The Beginner’s Guide To CRE Tech: 4 Reasons Why Venture Capitalists Are Betting Big On Real Estate Tech
Venture capitalists have been aggressive in their bets on the latest commercial real estate tech startups seeking to transform the industry.
In September alone, a whopping $2.7B in venture capital funneled into 45 PropTech startups, up 12.5% from the $1.17B invested in 40 companies in August, according to data from RETech.net.
Two real estate tech companies in particular received a large sum of capital in mega-funding rounds led by Japanese investment giant SoftBank. Through its $100B Vision Fund, SoftBank invested $400M into virtual brokerage Compass (pushing the New York company’s valuation to $4.4B) and $400M into home-buying and selling platform OpenDoor.
SoftBank also is reportedly mulling a $100M investment in digital real estate investment platform Cadre, owned in part by Jared Kushner — former CEO of development firm Kushner Cos. and son-in-law to President Donald Trump.
Why is this segment of the tech industry receiving such attention from venture capitalists? For an industry as resistant to change and technological advancements as commercial real estate, tech-enabled real estate unicorns like WeWork and Airbnb have piqued the interest of both entrepreneurs on the hunt for the next industry disrupter and investors that want to get in on the action.
“One of the reasons [VCs] are interested has to do with the fact that WeWork is one of the largest unicorns out there; [so is] Airbnb, as well as OpenDoor and Compass. These are very visible unicorns out there and have been among the ones growing fastest among this very select group of startups,” Vander Capital Partners CEO Roberto Charvel said. Vander Capital is a San Francisco-based angel investor that has funded real estate companies like Starcity.
Zak Schwarzman, a principal in commercial real estate technology nexus and accelerator MetaProp NYC, said several factors have converged to create worthwhile investment opportunities for VC firms in the real estate tech space.
“The largest firms in the venture capital industry are interested in this space. [PropTech] went from being next to nobody and a very niche category to being seen as a destination for the deepest pockets of investors in the asset class,” Schwarzman told Bisnow.
Below are four key factors driving major VC investment in commercial real estate tech:
1) Historically, PropTech Was An Undervalued, Overlooked Category
Real estate technology companies as a category for investment were both a nascent and overlooked market roughly five years ago, at times receiving less than $500M in annual funding, Schwarzman said. As the PropTech market has matured, investors have been witness to the shift. The industry has exploded in the past two years, with breakthroughs in residential tech, such as Zillow and RedFin, leading the charge.
“This is a story that has been brewing in a way. Suddenly, this industry is becoming interesting and taking off. It has to do more with the fact that a lot of very successful companies from entrepreneurs that did not specialize in real estate disrupted the real estate cycle. That started creating interest from the supply side — the entrepreneurs looking at what other assets could be disrupted, and from entrepreneurs saying this is a huge industry,” Charvel said.
In 2016, venture capital investment in global real estate tech reached $4.19M — that number tripled in 2017 with investors pumping $12.19B into real estate tech startups across the globe. So far this year, roughly $7.1B has been deployed into real estate tech, according to benchmark data from RETech.
2) 'Full-Stack' PropTech Companies In High Demand
PropTech companies that are receiving large sums of capital are more than mere software companies, Schwarzman said. These companies, dubbed full-stack companies, provide both software solutions and tech-enabled end-to-end services that transform the industry. WeWork is now reportedly the largest office occupier in New York City, with a portfolio of more than 5M SF in the city as of late September. Unlike a traditional software company for office owners, WeWork does not provide software solutions to office landlords — but rather WeWork is a coworking provider that operates like a commercial landlord. The same goes for Airbnb, Schwarzman said.
“Airbnb is not selling software to traditional hospitality companies; Airbnb is a hospitality company that employs a very different business model and cost structure than [traditional] hotels, providing a bookings engine and everything needed for that stay,” he said. “In order to really make those models work they often require more capital than what a traditional software firm would because they have to provide more layers of value.”
3) Lots Of Capital From Real Estate-Focused Funds
Though the real estate industry is among the largest asset types in the world, generating trillions of dollars in annual revenue, it has also been among the slowest to adopt technology. The PropTech wave storming the industry these past few years has presented ample opportunities for investment, resulting in the launch of specialized venture capital funds seeking to raise capital specifically to deploy in PropTech startups.
“I think there are [about] 30 VC real estate funds in the U.S. of which probably only 10% are managing north of $150M. Everybody else is a smaller fund, [and] most are first-time fund manager[s],” Charvel said.
Though deep-pocketed investors like SoftBank’s $100B Vision Fund are very active in the real estate tech space, most real estate-focused funds are still small in scale. Venice, California-based venture capital firm Fifth Wall has been a big player in the real estate tech market since 2016. The firm, with more than $275M in assets under management, raised $400M in June for its second real estate tech fund. Its first PropTech fund pooled $212M from industry bigwigs like Lennar, Prologis and CBRE. Fifth Wall is also raising $200M in commitments for a retail tech fund.
Commercial real estate brokerage JLL’s PropTech division, JLL Spark, launched a $100M global venture fund in June specifically to invest in burgeoning real estate tech companies. PropTech accelerator MetaProp closed its second real estate tech venture capital fund at $40M in June.
“The industry is not overcrowded yet,” Charvel said.
4) CRE Owner, Operator Interest In PropTech Has Been Piqued
Commercial real estate owners, operators, developers, brokers and architects can no longer deny the impact technology is having on the industry. While some professionals fear the industry’s adoption of tech could potentially eliminate the need for brokers or further automate services that could encroach on individual jobs, more leaders in the space have embraced the latest innovations to streamline work tasks and create a more paperless, transparent approach to sourcing deals and closing transactions.
“Traditional firms are paying more attention. I think the real estate industry was really resistant to and dismissive of their need to really be adopters of technology,” Schwarzman said.
“How are incumbent firms responding? … They are paying more attention. They are generally looking at RE tech companies as potential vendors and [contemplating] how to bring tech to their companies to compete, make operations attractive and efficient and to an extent, [to become more competitive] on the HR front by showing employees they are keeping up with where the RE industry is going.”
Brokerages such as CBRE, Colliers International, Cushman & Wakefield, JLL and Newmark Group have been heating up their tech infrastructure and investment as of late. Leaders in the space are expanding their services to include tech advisory components for clients — like Newmark Knight Frank’s new Global Knowledge and Innovation Center in New York — and tech accelerator programs.
Some are taking it a step further by launching their own solutions to help clients oversee assets and manage tenants. CBRE launched a workplace experiences platform called CBRE 360, a mobile app tailored for clients that allows employees to access building services and amenities. JLL has invested in a number of tech startups as of late, including strategic investment in artificial intelligence-powered sensor-as-a-service platform VergeSense to help reinvent property management. The brokerage giant also launched a new cloud-based project management tool for clients in partnership with Clarizen that will provide more robust real-time data on the progress of development projects.
“The customer and partner base for real estate tech companies is significantly larger than it has been historically. Firms throughout the real estate world today are paying attention to a degree that they never have previously to what’s happening in the PropTech world,” Schwarzman said. “They are paying attention in larger numbers and at higher levels in the organization … setting up innovation teams and owning corporate venture efforts.”
CORRECTION, NOV. 5, 11:17 A.M. ET: A previous version of this story incorrectly listed the $100M amount SoftBank’s Vision Fund is considering investing in Cadre. The story has been updated.
