Uber for HVAC? Emerging marketplace opportunities in commercial buildings
Online service-based marketplaces have transformed how we discover new offerings and transact with providers. Startups offering such marketplaces generally have changed a variety of industries. In many cases, the changes are profound. AirBNB’s marketplace is the largest provider of hotel rooms, though it owns none of them. Uber’s marketplace for rides is larger than any taxi company, yet it does not own any vehicles. Recently, venture firm Andreessen Horowitz (known as A16Z) published a great piece summarizing marketplace startup developmentsand made some predictions of what is ahead. It does not directly cover the building and facility management industry, but the essay is quite informative.
As background, Li Jin and Andrew Chen, the authors of the essay, start by quantifying the services landscape, which is a significant part of the US economy. 125M employees work in services. The essay cites Bureau of Economic Analysis data indicating that while 69 percent of spending is on services, only 7 percent of it is digital (meaning that the transaction was conducted online). There is a big opportunity for more digitization of the services value chain.
The authors also highlight the evolution of service marketplaces. They identify four stages, plus a “what’s next” stage: where they think marketplaces are going.
- “Listings”, which include Craigslist and Yelp as directories to find services.
- The“Unbundled Craigslist Era”, in which specific firms emerged that provide listings for specific areas of interest, and (in some cases) add communication with the service provider or booking capabilities. (This includes Angie’s list, TaskRabbit, etc)
- The“Uber for X”era, in which the booking and transaction are always handled by the central platform, adding to discovery and direct communication with the service provider.
- “Managed Marketplaces”, which add active oversight of the delivered service by the marketplace provider. This model grew out of the Uber for X concept, but supported “services that were more complex, higher priced, and that required greater trust“. For example, in real estate, OpenDoor will buy a home and then find the next owner, replacing the traditional sales process and reducing risk for the seller.
The A16Z essay’s big idea is that service marketplaces are next going to tackle regulated industries. This includes services delivered by individuals who hold a certification from a professional or industry organization. For buildings and facilities, this could include certified contractors or mechanical engineers.
Of course, there is an opportunity to transform service delivery in commercial buildings. Notably, services are a huge part of building and facility management. Mordor Intelligence in 2018 estimated that HVAC service is a $49B market, with the largest share being in commercial buildings. Johnson Controls, for example, as late as 2016, derived over 50 percent of its buildings business unit revenue from services (See here, page 35, exhibit 97). Large facility management providers, like CBRE and JLL, offer dozens if not hundreds of unique services, some of which are subcontracted.
Among mechanical contractor firms, which are focused on HVAC installation and repair, there are many small firms that could benefit from more streamlined customer discovery and expedited bookings and transactions. The Census Bureau reports that there are about 97,000 HVAC and plumbing contracting firms, only 151 of them have 500 or more employees. Department of Energy reports that “20 percent of HVAC contractors across the industry eventually fail,and 70 percent of new HVAC businesses fail in their first year of operation“ (note: the Department of Energy data points include commercial and residential building service providers). The HVAC contractor market is fragmented and many small firms fail because they struggle with the business side of running a services firm. Moreover, there is a growing talent shortage in the industry. That said, HVAC service is a significant part of delivering comfortable buildings and it will continue to be moving forward.
In many cases, these services are delivered in a traditional way: the building owner, operator or manager has an existing relationship with a mechanical contractor or local OEM branch, and contracts with that organization for its service. Trusted vendor relationships reign supreme. And, they work well because getting the job done right, on time, and on budget, is more important than finding the least expensive provider. The risk of switching is just not worth it. This is especially true for large buildings with very complex HVAC systems, such as chillers. Moreover, research indicates that the buildings with on-site management, which does not exclusively include facility management,realized energy consumption reductions of 7-8 percent. A human element is beneficial when it comes to running commercial buildings.
According to the Commercial Building Energy Consumption Survey (CBECS), about 80 percent of commercial buildings have some kind of cooling system. Additionally, many large buildings also have heating and ventilation equipment, lighting, elevators and conveyance systems, and in some cases commercial or industrial refrigeration. They typically have separate service contractors for each system but similar delivery dynamics. Many of the opportunities noted above for cooling also could be applied to these other critical systems.
But, according to CBECS, only 67 percent of all buildings perform regular HVAC maintenance. While the data does not break down who provides this regular maintenance, it’s likely that in some cases, it is performed by in-house employees, some of whom may not be experts in the field. Buildings that don’t currently maintain their equipment regularly may be compelled to do so with a different delivery model, such as a vendor marketplace.
An online marketplace could reduce the risk of finding quality service providers that provide better value than the incumbent, which may lead building owners and operators to switch. This is just the kind of marketplace that the A16Z authors predict will emerge in the future.
It appears that these managed marketplaces are starting to permeate the residential real estate space. A recent Oxford report about the proptech startup landscape found that the most common type of offering is focused on transactions, (which would be a marketplace). But, most of these firms are focused on residential, rather than commercial buildings. Over 60 percent of all proptech firms in this report were marketplace startups, but within the smart buildings (commercial) category, less than 20 percent of firms focused on a marketplace. (See table 3.4 of this report.) Given the complexity in commercial buildings and overall spend on operations and maintenance, marketplaces likely could be successful when oriented to commercial buildings.
Moreover, the increase in sensors and equipment monitoring may help accelerate adoption of a new marketplace model in large buildings. With more data about equipment and building operations being collected, analyzed, and made available in the cloud, it is possible to identify problems before they occur and reduce the schedule-based maintenance being performed. And, beyond this, there is an opportunity to create new service marketplaces based on these data streams. Vendors could review equipment data remotely and provide a bid for repair without making an on-site visit. And, building owners could quickly identify service providers who have significant experience with their equipment types and specific maintenance issues. Even large incumbents service providers could have their own internal marketplaces that help with workforce management - match the best and available engineers with the current jobs. These vendors also could start discovering new subcontractors and managing the procurement and delivery of services through an online marketplace.
It’s likely that service marketplaces will grow in importance to building owners and managers, as they become legitimate alternatives to traditional service delivery methods utilized today. It’s prudent to watch this space and stay on the lookout for marketplaces that may deliver value to your buildings.
Joseph Aamidor is a senior product and market strategy consultant focused on smart buildings, real estate technology, IOT and energy. He helps startups and established industry players understand the smart buildings market, develop competitive strategy and enhance their product offerings. He previously served in senior product management roles at Lucid and Johnson Controls. Joseph Aamidor also publishes the highly regarded “Smart Building Insight” newsletter.
- smart buildings
- commercial building
- building IOT