13 filter provides the same health benefit without a dramatic increase in cost. 

It ultimately comes down to addressing tenant concerns while balancing efficiency.

As Deborah Boyer, The Swig Company’s EVP of Innovation & Community Impact, recently said: “There were times when we chose to do things that a mechanical engineer may have refuted, but at a certain point, if a measure creates the perception of safety for a tenant, we might still implement it.” 

Evaluating back-end operations is also a key component in modernizing equipment.

This could come in the form of setting visual controls, performing preventative maintenance to help keep costs low, and updating procedures to ensure the site team is staying on top of it. At a Class A office tower in Miami with 674,000 square feet of rentable space, L&B Realty leveraged AI technology to gather over 34 million data points, leading to energy-saving measures that make the building more efficient and alleviate maintenance for the site team. These steps included isolating energy zones during evening hours and installing LED lighting retrofits in common areas with controls. 

3. Build a resilient partner ecosystem. 

A real estate portfolio is only as modern as its partner ecosystem. Portfolio managers should take a step back and assess their partners; specifically, property managers, on-site teams, vendors, service providers, equipment providers, consultants and contractors. Are they all aligned with a modern, sustainable and scalable approach that will be just as resilient and long-lasting as the portfolio itself? Are they using the latest technologies? 

Additionally, portfolio and asset managers should consider their partners’ ability to support the portfolio for climate resilience. Modernization cannot be fully achieved without equipping assets across the portfolio with solutions that reduce carbon emissions and ensure a positive contribution to the environment. As LPs are increasingly prioritizing funds that are committed to ESG, funds with portfolios that have data-backed climate solutions will be primed for investment. 

Partners should be able to scale, grow and adapt to the business’s evolving needs, keeping their portfolio cutting-edge and continuously modernizing for a brighter, more sustainable future. They must be resilient, versatile, technologically savvy and have a predisposition towards proactive problem-solving. 


In a rapidly changing and uncertain environment, portfolio managers can ensure adaptability and long-term resilience by modernizing their portfolios using AI-driven technologies to identify strategies with the best returns, to optimize their assets, and to maintain the right partner ecosystems to ensure efficiencies gained are not lost. 

Taking these important steps can give managers a competitive advantage in pursuing investors and tenants alike.

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