Smart Building Insight - March 2024

Aamidor Consulting continues to provide insight to smart building innovators every month in our newsletter. This month, we’re going back to our 2023 predictions and updating them for the new year.

Last year, we published our annual predictions for 2023 in Smart Building Insight. This year, we’re revisiting and revising those predictions. See below for our updated views on the market and where we think it will go this year.

2023 Prediction: Rationalization of the marketplace. We highlighted the fragmented nature of the smart building technology landscape, and how this creates confusion among buyers. Last year we expected the fragmentation to subside, with more solutions fitting into more standard product/application categories. Our view is that the market still is fragmented (both in the number of solutions, and the overlapping categories of those solutions). But there are some signs that it’s (1) easier to buy energy management software, and (2) fault detection and diagnostics (FDD) is a more recognized as a key part of a smart building stack. As we noted in last month’s newsletter, from our trip to AHR, the large OEMs are investing in technology platforms and solutions, which should help with rationalization - those solutions will make for easier comps for buyers.

2023 Prediction:?Continued?adoption, for now. In the future we plan to dig more into the actual scale of adoption, but anecdotally, we do see some firms growing, and others with less growth (but continuing to support their existing customers). We don’t see adoption in smart buildings at an increasing rate annually (no snowball effect here), but the result of a complex and naturally slow-growing industry. We are a bit more bearish here than in 2023. But 2023 also was a highly uncertain year for many buyers of these solutions, which may have delayed some of their procurements until 2024.

2023 Prediction: Increasing?pace of merger and acquisition activity. This one simply didn’t happen at the magnitude we predicted, and some of our contacts note that there may not be an uptick in smart buildings M+A this year, either. That said, many public firms in this space have cash and some have indicated an interest in more M+A (see the public firm financial results section, above). Generally, M&A activity may have bottomed out in 2023 across the whole economy. We haven’t seen any data like this relevant to proptech or smart buildings, but anecdotally, some deals aren’t closing, and overall number of transactions has not grown that much (despite predictions of 2023 as a year of proptech and smart buildings M&A).

2023 Prediction:?Renewed?focus on solution return on investment. Buyers are more focused on the core value props and ROI of the solutions that they want to deploy, and we believe that this will continue in 2024. At the same time, we still see startup pitch decks and marketing content with very nebulous or hard-to-quantify value props/ROI. We think many vendors were forced to “get fit”, financially (a related point). The fact that many public firms have reduced costs and increased cash flow is a good example of this trend - they are getting fit. Anecdotally, we have seen many smaller firms reducing costs. We think this may be a step on the path to focus more on delivering maximum value to their end users. The “grow at all costs” mindset has been replaced by “be profitable”. We think this is a good thing for the solution buyers and users.

But, one caveat: historically, individual innovators have been successful by finding their clients before their competition, developing a relationship, and letting the fragmented market limit the ability of the buyer to conduct a full review of the options (so they don’t full discover the competition). Some of those dynamics are still in place…we wouldn’t be surprised to see firms attempt to outcompete their peers on sales/marketing - a return to the model of years past. However, we think the market dynamics mean this won’t really happen until 2025 at the earliest.

2024 Action item: We expect 2024 to be a better year for smart buildings technology adoption than 2023, but not a return to the go-go years of 2021 and 2022. For technology vendors, the best approach is to focus on reducing costs, developing products with a discrete and quantifiable return, and limiting sales/market expenditures. Buyers should be more focused on overall value delivered by firms and those which appear to be well-positioned to deliver on their product strategy and succeed in a challenging economic backdrop.

Aamidor Consulting works across the smart building industry, supporting startups, capital allocators, and industry incumbents throughout their journey, from the early stages of customer discovery to being on a rapid growth trajectory. Specifically, our firm supports startups on product and market strategy, investors as an independent advisor during diligence, and real estate owners/operators as they develop plans to deploy technology. See a summary of our past projects and also a description of our consulting services for more details on how we can help.