Written by Natalia Iamundo and Michelle Yung
As the COVID-19 pandemic recedes and the workforce gradually returns to the office, the commercial real estate industry will rely on PropTech to adapt. Building developers, construction companies and property managers will utilize PropTech to create more efficient, health-promoting and sustainable workplaces.
PropTech creates value in a myriad of ways including, for instance, in the areas of retrofits, smart buildings and safe workplaces. As the industry applies PropTech's new and enhanced technologies, there are several legal considerations that should be addressed.
The Value of PropTech
PropTech describes a movement and shift in mentality within the real estate industry to begin looking to technology-driven innovation in data assembly, transactions and the design of buildings and cities as the way of the future. PropTech creates value that not only achieves efficiencies and cost-savings but also promotes healthy and sustainable workplaces.
Retrofits: The renovation, retrofit and refurbishment of existing buildings provides a key opportunity to upgrade the energy performance of commercial building assets for their ongoing life. Often, retrofits involve modifications to existing buildings that aim to improve energy efficiency and/or decrease energy demand, thereby increasing cost savings and lowering emissions. Retrofits also provide an opportunity to install distributed generation to a building. These efforts reduce the operational costs, particularly in older buildings, as well as help attract new tenants and gain a market edge.
Smart buildings: Smart buildings describes technology-based platforms that facilitate the operation and management of real estate assets. This technology may provide information on building or urban centre performance, or directly facilitate or control building services.
Safe workplaces: As we move towards a post-pandemic world, the creation of a safe, healthy and welcoming working environment has found new significance. We recognize that creating a health-promoting workplace will yield improved health outcomes for employees. Innovations in shading and lighting levels, indoor air quality and filtration, personalized thermal comfort and building configuration go far to support these efforts.
Environmental, Social and Governance (ESG): PropTech will be an important tool in helping the commercial real estate industry meet the needs for sustainability, as the importance of ESG issues intensifies for owners, investors, lenders and other stakeholders.
PropTech and Legal Considerations
Privacy concerns: While high-tech buildings, for example, result in reduction of energy costs and an increase in other efficiencies, the technology employed (often AI-based) relies on the collection of data to function. Data privacy is becoming of increasing concern, and integrated technology systems are not immune from cyberattack. An office worker or tenant is more likely to look to a building owner or manager in the face of a data breach than to the company which supplied the technology. Building owners and operators therefore need to be acutely aware of how such data is being used and stored and:
- develop appropriate policies to help them manage both privacy concerns and cyber risks;
- invest in audit and compliance processes; and
- involve end users so they are informed of and understand how their data is being used and what measures are in place to safeguard it.
ESG: Growth in ESG investments is on the rise for a variety of reasons, including most recently on account of the emphasis being placed on ESG principles under pandemic-related recovery programs. Recent years have seen widespread expansion in investing into real estate as an asset class. We expect that, both from an operations and a financial perspective, those investors and building owner/operators who have incorporated ESG principles will benefit from sustainable long-term value. "Green building" (and more recently, "healthy building") have been identified as key components of ESG. A green building strategy can involve, among other things:
- A commitment to emission reduction targets. The application of PropTech allows for the optimization of resource consumption management systems.
- The use of green leases: PropTech facilitates communication with tenants and other applications to enhance the tenant experience.
- Establishing green building technology: Beyond the implementation of policies around minimizing waste, water consumption and the use of sustainable construction materials, features like occupancy and indoor air quality monitoring are now critical.
PropTech is vital in allowing for the collection and measurement of ESG metrics:
- managers and operators can assess whether a space is performing in a sustainable way and if not, identify areas of improvement to raise ESG ratings;
- occupants can access and monitor in real-time functions such as indoor air quality data;
- owners are equipped with comprehensive data and are therefore enabled to see trends, become highly responsive and find cost-savings; and
- the data helps ensure that legal compliance with regulations is rigorously effected.
Insurance concerns: Insurance rates are on the rise, driven by increases in extreme weather event-related losses, concerns over airborne infections like COVID-19 and simply by virtue of a greater portion of the population working from home. PropTech can help mitigate some of these increased risks, since the areas of PropTech that manage the maintenance and operation of a building through automated processes allow for real-time reporting, analysis and compliance. Insurers are beginning to recognize the value in preventative measures like this, whereas previously, investment in such measures may have been more difficult to justify from an economic perspective. As the growth of PropTech continues to surge, it remains to be seen whether the conventional insurance coverages will continue to remain applicable or if gaps in coverage will emerge.
The Bennett Jones Commercial Real Estate group will continue to share insights on the key legal and business developments in PropTech as the Canadian economy adjusts to new and more sustainable workplaces. If you would like to speak with a member of the firm's commercial real estate group, please contact Michelle Yung or Natalia Iamundo.