With the UNEP calling for immediate action and investment into the sector, it is clear that the decarbonization of buildings is critical to avoiding going off the 1.5 C degrees ledge.
Given our focus on digital tech solutions to protect people and the planet, we are exploring an emerging sector of companies who are applying AI to increase building energy performance as part of the targeted effort to make the built environment more sustainable.
The Buildings Sector’s Dirty (Not-so) Little Secret
The buildings sector’s environmental issues can be categorised into three core factors:
❗Energy usage - Buildings are responsible for a substantial proportion of energy use worldwide. Energy demands for operations, such as heating and cooling, water, lighting and cooking accounts for the majority of demand and continues to increase; in 2021, this demand reached a peak of almost 135 EJ.
❗Natural resource use - According to the OECD, global material use is expected to almost double by 2060, with the most significant increase in minerals, including those in construction materials and metals. Whether the recent inflation will curb construction in the long-term is yet to be seen.
As illustrated by the Global Buildings Climate tracker, the buildings sector is off track on achieving a zero-carbon building stock target in 2050 and the gap is widening. The next decade will be crucial in re-navigating back to the net-zero reference line.
Buildings and construction are facing multiple pressures to increase the sustainability of both existing and new buildings, with some of the core forces being…
Regulatory - The EU has issued multiple directives to strengthen the achievement of building and renovation goals in the European Green Deal, including requiring all new buildings to be nearly zero-energy buildings (NZEB). Also, the SFDR and CSRD rulings will require certain investors with real estate portfolios and real estate organisations to comply with sustainability reporting requirements and disclose energy-inefficient real estate assets.
Increasing energy costs - The operational costs for buildings have increased due to recent energy price hikes; Despite ending steady at the end of 2022, H1 2022 saw energy prices accelerate at rates not seen since the 2008 financial crisis, which followed a ~50% increase in 2021.
Investor demands - Savvy real estate investors have become more interested in ESG in due diligence, having to effectively manage climate risks to their assets while also looking to capitalise on climate opportunities.
Tenant demands - Sustainability is becoming a key demand by tenants especially for those in premium office spaces. This focus on sustainability is driven both by an interest in the impacts their individual operations are generating and the impact on wellness of their employees.
Overall, some progress has been made since 2015 and global building and construction trends have shown that policy and regulation has led to increased focus on energy efficiency (i.e., increase in energy codes and Nationally Determined Contributions (NDCs) that mention buildings), but it is not enough to offset the continuing trend of increasing floor area (see figure below).
Market opportunities for sustainability technologies
These pressures have resulted in rapid growth and increased investment in the low-carbon transition in buildings and real estate (as seen in the above figure), creating a prime market environment for investment into sustainable property technology (PropTech).
Despite being known as an industry slow to embrace change, real estate is entering into its third wave of major technological change, PropTech 3.0, following periods of significant technological shift.
🌊 PropTech 1.0 - Beginning in the mid-1980s, this wave introduced the industry to the personal computer, the internet, and associated softwares such as accounting.
🌊 PropTech 2.0 - Beginning in the early 2000s where cloud computing, mobile internet and broadband opened the market to online agency and marketing platforms like Rightmove and Zoopla, and new property sharing models like WeWork and AirBnB.
🌊 PropTech 3.0 - This wave is expected to be driven by “global pressures of climate change and rapid urbanisation and enabled through the maturing of exogenous technologies including the Internet of Things, Machine Learning and Artificial Intelligence and Blockchain” (University of Oxford, PropTech 2020: the future of real estate)
Investment in the energy efficiency of buildings reached more than US$237bn in 2021, marking the largest YOY growth in the past 10 years. However, this increase reflects the post-pandemic rebound in construction and public investment from high income countries. Broader investment is needed to tackle efficiency improvements among the existing global building stocks property technology.
The proptech space has grown rapidly and continues to garner venture capital attention with significant opportunities for companies focused on ESG. Despite VC funding in the proptech space declining by 38% in 2022 (raising $19.8bn), the outlook on ESG proptech remains positive with real estate stakeholders exploring climate tech solutions; VC investment in clean energy proptech more than doubled in 2021.
We cannot ignore these developments and need to act, which is why we at 4impact are focussing on the proptech space. As climate change and sustainability continues to be a driving force for industry development, 4impact is uniquely positioned to leverage our expertise in impact and digital technology. Some other notable VCs that focus on the built environment include Kompas and 2150 VC.
ESG Optimised Building Management Systems: Real Estate’s No Brainer
The decarbonisation of the buildings sector requires significant improvements on building energy efficiency. ESG-focused property technology, which is digital technology that offers different stakeholders including property managers, property developers and housing companies online solutions to define, measure, improve and report on their ESG performance, offers a promising solution.
As such, we have been conducting a deep dive on SaaS AI-enabled solutions which plug into building management systems (BMS). These technologies incorporate data inputs from building parameters, external weather, HVAC hardware and apply artificial intelligence to predict future behaviour and enable optimisation of building operations, reduction of costs and environmental impacts. Because these ESG BMS softwares require minimal capital upfront, and have the potential to decrease energy consumption per building by 20-40%, they are an economically efficient and scalable solution to address real estate’s market pressures.
Market Size: The Total Addressable Market size in the EU stands at 6.4bn sqm of commercial space. Accounting for conservative estimates of viable building stock with BMS (EU Buildings Database) and price/sq metre this amounts to approximately €1.5bn of potential revenues today, only set to increase materially going forward.
Notable concluded VC deals:BrainBox AI closes Series A fundraise of US$30mm (July 2022), DeltaQ raised €8mm for international expansion (September 2022)
ESG-focused BMS proptech provides scalable, affordable, impactful solutions positioned competitively against traditional substitutes including CAFM systems (computer aided facility management systems), ESG consultancies and real-estate inhouse solutions.
However, the ESG proptech market in the EU is fragmented with multiple players focused on energy usage and carbon emissions, all aiming to achieve the same goals. This fragmentation, along with the numerous stakeholders involved in the onboarding process (real estate owners, building managers, maintenance, etc), mean that there remains opportunity to capture market share.
At 4impact, we have analysed 20+ players and have identified key characteristics within this market:
Data inputs: Common data inputs include building parameters, external conditions, and BMS data (HVAC systems, metering, operational costs, internal air quality). Although some companies, like Clairify, focus on internal air quality, most companies, such as NUUKA and BrainBox AI, concentrate on data relevant for energy and HVAC systems.
Optimization outputs: As HVAC can represent over 40% for energy consumed by non-residential buildings, almost all players in the space (including DeltaQ, Dabbel, and Kapacity), including increasing energy efficiency, maintaining indoor climate comfort, and providing hardware insights.
Hardware: Several companies, like Thermosphr and Smartwatt, require no hardware installation. But for those that do require a hardware element such as an IOT device, an over-the-counter, plug-and-play solution is important to reduce upfront capex.
Automation: Customers prefer flexibility within solutions where optimization can be conducted automatically or manually by the maintenance teams, depending on the relationship with their maintenance and management teams.
Technology: The technology is key to building optimization. We have come across a variety of AI types utilising Model Predictive Control across White box / Grey box / Black box solutions. Grey box, as utilised by DeltaQ, enables less onboarding than White box, while benefiting from increased precision compared to Black box.
Target Market of clients: Given the diversity of the real estate market, players may target either the commercial or residential markets, with most focusing on office and commercial buildings broadly (Aedifion), while some target industrial buildings (Beebryte), light commercial (Smartwatt) or both residential and commercial (Hero Balancer).
Impacts: There are a variety of impact metrics calculated across CO2e emissions, energy usage, operational problems, anomalies reduced and tenancy wellbeing. Companies able to validate their environmental impact at reduced costs will garner traction.
Upfront costs and cost-sharing: With a range of payback periods, companies with shorter periods and cost-sharing structures, like Aedifion, will have a competitive advantage.
Future market capabilities: The ability to support grid balancing from buildings in the future is key to a systemic transition to renewable energy. We are interested in companies that have the capability and foresight to scale to support this balancing.
The market opportunity in ESG-focused proptech is too strong to ignore – there continues to be pressure on building owners to become more sustainable, ensuring competent demand for ESG proptech. We believe that ESG BMS software offers a viable and economic first step to addressing global environmental issues in real estate. Companies with a strong go-to-market strategy, a team with real estate expertise, proven impact and cost results, and adaptable technology that provides easy customer onboarding and support, will be able to quickly garner market share.
We are interested in learning more about companies in this space and supporting the transition so needed in the buildings sector - let us know who we should be talking to!