Broadly defined, HVAC systems are responsible for providing thermal comfort and high-quality air supply within indoor spaces. To maintain thermal comfort, equipment such as furnaces or boilers are used for heating and air conditioners or chilled water systems are used for cooling. To ensure high-quality air supply, mechanical ventilation systems are used to introduce fresh air and to move air throughout a building’s interior. HVAC systems in residential or small commercial buildings are commonly controlled via thermostats, while systems in large buildings are controlled by facilities managers via building management systems. The type of HVAC system installed in a building depends on a variety of factors including the building budget and location, but the goal of all HVAC systems is the same: ensure that building occupants are comfortable and healthy. When operating properly, an HVAC system should not require much user input and should be hardly noticed by building occupants.
The reliability and performance of HVAC systems is exceedingly important for both commercial and residential real estate for several reasons. First, occupants are very sensitive to the environment inside a building, and occupant health, mood, and productivity can be significantly altered by changes in air quality and/or temperature. Secondly, the HVAC system is typically the largest energy consumer in both commercial and residential buildings. HVAC systems account for roughly 40% of the energy consumed by buildings each year (according to the U.S. Energy Information Administration), and the utility bills associated with these systems can be quite large. Finally, HVAC outages and repairs can be extremely costly both in terms of equipment and repair costs and in terms of occupant discomfort or loss of productivity during extended outages.
The breadth of technologies within the HVAC space is quite large. For the purposes of this discussion we aim to focus on new technology innovations—ones that we find directly in the market—that make HVAC systems more efficient (in terms of energy usage), easier to control or program, less expensive to repair or install, or better at providing thermal comfort and/or high air quality. We first will outline many of the major issues and flaws that plague commercial and residential HVAC systems. Then, we will describe the impact of these issues and will highlight some technologies and companies that are addressing said issues.
Firms can save energy while improving thermal comfort
Based on our research and discussions with players in the real estate industry, the most common problem with today's HVAC systems is an inability to provide continuous thermal comfort due to over/under cooling. Whether in office buildings, malls, or at home, occupants often encounter rooms that are too cold or too hot causing reduced levels of comfort. The problem can be divided into several scenarios: (a) granularity of control, i.e. we want different rooms/zones to have different temperature setpoints, (b) scheduling, i.e. a room should be 24 degrees centigrade during the day and 30 degrees at night, and (c) thermal response, i.e. meeting room becomes hot as more people gather for the meeting. Providing thermal comfort as and when needed (preventing under/over cooling) is important for occupants for obvious reasons, but it is also important for building owners and tenants because it saves energy and reduces the number of occupant complaints that must be addressed.
For residentials with centralised cooling (common in the US), we have smart thermostats from companies like Nest and Ecobee. The advantage of this new generation of thermostats, apart from being programmable, is the capability to sense the presence of occupants in the building and learn about the occupant's temperature preferences. However, solutions for residentials with centralised cooling do not stop at thermostats. Companies such as Flair, Keen Home, and Ecovent produce smart vents, which automatically open and close to fine tune air flow on a room-by-room basis. These smart vents are installed in place of traditional vents/registers and work in conjunction with the smart thermostats mentioned above.
A solution for residentials with window or mini split air-conditioners also exists in the form of internet-connected smart remote-control replacements. These smart devices control AC units by mimicking the signals sent by the remote-controls that come with the units, usually through infrared. The smart devices are also typically equipped with various sensors (temperature, humidity, occupancy), providing additional input data for the temperature control algorithms. This additional input data coupled with advanced data processing allows the AC units to work more efficiently and provide an even temperature profile throughout the course of a full day. Companies in this space include Ambi Labs, Sensibo, Tado, and Flair.
Thermal comfort innovations in the commercial space revolve around using big data, machine learning, and feeding occupancy data into control algorithms to fine-tune HVAC settings for comfort and energy savings. Example of companies that use big data and algorithms to better control HVAC systems are BuildingIQ and 75F. On the other hand, companies like Enlighted and Envairo use occupancy data and other data gained from sensors to deliver better thermal comfort and improve indoor air quality. A common goal of these companies is to reduce the number of temperature related complaints from building occupants and to save energy by reducing overcooling.
Indoor air quality will soon become a major selling point
The other primary function of a HVAC system is to maintain high-quality air supply within buildings. Several studies have shown that the quality of the air you breathe while indoors varies significantly from building to building and can have significant effects on health and productivity. The most common contaminants found in conditioned indoor air are small particles (PM2.5), volatile organic compounds (VOCs), and high levels of carbon dioxide (CO2). PM2.5 particles are particularly unhealthy because extended exposure to them has been linked to higher levels of cardiovascular disease, increased risk of respiratory issues and asthma, and worsening lung function. High levels of VOCs and CO2 in indoor air are less acutely dangerous, but these contaminants have been shown to significantly decrease worker productivity and increase negative symptoms such as allergies and headaches.
From the point of view of a building occupant, poor air quality causes discomfort and can make it difficult to focus and work—which we experienced first-hand in our office in Paris. Occupants may end up spending less time in the office and may feel groggy or tired while in the office. In buildings with very bad air quality, occupants may also begin to feel sick and have frequent headaches. This type of situation can be very frustrating for occupants because they often are not able to control or modify the HVAC system in the building and may not know why they feel sick. For example, an employee in a large office building is not able to log into the building management system, check the CO2 level in the office, and modify the ventilation rate in a building to fix a problem. The employee is only able to log a complaint with the facilities manager when air quality seems poor.
Facilities managers, tenants, or building owners should also be incentivized to maintain high air quality. Because employee productivity decreases when indoor CO2 levels are elevated, employers should choose a workplace with a HVAC system that provides good air quality to have a highly productive workforce. Furthermore, maintaining a high air quality level improves building occupant comfort levels and reduces the number of air quality related complaints that facility managers must address.
Poor indoor air quality can arise due to several different causes including lack of ventilation, improper placement of a fresh air intake, poor air filter maintenance, or chemical emission from new furniture or carpet. Other issues can arise due to faulty HVAC equipment or improper HVAC system settings. Because most HVAC systems (especially in the US) do not measure indicators of indoor air quality, these problems are not proactively identified and are typically only fixed after many occupants log complaints. At best, some HVAC systems measure CO2 levels at a system level (1 sensor per building) and use the data to slightly adjust ventilation rates (when CO2 levels are high, more fresh air needs to be brought in). However, there are few, if any, systems that measure indoor air quality at several different points throughout a building. This means that many buildings with air quality problems are not even aware of the issues!
Fortunately, due to the decreasing cost of internet-connected sensors, several start-up companies are now developing systems that can measure indoor air quality at a room-by-room level. With these systems, air quality issues can be proactively identified, and the HVAC system can resolve issues before occupants begin to feel uncomfortable. Envairo is a company which makes inexpensive CO2 sensors and advanced HVAC control algorithms that ensure high quality air is supplied to all the rooms within a building. As an example, an Envairo CO2 sensor in a crowded meeting room can detect rising CO2 levels before they become an issue and can tell the HVAC system to increase the supply of fresh air to the room. Breeze Technologies is a startup that has developed a multi-sensor device that measures several air quality indicators in real-time and can identify problems quickly. A Breeze device can detect if a running car is parked near a building’s fresh air intake and can tell the HVAC system to temporarily stop bringing in the unhealthy outside air. These systems are inexpensive and can improve both worker comfort and productivity.
Untapped market potential for HVAC innovations
In one of its report, Jones Lang Lasalle describes a 3-30-300 rule of thumb, which states that only USD 3 psqft p.a. is spent on energy while USD 30 psqft p.a. is spent on rent and USD 300 psqft p.a. is spent on human capital. Instead of focusing on the actual numbers, we should focus on the multiplier. A 10% savings in energy is meagre compared to a 10% savings in rental and even less compared to a 10% savings in labour cost.
A simulation study by Pacific Northwest National Laboratory for the US Department of Energy in 2011 states that adding advanced controls and feeding demand (occupancy) data to HVAC systems can reduce energy consumption and associated costs by 20-40%. The obvious way to get the savings is by first installing a HVAC Building Management System (BMS) and giving building managers the capability to do remote management and automation. However, an Energy Information Administration (EIA) survey in 2012 states that the percentage of small buildings (under 1,000 sqm) and mid-sized buildings (between 1,000 sqm and 10,000 sqm) equipped with HVAC Building Management System was 8% and 25%, respectively, while the percentage for large buildings was 71%. We suspect that this low penetration in small and mid-sized buildings is due to the significant fixed cost—costs that do not scale with size and are significant for small and mid-sized buildings, and less so for large buildings—of installing traditional BMS systems, hindering HVAC BMS adoption despite potential long-term savings.
One way a HVAC system can contribute to increased productivity from human capital is by improving indoor air quality (as discussed previously). It is an increasingly popular topic, so much so that in 2017 researchers from Harvard did an experiment on how indoor air quality affects decision-making performance. The researchers estimated that "productivity benefits from doubling the ventilation rates are $6,500 per person per year" and that "the cost of doubling ventilation rates would be less than $40 per person per year". Like energy savings, the case for increased productivity from better air quality is convincing, yet obstacles remain. The biggest obstacle is the misalignment of incentives in which building managers are often incentivised to keep costs low and system uptime high, while productivity gains from improving ventilation rates and indoor air quality is enjoyed by tenants.
To decrease the cost of rent, there are a number of firms tackling the space optimisation problem. Studies have estimated that up to 40% of office space is underutilized, which means many businesses could rent smaller spaces. There are both early and late stage ventures working in this area, and some firms specialise in sensors while others specialise in data aggregation and processing. One very early stage venture we encountered, Envairo, uses CO2 sensor data to determine occupancy levels in addition to using the data to get energy savings from HVAC systems and to improve indoor air quality. Envairo can also use the data for space-use analytics, allowing tenants to analyse hot and cold spots in their space and do optimisations. Anecdotally, unlike energy savings and indoor air quality, one of the difficulties faced by firms selling their products in this space is the disconnect between spending money on data gathering activities and using the data to get returns from optimised space. Despite that, a few firms such as RetailNext and Enlighted have managed to raise hundreds of millions of dollars selling solutions for space-use and indoor analytics. Enlighted started their business by bringing energy-saving lighting control systems and has now ventured into controlling HVAC systems and providing space-use analytics, leveraging occupancy data gathered by the smart sensors in their lighting system.
Considering this 3-30-300 guidance, we suspect that the focus of innovations in the HVAC space will move away from the smaller and more saturated energy market to the larger and greener pastures of space optimisations and labour productivity improvements. However, it seems that the way to unlock these markets is by providing solutions with demonstrable and more immediate benefits (i.e. energy savings) and expanding from there.