Property rights in smart environments: the advent of digital rights for smart buildings

This section explores another consequence of the emergence of smart space in real estate analysis: the changing nature of property rights in smart urban environments. Property rights are a fundamental tenet of real estate, its legal dimension. Alongside land and building, property rights are a major real estate resource which represents “income or income potentials [for] the people who own, use, produce, finance or market them” (Weimer and Hoyt, 1966).

In his Fundamentals of Real Estate Development (1981), James A. Graaskamp elaborates further:

Individual and collective use of space-time resources and land has always been regulated by society, in part through law and in the larger part through political administration of the laws [...] The rights to use or abuse, to provide expertise or choose contractors, the rights to prohibit or to condition use in certain ways or to transfer rights from one person to another are defined as property rights. Society creates, and continually modifies the allocation of property rights among private ownership, public institutional ownership, and common ownership indivisible among all members of society.

In the four-dimensional framework of real estate (height, length, width, and time), rights for “space-time resources” are well captured by the classic concept of property rights. However, in smart buildings, there is a fifth dimension of real estate, that of digital (Lecomte, 2020). In parallel to Graaskamp’s space-time and money-time realms of real estate, a new digital-time realm emerges. Given this sweeping evolution, are property rights defined in the classic framework of nonsmart buildings in non-smart cities applicable to smart buildings in smart cities? Or is there a need for a new definition of property rights pertaining to smart buildings in smart cities? If so, how should these new rights be defined, valued and exchanged? What are the implications for owners of smart buildings?

These are the main questions that this section addresses by exploring:

  • - the nature of property rights in smart environments,
  • - the economic foundations of property rights attached to smart buildings,
  • - the economic analysis (and pricing) of these property rights through a series of axioms underpinned by Henri Lefebvre (1974)’s seminal analysis of urban space’s appropriation in The Production of Space.

In this book, smart real estate’s new property rights are introduced as “digital rights”, a term explained in the following section.

The advent of digital rights for smart buildings

• Embedded technology as a trigger for a new type of property rights in smart real estate

Pervasive computing’s impact on real estate’s legal dimension should not be overlooked. As a new spatial dimension opens up in smart environments, an increasing number of human activities are mediated by smart technologies, thereby taking over the usual role of buildings in cities (Ratti and Claudel, 2014). Property rights are rights in the space-time and money-time realms. What about rights pertaining to property ownership in the digital-time realm?

From property owners’ standpoint, does controlling access to smart space have value? By the same token, does controlling the use of smart space have value? To both questions, the answer is undoubtedly yes. As smart buildings are akin to a series of interactions at the intersection of physical and digital spaces, controlling access and use of smart space does have value. Hence, property rights attached to access and use of smart space should be properly ascertained and assessed. The term ‘digital rights’ has been coined to describe these new rights. Digital rights are property rights in smart space. The very concept of a new type of property rights resulting from the emergence of a new technology is nothing new. This is a natural process: property rights evolve over time. As pointed out by Ratcliff (1949):

Since society is dynamic, so must be the institution of property, to be subjected to constant alteration as man’s notions of the general welfare shift and evolve and as technological advance calls for new patterns of social organization. [...] Property in the sense of ownership has been defined as ‘the exclusive right to control an economic good’. Property has no significance when the property object has no economic value. Property raises a wall about ownership to exclude all others.

Studies conducted by property rights scholars support a similar view that technological innovation should trigger an evolution in property rights. Furthermore, according to Demsetz (1967) who pioneered the academic study of rights creation, “new rights are created in response to new economic forces that increase the value of the rights" (Barzel, 1997).

In the case of smart space, these new economic forces are numerous and only starting to appear. Property rights cover all activities involving non-conscious cognitive devices and pervasive computing in smart buildings. These encompass:

  • - Embedded technology (e.g. loTs, sensors, actuators),
  • - Human-smart space interactions,
  • - Data collection, warehousing, and analytics.

Potential liabilities pertaining to security, privacy, and behavioural control in smart real estate come with digital rights. Noticeably, rights related to the smart grid (e.g. the right for property owners/tenants to sell energy produced in smart prosumer buildings) are not within the scope of digital rights. Instead, they are treated as an extension of property rights inasmuch as they do not materialise in smart space but in physical space.

There are many instances when smart technologies create opportunities to generate value in smart real estate and thus many instances when digital rights would be extremely valuable. To make the argument in favour of digital rights more concrete, let’s look at a few seemingly straightforward situations arising when shoppers visit a smart shopping mall. In these situations, agreeing on property rights’ ownership in smart space would be extremely difficult without a well-defined regime of digital rights.

For instance, who should own the data collected when shoppers evolve in a mall? Who should have the right to install and exploit cyber-physical systems (e.g. based on facial recognition systems) in the mall, or within limited and well-defined areas of the mall? Who should have the right to use smart technology to entice shoppers towards one retail outlet/ area of the mall rather than another? Whenever shoppers enter into a particular retail outlet, who should own the data collected during their visits in the store? Do the data belong to the mall operator or to the tenants? Should data ownership be divided depending on which

Digitalisation of commercial real estate 93 interactions in smart space are concerned (e.g. environmental interactions for the mall operator, all other interactions for the tenants depending on where they take place in the mall)? If the data belong to the mall operator, can data collected in a retail outlet be used to drive sales in other potentially competing outlets located in the same mall? Does a retail outlet have the right to digitally interact with shoppers while they are visiting or simply walking by competing brands’ outlets? Who should decide? If cyber-physical systems embedded in the mall’s physical structure enable interactions in common areas, who should benefit from them in order to attract footfall and generate sales, for instance in case of two neighbouring retail outlets? Can tenants decide to opt out from the mall’s smart ICT infrastructure (e.g. face-recognition-free retail spaces) or pledge to restrict their in-store data collection on shoppers’ behaviours (e.g. anonymous data only or disclosed time limit on all data uses) at the expense of the mail’s overall ability to optimise returns in smart space over time??

Similar issues to those identified here in the case of retail properties apply to other commercial property types (e.g. office buildings). In sum, who owns access to smart space and determine space users’ interactions in smart space? Who owns the right to exert control on space users’ experiences in smart space? Concretely in tenanted smart buildings, should property owners own these economic rights? Or should they rest with tenants, e.g. proportionately to their usage rights for physical space as contractually agreed in leases? The institution of digital rights can help address the myriad of questions that will inevitably pop up as smart technologies become ever more pervasive in the built environment, while enabling the real estate sector to capture as much value as possible from smart space.

• Lockean Proviso and digital rights in smart buildings

Although obviously linked to value creation in real estate, digital rights in smart space do not necessarily require the formation of privately owned property rights. Commons could be the optimal solution for smart space. The litmus test applied by property rights scholars to determine whether a market should be regulated by commons or private property rights is known as the Lockean Proviso. The Lockean Proviso is named after 17th-century philosopher John Locke who, in his Second Treatise of Government, analyses land appropriation by using the famous phrase “still enough and as good as left”. Schmidtz (1994) explains:

Locke’s idea seems to have been that any residual common [...] claim to the land could be met if a person could appropriate it without prejudice to other people, in other words, if person could leave enough and as good for others.

In practice, the Lockean Proviso is exceedingly difficult to meet. The main criteria in applying the Proviso is the scarcity of resources inherent to capitalist economies. As pointed out by Alchian and Demsetz (1973), “capitalism relies heavily on markets and private property rights to resolve conflicts over the use of scarce

resources .

Schmidtz (1994) assesses:

When resources are not scarce, the Lockean Proviso permits appropriation; when resources are scarce, the Proviso requires appropriation [...] When resources are scarce, it is leaving in the commons that would be prejudicial to future generations.

So, the question boils down to: is smart space scarce? If so, the Lockean Proviso would prescribe the creation of specific property rights in smart real estate. Conversely, commons would suffice to manage access and use of smart space in smart buildings.

Smart space sits at the intersect of physical space and digital space: it is a hybrid space. Therefore, there are two potential drivers of scarcity for smart space: physical space, and digital space. Of these two spaces, physical space is the most likely to be limited insofar as digital space depends on technologies whose progresses are not limited in the long run. Physical space in any property is a finite resource captured in areal surface measurements. As such, whenever a space user is in physical space, he/she might prevent others to consume smart space: due to its physicality, smart space is subject to exclusion.

Likewise, the number and capacity of non-conscious cognitive instruments (e.g. loTs, cyber-physical systems) embedded in physical space are also finite. One square meter in any building can embed so many sensors and captors which, irrespective of how large technological progresses enable them to be, are not unlimited. Furthermore, these devices are also limited in terms of their usage capacity. Whilst an actuator is involved in implementing a pre-defined interaction in smart space, it cannot take care of an unlimited number of other interactions, notwithstanding its extreme versatility.8 Therefore, whenever a space user interacts with technology in physical space, he/she uses up smart space resources: smart space is a rival good.

In that sense, technology-embedded physical space within the structural confines of a smart building is a private good and a scarce resource.9 By dominating space, technology allows property owners to create property rights that regulate interactions in smart space. To paraphrase Weimer and Hoyt (1966), in smart urban environments, real estate resources include land (with smart grid), smart buildings (physical structure and embedded ICT infrastructure) plus property rights. These rights are of a dual nature: property rights for the physical space and digital rights for the smart space component of real estate.

Technology influences property rights, but the reverse is also true (Pejovich, 1996). Without a proper regime of rights in smart space, there will be little incentive for the real estate industry to invest in future proofing their properties and bear the legal liabilities and regulatory requirements that will increasingly come with the implementation of embedded pervasive technologies in the built environment.10 Digital rights appear like the necessary complement to the two hedonic pricing models of smart buildings, by creating and protecting value for

Digitalisation of commercial real estate 95 investors. It does not take a crystal ball to see that digital rights are bound to play an instrumental role in the digitalisation of commercial real estate.11

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