EUROPEAN SMART BUILDING FORECAST

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1 EUROPEAN SMART BUILDING FORECAST In conjunction with Intel Corporation

2 Contents Executive Summary What Is a Smart Building? Supply-Side Dynamics Demand-Side Dynamics Scenario for Market Development Smart Buildings in Europe: Market Forecast Conclusions

3 Executive Summary The Internet of things (IoT) is so broad that it does not make sense to attempt to forecast the whole market such forecasts invariably lead to more questions than answers. CCS Insight s approach to forecasting in IoT is to select specific areas in the market and forecast those more deeply. Here we focus on smart buildings. In our forecast we refer to systems that form the infrastructure of the building, rather than systems involved in the way the building is used. Smart buildings are an exciting development area, using technology to modernise the way in which the systems within a building are run, and promising many improvements: Lower running costs, thanks to more-intelligent heating and lighting, predictive maintenance, centralisation of information with dashboards and so on. A better user experience, as various aspects of the building are easier for people to use, often because they are controllable through an app. Better eco-credentials, as less energy and fewer resources are wasted. Better cities in the longer term, as a growing number of buildings contribute data into city systems, enabling better management of cities. These benefits can apply to commercial and residential buildings alike, and this means that the addressable market is huge: almost the entire stock of buildings in the long term. There is high energy across the fragmented landscape of building system suppliers to make their systems smart. Some are using the opportunity to expand their role, specifically to provide moregeneralised platforms for managing systems in buildings. But the demand side is slower with smart systems mainly being considered only at key points in the life of a building. System and supplier complexity, together with inadequate skills and limited knowledge of IoT among building managers and builders mean that this is an area with high perceived risk. IoT hype is alive and well in the market. Our work suggests that the smart building market will develop relatively slowly over the next five years, subject to long slow replacement cycles of the building systems, a high degree of supply-side complexity and conservatism among buyers. Adoption will be much quicker in new buildings but these are a small share of the total stock of buildings. Across the nine markets in Europe in our forecast, we expect 18 million buildings or dwellings to be smart at the end of 2020, growing at a compound annual growth rate (CAGR) of 28 percent from 2015 to Sales of smart systems will remain mostly in a slow growth phase until We forecast 2.8 million smart building systems to be sold in 2020, only 33 percent up from We expect accelerated growth to start in We recognise that changes in the market, such as new regulation or the arrival of new players using IoT disruptively, could bring significant acceleration to adoption and sales. CCS Insight

4 What Is a Smart Building? The smart building market is about the systems in a building that form the infrastructure of the building and that generate data, enabling analysis, decisions and actions to be taken. As in all IoT areas, defining the smart buildings market is challenging. In our forecasts, we are talking about the core systems of a building, including heating, air conditioning, lighting, utility usage, access control, security, fire and other safety systems, elevators and moving walkways, communications and networking (data, audio, video distribution). We do not include systems that relate to operations in or usage of a building. For example, hospital machinery, retail systems, household smart gadgets and factory machinery. We recognise that there are some boundary problems where definitions are fuzzy. Indoor location systems could easily become part of the building infrastructure. Similarly, smart meters could be viewed this way, although today they are external to the running of the building and primarily benefit utility providers rather than building users. Desk occupancy systems could also be argued to be part of the infrastructure, helping to make a building smart, however there is a high transient use of these and they relate more to the operations of the building than the smartness of the building itself. For the moment we are excluding all of these, but we will keep this under review. The definition of smart here is also challenging. We have taken the view that a smart building system produces data that enables decisions and actions to be taken, either within the system itself, or by sharing the data between systems. For example, a smart heating system may use the data it generates to learn the heating and cooling characteristics of the building, so it can provide the right temperature for the occupants at the right times, but without heating the building unnecessarily. In the longer term we expect a much higher degree of intelligence as the various systems increasingly work together and make use of artificial intelligence. The use of data is an important distinction from earlier forms of intelligence in building systems, such as passive infra-red light switches that save electricity by switching lights off if no one is in a room. For us, these do not qualify as smart because they are a closed system, with a direct link between the sensor and the switch that performs only a single dedicated function, and does not enable any broader decisions, actions or scenarios. CCS Insight

5 Supply-Side Dynamics At the core of the emerging smart buildings market is an enormous analogue-to-digital shift in the systems used in buildings. With this digitalisation comes the opportunity to generate and store a lot of usable data from the various sensors and components used in building systems. This is leading to a complete overhaul of building system architectures. And, in turn, this is opening up opportunities for suppliers to redefine their scope and introduce new business models. However, the supplier landscape for building systems is highly fragmented. There are eight to 10 key systems in a building, each with its own specialist suppliers, and there are many national players. In addition, there is a layer of facilities management providers that run commercial or multi-tenant buildings on a contract to the owners, and act as an interface for occupants. Facilities managers often have their own monitoring systems for asset management, scheduling and other key functions that run across the various systems in a building. This clearly starts to raise questions about where the smart systems data should be stored and how any intelligence should be provided. At present a number of systems suppliers are providing smart systems at the higher end of their offerings, while not withdrawing all of their older systems, so there is a transition taking place. The smartness of the systems is a key point of differentiation. In addition to new systems, some providers are launching smart building platforms run locally or in the cloud for collecting and analysing data and for providing profiling, machine learning and decision rules. Some of these platforms relate only to their specific system, some are crossing into related domains, and others are attempting to be universal smart building platforms for all systems. For example, Milestone, a Danish surveillance management specialist, is branching into access control using its platform to connect various door locks and entry systems. Similarly, lighting supplier Aurora has set up Gooee, which is attempting to create a universal platform for building systems. ASL designed a system from scratch to provide a universal smart building platform. How these platforms will work with facilities management platforms is not clear. One facilities management company suggested to us that system-level platforms could in future send an into its system to raise a ticket for action. Although this was only a single example, it suggests that there are parts of the market that are just not equipped for modern Web development practices yet. There are also suppliers that are looking to disrupt the status quo by using smart building technology. And lastly there are several other groups of technology suppliers that see smart buildings as a huge potential adjacent market that they can start to tap into. Such suppliers include chipset providers and telecom network operators with narrowband or mobile networks. They are beginning to position themselves as enablers of the smart building revolution; they are starting to form relationships with the many different providers of systems in order to become key ingredient suppliers to them. Given the complexity of the building system supplier landscape, this will take some time. CCS Insight

6 Demand-Side Dynamics There are several different points in the life of a building when smart systems will be considered. They occur during new builds, refurbishments and retrofitting or upgrading an existing system. For new buildings, the developer has a very strong incentive to make the building as attractive as possible so that it is easy to sell or let out. Similarly, an investor in a brand-new residential development might want to make it future-proof and employ the latest technology. This means that there is a higher propensity to adopt new, smart systems. Major refurbishments involving the infrastructure systems of the building take place infrequently. For office space this could be every 10 years, and other types of commercial building run on longer cycles of 15 to 20 years; residential buildings can be even longer. Builders and developers know that infrastructure systems have to last a long time, so there is a natural conservatism when selecting suppliers and products. Many people have had poor experiences with technology not working, or with software updates, and perceive that it may not be good to be on the bleeding edge. We spoke to one supplier of KNX smart home systems for very high end properties, which said that it does not even perform software updates once it has installed a system, for this reason. In between major refurbishments, provided the existing systems are working there is a strong incentive to leave them alone. Having paid for a system with a long expected life, the owner will be looking to amortise the system, rather than to spend more money. Even more importantly, replacing something like a heating or air-conditioning system may mean the building has to close for a period, with loss of rent, significant disruption for occupants and so on. Even if a smart system promises cost savings in the future, the risk of disturbing a working system is one that many building owners would prefer to avoid. However, there are opportunities for retrofitting smartness to existing systems without replacing the whole system. These come where the smart upgrade can deliver significant savings in running costs, for example as promised by Nest, Hive, Tado and other smart domestic thermostats. Or it can be where the cost and the risk of the upgrade are relatively small, and the smartness adds value in other ways, such as Wi-Fi hot spots in smart light bulbs in offices, or sensors monitoring activity in the house of an elderly person. For commercial buildings in particular, there are some further dynamics in play. Firstly there is the fact that building managers have not usually had much training in technology and so are unlikely to be familiar with RESTful APIs, algorithms, neural networks or other features of a modern smart building system. Secondly, each building has a unique mix of systems, so it is a difficult and high-risk task to select the optimum platform for managing them. The only way we can see to overcome this is if some platform suppliers can genuinely claim to interface with almost all suppliers systems. We believe Tridium s Niagara is currently closest to this. Thirdly, the role of facilities management companies can mean that there is a blurred line with the building owner about who is responsible for recommending, scheduling, investing in and implementing new systems. Many facilities management companies are on long contracts so this factor is likely to provide inertia against adoption. CCS Insight

7 Scenario for Market Development Given the dynamics in the market, our main scenario for adoption of smart systems in buildings is that the market will be driven by supply-push more than demand-pull. Suppliers will continue to improve the smartness of their systems, mainly as a form of competitive differentiation, rather than in response to strong demand. For some time, only some buyers will invest in smart systems, although this proportion will rise steadily. The proportion will be higher in new building projects than in major refurbishments, and the number retrofitting systems will be smaller still. Because suppliers will be continually improving their systems, after a while it will be difficult to buy a building system that is not smart. We estimate that this will take five to 10 years faster in commercial building systems, slower in residential systems. At that point adoption will reach 100 percent in new buildings and in refurbishments. Then the rate at which the buildings stock in a country becomes smart will depend only on the amount of new building and the rate of refurbishment. There are some key differences between countries. Our research shows that in Europe the Nordic countries are adopting fastest, helped by a need for heating systems that deal efficiently with severe winter weather and by a strong focus on environment and climate preservation. Germany is also a fast adopter, with very strong interest in the eco-credentials of the building, and benefiting from the overall Industry 4.0 aura around industrial IoT. Germany is also home to several suppliers of smart building systems. After those countries in terms of rate of adoption come France and the UK, followed by Italy and Spain. In parallel with this central scenario, there are some companies attempting to disrupt existing facilities management and building system markets using IoT. We estimate that these will see limited success over three to five years, because of the inertial factors in the market. However, it is possible that an Uber of smart buildings could emerge within that time and accelerate the whole process. It is also possible that there will be some significant regulatory changes in construction that will accelerate adoption. We do not expect this to have a transforming effect on our forecasts, because new regulations in this area are usually introduced with a lead-in period of several years. CCS Insight

8 Smart Buildings in Europe: Market Forecast Our forecast for smart buildings in Europe covers nine countries: France, Germany, Italy, and Spain, the UK and the Nordic region, consisting of Denmark, Finland, Norway and Sweden. In these nine countries, we estimate that in million buildings or dwellings, or about 4 percent of the total, were smart; that is, fitted with at least one smart system. We expect this figure to grow to 18.3 million buildings or dwellings, or almost 10 percent of the building stock by 2020, as shown in Figure 1. Figure 1. Installed base of smart buildings by country, Source: CCS Insight The differences between markets are significant: we expect almost 20 percent of the building stock in the Nordic region to be smart by 2020, while for Italy, Spain, the UK and France this number will still be a single-digit percentage. Furthermore, adoption will be different by type of building, with commercial buildings marching well ahead, with 22 percent of the total across the nine markets being smart in 2020, while the proportion of single-family homes will be only 6 percent. Dwellings in multi-tenant buildings will be somewhere in the middle with 12 percent. Sales of smart systems for buildings will grow relatively slowly in the next five years, with visible acceleration starting toward 2020: earlier in the Nordic countries and Germany, and later elsewhere. We forecast smart systems to be sold into 2.8 million buildings in 2020, up from 2.1 million in 2015: this is a CAGR of just 6 percent (see Figure 2). Growth in the five-year period to 2025 will be significantly higher, as the market reaches the hockey stick stage. Figure 2. Sales of smart systems for buildings by country, Source: CCS Insight CCS Insight

9 Smart Buildings in Europe: Market Forecast An interesting aspect of the market s development is the expected change in the mix of clients in the long term. As explained above, refurbishment will be the biggest source of adoption of smart building technology. Currently it accounts for about half of the demand for smart systems. Over a third of the sales of smart systems are currently retrofitted, and only a small proportion (14 percent) is consumed by newly built buildings and dwellings. However, the share of sales to refurbished buildings will grow considerably, and in 10 years it will be close to three-quarters of total sales. At that point the share for retrofit will fall to about 10 percent; sales to new buildings will stay fairly stable during the forecast period. The reason for this dynamic is simple to explain. Currently, advanced technology adopters retrofit Nest thermostats and similar systems to their homes, but there is some evidence that this is not turning into a mass market owing to the barriers outlined above. On the other hand, new buildings and refurbished buildings will fairly soon become smart by default. In the future, the structure of the market will be driven mostly by the proportions of activity in the building market: every year the number of buildings that are fully refurbished is significantly higher than the number of brand-new buildings. To make the most of the market potential, suppliers will have to work with builders and installers in the refurbishment market, and not focus only on architects and constructors for new building developments. CCS Insight

10 Conclusions The sheer number of buildings in each country and the number of different systems within each building, point to an enormous addressable market for smart building systems. Suppliers of building systems are investing to address that. There are also other players within the technology supplier community with high hopes for smart buildings, including chipset providers and telecom network operators. However, unless a really successful disruptor emerges, we expect the market to develop relatively slowly. The high adoption rate of smart systems seen in new buildings is good, but this serves a small proportion of the total stock of buildings, typically a few percent. Major refurbishments are the biggest long-term opportunity, but the rate at which they happen is unlikely to be quickened by the existence of new smart building technology. The important change in speed of adoption will come when supplier competition means that all building systems have become smart and it is difficult to buy an older, non-smart system. The vision of smart cities, in which smart buildings form a community of data providers that feed the overall smartness and efficiency of a city, will remain a longer-term prospect for some time. Although there are a few brand-new cities in China in which it is possible to achieve this, they will remain outliers. CCS Insight

11 CONTACT US For EMEA sales, please contact: For US sales, please contact: