Smart buildings are key to a greener future. These companies are leading the charge

Published Sat, Dec 12 20208:47 AM EST

(This story is for CNBC PRO subscribers only.) Lights are on in all the conference rooms. Each room is cooled to the same pre-set temperature. But there's only one person on the entire floor. This is an all-too common phenomenon—and problem—in commercial spaces big and small across the U.S. (and never more so than in the time of Covid, with few people working in big-city buildings). As the country pushes toward a cleaner future, making buildings more efficient is key. Energy efficiency is a "vital part of the sustainability story" and a "very needle-moving dimension of decarbonization," Raymond James noted in a recent report. Recognizing the environmental impact of buildings, President-elect Joe Biden has made sustainable buildings a priority within his climate plan. Building newer and cleaner buildings plays a part, but that's not enough: older buildings also need to be upgraded. As states and cities beef up their building codes, there's a real opportunity for a number of companies working on digitizing buildings, three of which stand out: Honeywell , Johnson Controls and Schneider Electric . All three offer digital platforms for customers that monitor and track every inch of a building's metrics. The systems harness the power of big data and machine-learning to deliver the best overall experience, tailored to the needs of each specific customer, whether it be an office building, a hospital, a shopping mall, or an airport. For commercial properties in particular, smart buildings are instrumental in cutting emissions. Sophisticated building management systems can automate and connect the central nervous system of a building. With the heating system talking to the security system, for example, the building would know that only one woman is on the floor, pinpoint her location, and provide temperature control for just that one room. Making buildings sustainable is not just about the environment, however: it's also about economics. The EPA found that, on average, 30% of the energy used in commercial buildings is wasted, meaning there are significant cost savings to be had. Building on Biden's plan President-elect Joe Biden made combating climate change a central tenet of his campaign and has now named John Kerry as his special presidential envoy for climate in the new administration. Part of Biden's stated goal includes retrofitting four million commercial buildings . This figure is significant, since it represents roughly 70% of commercial buildings across the country, according to the latest data from the U.S. Energy Information Administration. Biden has also called for stricter building-performance standards nationwide and said that all new commercial buildings should be net-zero emissions by 2030. Overall, his plan aims to cut the carbon footprint of buildings in half by 2035. What Biden can realistically achieve will be limited should Congress remain split. But states and cities are taking up the initiative, and while policies vary widely, the vast majority of states have some sort of energy provision baked into their building codes. New York City, for example, has instituted carbon caps for buildings over 25,000 square feet beginning in 2024, with the caps becoming stricter over time. The city predicts this will cut emissions by 80% by 2050. It may come as a surprise to many how big the carbon footprint of buildings actually is. According to the U.S. Energy Information Administration, buildings — both commercial and residential — account for 40% of the country's total energy consumption. All told, buildings account for more than one third of the country's carbon footprint. The Paris Agreement stipulates that all buildings must be net zero by 2050, but the World Resource Institute estimates that currently less than 1% of buildings around the world are. "We believe we are in the early innings of a significant recapitalization of the building stock in the U.S., driven by the convergence of sustainability, technology, and post-COVID initiatives," Morgan Stanley said in a recent report. The firm noted that the total addressable market for upgrading buildings is "far larger than most appreciate." Many companies across industries are currently involved in digitizing buildings — everything from power providers to lightbulb makers to sensor manufacturers that are instrumental in gathering data. But companies that control the building management systems, which marry the physical and digital, are arguably poised to benefit most dramatically from the "green" movement in buildings — notably the following three. Honeywell International Industrial conglomerate Honeywell International has been engaged in building management for over 100 years. The North Carolina-based company has a market cap of roughly $149 billion, according to FactSet. Shares rose to an all-time high on Friday and are up about 21% for the year — outperforming the S & P 500's industrials sector, which has advanced nearly 9%. Over the last three months, Honeywell's stock has returned nearly triple that of the S & P 500 amid investors' rotation into cyclical areas of the market. In addition to offering building management systems, Honeywell in February launched "Forge Energy Optimization," which is a cloud-based, machine-learning solution that monitors a building's energy usage. "It continuously studies the building's energy consumption and different patterns, and automatically adjusts to the optimal energy saving setting without compromising any optimum comfort level," said Manish Sharma, vice president and chief technology officer at Honeywell Building Technologies. As a result, the system can deliver double-digit energy savings without sacrificing the overall experience for occupants. To illustrate how buildings can adapt, Sharma pointed to the question of figuring out what time to start the heating system. Rather than simply firing it up at 5 am, for example, the system can evaluate when occupants are actually in the building in order to determine the optimal set point. Sharma noted that roughly 90% of buildings across the U.S. are classified as small or medium-sized. These businesses might not have the same need or budget for going "smart" as the highly sophisticated, 100,000-square foot buildings in the country's largest cities, meaning that it has traditionally been difficult to benchmark their energy usage. In some cases, these buildings — a chain restaurant, for example — might even use a residential thermostat. And so, in an effort to simplify the process, this week the company launched a service aimed specifically at small and medium-sized buildings. According to Honeywell, the offering can reduce energy usage, and in the process save customers as much as 30% from the facility's energy costs. Johnson Controls Based in Cork, Ireland, Johnson Controls International is working on the digitalization of buildings, and in July launched a new platform called OpenBlue that harnesses decades of insights into the functionality of buildings. The company's market cap stands at $33 billion, and shares are up roughly 12% this year, slightly outperforming the S & P industrials sector. Research firm Atlantic Equities upgraded the stock to an overweight rating on Wednesday, saying the company is well-positioned for the new up-cycle, and that Johnson Controls' operational execution, cash generation and balance sheet have improved since its 2016 merger with Tyco. On Dec. 2, the company released the results of its annual energy efficiency indicator survey, which illustrates the need for smarter building control systems. According to the survey, buildings have experienced an 80% drop in occupancy during Covid, but only about a 20% decrease in energy consumption. Katie McGinty, vice president of global government relations at Johnson Controls, said that under the current system many buildings are "blunt instruments" — either they're on or they're off — and that only by going digital can buildings realize a step function increase in efficiency. It takes the HVAC system, lighting system, security and access system, etc., all working together to achieve "massively compounding energy efficiency opportunities." She called energy efficiency the low-hanging fruit, where it's possible to tackle climate change while cutting costs. The survey also showed that, not surprisingly, cost is the primary driving force when it comes to energy efficiency investments in buildings, with 85% of respondents saying it's an extremely or very significant factor. But nearly 70% of those surveyed also said that greenhouse gas footprint reduction was an extremely or very significant driver. Meanwhile, 70% of organizations said they were very or extremely likely to have one or more facilities that are nearly zero or net zero within the next ten years — a 7% increase from the 2019 survey. "We have the technology to get this job done, and when you move in this direction, you're going to cut peoples' energy bills and electricity bills. This is a cost saver as well as a climate saver," said McGinty. Johnson Controls is so confident in its system that it guarantees operating cost reductions and will finance the upfront costs of the system for customers. "The trend toward clean air and efficient buildings, and the drive towards sustainability, are going from a 'nice to have' to a 'must have,'" said McGinty. Schneider Electric Schneider Electric, which focuses on energy management and automation, is based in France, which — given that Europe has led the way in terms of prioritizing sustainability — means the company works with the newest technologies. "With sustainability at the heart of the group's strategy and products/solutions, we see it as a key enabler to reduce the carbon footprint of city infrastructure and buildings," Barclays said of the company in a recent note. Schneider Electric has a $78 billion market cap, according to FactSet. The stock hit an all-time high in November, and U.S.-listed shares are up roughly 35% for the year. Laurent Bataille, executive vice president of digital energy at Schneider Electric, noted that building management systems are rapidly evolving, thanks to harnessing technological breakthroughs from other industries. Given the recent changes, he said that it's vital for buildings to have the latest technologies in place in order to take advantage of smart buildings' full capabilities. As an example, he pointed to the latest C02-measuring sensors. "If you cannot use these new sensors as part of your BMS infrastructure, you're missing out on some of the analytical capabilities to optimize your ventilation system," he said. Bataille sees buildings of the future focusing on four key areas: sustainability, hyper-efficiency — in terms of how resources, including space, energy and maintenance issues, are managed — bringing resilience in areas like cyber security and grid stability, and, last but not least, what the experience of being in the building provides for its occupants. This is especially true in the aftermath of the coronavirus pandemic. "Covid is not creating new needs, but it's fully accelerating the awareness of how much the environment is important for us, and especially again, our buildings," he said. With Biden in the Oval Office, Bataille expects more sustainability-focused mandates, and more ambitious climate targets. "Europe is raising the bar. … We are confident that we will see the same thing happening in the U.S.," he said. - CNBC's Michael Bloom contributed reporting.

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(This story is for CNBC PRO subscribers only.)

Lights are on in all the conference rooms. Each room is cooled to the same pre-set temperature. But there's only one person on the entire floor.

This is an all-too common phenomenon—and problem—in commercial spaces big and small across the U.S. (and never more so than in the time of Covid, with few people working in big-city buildings). As the country pushes toward a cleaner future, making buildings more efficient is key. Energy efficiency is a "vital part of the sustainability story" and a "very needle-moving dimension of decarbonization," Raymond James noted in a recent report.

Recognizing the environmental impact of buildings, President-elect Joe Biden has made sustainable buildings a priority within his climate plan. Building newer and cleaner buildings plays a part, but that's not enough: older buildings also need to be upgraded. As states and cities beef up their building codes, there's a real opportunity for a number of companies working on digitizing buildings, three of which stand out: Honeywell, Johnson Controls and Schneider Electric. All three offer digital platforms for customers that monitor and track every inch of a building's metrics. The systems harness the power of big data and machine-learning to deliver the best overall experience, tailored to the needs of each specific customer, whether it be an office building, a hospital, a shopping mall, or an airport.