‘Dawn Of The VR Era’: Proptech Adoption Exploding As CRE Goes Digital
Commercial real estate firms are rapidly trying to shed their tech-averse nature as they adapt to mandated social distancing, creating a demand surge for proptech companies that allow prospective tenants to tour spaces virtually.
While the coronavirus and the shift to remote working have spurred new interest in these technologies, they have also presented new challenges. Tech companies that create virtual tours still must travel to a building to film it. And with real estate firms looking for ways to cut costs and becoming more skeptical about spending on new products, tech startups are under greater pressure to prove they can create immediate return on investment.
“A lot has been talked about in the last few years about how slow our industry has been to adopt proptech solutions,” Truss co-founder Bobby Goodman said. “In the last 30 days since COVID[-19] has made its way through the world, we have seen a massive acceleration of adoption.”
“Everyone in our ecosystem is running toward proptech solutions,” he added.
The proptech industry was already experiencing a flood of venture capital investment before this year began. In 2019, global VC investment in real estate tech companies reached a record-high $31.5B, a 227% increase from the previous year, according to a year-end report from CREtech.
But investment into the sector hasn’t necessarily translated to industry-wide adoption of proptech solutions. An Altus Group survey of 400 global commercial real estate executives released in January 2019 found more than half were still using spreadsheets, rather than high-tech software products, for critical functions such as reporting, valuation and cash-flow analysis.
The social distancing policies put into place to stem the spread of the coronavirus are forcing real estate companies to adopt new technologies, industry leaders say. Among the greatest beneficiaries are virtual reality companies that offer 3D building tours.
Landlords in the past may have preferred to bring prospective tenants in, shake their hands and show them around the space, making them hesitant to spend money on virtual touring technology. But now, they don’t have a choice.
“This is the moment, finally, that they are given proper and due attention,” CREtech CEO Michael Beckerman said of virtual reality proptech companies. “This is the urgency right now, because you’ve got to lease space, and how do you do that in a virtual setting that’s impactful and effective? I think we’re at the dawn of the VR era in commercial real estate. No doubt.”
‘We’ve Seen An Explosion In Demand’
Real estate owners and brokers who had avoided technologies like virtual-reality touring, or those who had just begun to dip their toes in the water, are now diving in head first as they seek new ways to show their properties to prospective tenants and buyers.
VirtualAPT, a four-year-old startup that uses robots to create virtual walkthrough tours of residential and commercial properties, has seen demand rise by more than 500% over the last month, founder and CEO Bryan Colin said. The company has been receiving requests from about 10 new prospective clients per day over the last month, he said. Previously, it would hear from about one per day.
“The coronavirus situation has led to a whole bunch of new business,” Colin said. “For a lot of companies that have been on the sidelines or have done a few projects, now they need it for every project. Instead of having it as a ‘nice-to-have’ they’re seeing it as a ‘must-have.’”
Colin said he sees the virtual reality touring space as counter-cyclical. When the economy is strong and landlords can lease their buildings, they don’t need to try new technologies. But during economic downturns when landlords struggle to fill vacancies, Colin said they are more likely to try new solutions like VR touring.
“All of the companies in the space, across different price points, are getting quite a bit of demand,” Colin said. “Right now, virtual touring and visualization is certainly the most active [proptech] sector that I’m aware of.”
Truss, an online leasing platform that offers virtual tours of buildings, has received more than 500 requests for virtual tours over the last two weeks, a tenfold increase from the prior month, Goodman said.
“We have seen an explosion in demand, an absolute explosion,” Goodman said of the VR touring offering. “It’s the only way they can show space right now, so they have a choice to make: ‘Do we publicize spaces and get traction today, or do we sit back and wait for the uncertain period to end and see what happens?’ I haven’t seen too many landlords selecting option No. 2.”
Akridge Chairman Chip Akridge, whose D.C.-based firm owns more than two dozen office buildings, said he had tried virtual touring before this crisis and is continuing to use it, but he doesn't see it as a permanent replacement for in-person tours.
“We do some virtual tours, but they’re not nearly as effective as the real thing,” Akridge said. “I doubt very much space will be leased without an in-person tour. Doing a virtual tour will pique their interest, and if they see things they like, they may come in.”
Stream Realty Managing Director Matt Pacinelli, a broker who represents landlords, said his team has used 3D renderings and created virtual tours using in-house photography in the past, but now he is looking at trying out new technologies.
A Downtown D.C. office building Stream is leasing on behalf of MRP Realty and J.P. Morgan Asset Management, 1501 M St. NW, is preparing to deliver 45K SF of pre-built spec suites. Pacinelli said the team was forced to cancel an upcoming event where it had planned to bring brokers in to see the spaces, and now it is exploring new ways to show off the suites.
“We have great renderings, and we’re planning to get photography done, and now we’re thinking about expanding that offering so it’s more than just images,” Pacinelli said. “It might be 3D and video tours. We’re trying to give the tenants and tenant reps as much information as possible and give them the best experience you can from afar.”
The growing demand for virtual touring has created some logistical challenges, Goodman said. To offer a virtual tour of a building, a company representative needs to visit the building and film it, a difficult task when people are complying with state-mandated stay-at-home orders.
“We’ve seen such a surge in demand that, candidly, we’re having trouble getting our arms around it,” Goodman said. ”Someone has to go to the space and shoot the space, and that can be problematic right now because of shelter-at-home orders. We’re seeing success in some markets where we’re able to get them done, but in others, we’re just building a queue right now.”
Avison Young Principal Jonathan Wellborn, a landlord broker who has been working with building owners to implement virtual touring, also said he has run into logistical challenges around filming the spaces.
“We’re working through how to get these done,” Wellborn said of virtual tours. “I think we’d rely on some of the essential employees, many of them engineers, on the front lines of buildings to help us with the process. It’s a fluid situation and I wouldn’t say I have the perfect answer, but we’re working on ways to get what we need without having to go to the building.”
Navitas co-founder and Managing Partner Travis Putnam, whose venture capital firm is an investor in Truss, said he has seen an increase in demand across the virtual touring and leasing sector. Matterport, another Navitas portfolio company that creates the VR technology Truss uses, has never had as many inbound sales calls as it has in recent weeks, Putnam said.
MeetElise, an artificial intelligence leasing assistant in which Navitas owns a stake, has experienced a 50% increase in the number of units on its platform over the last 45 days, he said.
“What we’re seeing in the market is anyone who doesn’t use those technologies is rapidly looking to deploy them because they have no other choice,” Putnam said. “It is absolutely accelerating the need for these solutions, because it allows people the benefit and ease and safety of not having to go on site, and getting the same sort of look and feel of a space.”
In addition to tech companies that offer virtual reality tours, digital platforms for searching market data like Compstak and Reonomy say they have also seen an increase in demand.
Reonomy CEO Richard Sarkis said March sales were higher than they were at the same point last year, and demand increased in the final two weeks of the month as the crisis worsened. Reonomy’s platform offers diverse information on properties such as building size, ownership, debt and tenants that can help people prospect the market for new business.
“We saw a lot of people working from home trying to make money,” Sarkis said. “Some people were laid off and don’t have a corporate subscription anymore, but they need something to try to dig themselves out of a hole and get back on their feet.”
Compstak CEO Michael Mandel, whose company provides lease and sales comparisons, said some of its customers have increased the number of accounts on their subscriptions. One firm added 30 new users because the lack of collaboration in the office meant professionals could not work as closely with the research team and needed their own access to the tools.
“Reduced communication within these firms means that more people need resources they have access to directly to do work independently,” Mandel said.
Cost-Cutting Creates Challenges
As real estate owners are looking for new ways to generate demand for their buildings, they are also searching for ways to cut costs. This has created a dynamic in which proptech companies are put under greater scrutiny than they were during the economy’s decade-long expansion, and those who can't prove their value are at risk of failing.
“Value rises to the top,” said Altus Group Executive Director Scott Morey, a real estate industry veteran who now researches the proptech sector. “I’m hearing already about some of these companies, pretty good-sized companies, trying to figure out how to downsize their cost structure to ride out an uncertain cycle.”
Mandel said he has been surprised by the recent increase in demand. When the coronavirus pandemic turned into an economic crisis, Compstak first projected its sales would drop this year.
“We, as a company, drastically reduced our financial forecasts, as most companies are under the expectation that customers’ willingness to buy will be frozen in the near term, and perhaps reduced in the long term, as we enter into a recession,” Mandel said. “You’ve got companies struggling financially who are concerned about spending money.” Many proptech companies offer cost savings as their value proposition, but Sarkis said they need to prove their value in the short-term, because real estate companies are less interested in long-term savings.
“Something I’ve seen in various recessions is, what happens when shit really hits the fan is people don’t think about efficiency and long-term strategy, they think about ‘I need to cut costs now,’” Sarkis said. “It’s going to create this reckoning and shine a bright light on the solutions that the commercial real estate tech companies are offering.”
Beckerman said the coronavirus is going to separate the winners and losers in the proptech space.
“Those that can deliver measurable ROI are going to be the ones that are going to see their sales rise through this pandemic,” Beckerman said. “You’ll see real estate companies narrow down what their needs are and be incredibly selective about who they are working with.”
Will The Tech Adoption Last Beyond Social Distancing?
Even for the companies that become winners by proving their value during the pandemic, the question still remains of whether this increased tech adoption will be long-lasting. If real estate companies revert back to their past practices once the pandemic is over, it will be a blip in demand growth for tech companies. But if the coronavirus creates permanent changes in the way business is done, it could be transformative for the proptech industry.
“The interesting question for Q2 and Q3 is: Is this going to fundamentally reshape how business is done in what has historically been an incredibly tangible and human-contact-centric asset class?” Sarkis said. “There are very few corners of the economy that are more predicated on being there, interacting with and seeing the asset.”
Shadow Ventures founder K.P. Reddy, whose venture capital firm invests in proptech startups such as InfoTycoon and Amenify, said he sees a cultural shift happening that will create long-lasting impacts.
“You can’t unring the bell,” Reddy said. “If people have been showing properties virtually through this time, then are they really going to go back to selling them the old way?”
Reddy does not think in-person property tours will completely become a thing of the past. But for prospective buyers that may have previously sent a full team to view a property, they can now all tour it virtually and then send one person to visit the building.
“Tech companies that have struggled to disrupt the industry because they were told, ‘No one would do that,’ are now seeing those cultural barriers coming down,” he said.
Wellborn said the landlords he represents hope to see long-term benefits from investing in VR technology that last beyond the pandemic.
“It’s sort of the only option in the near-term,” Wellborn said of virtual touring. “But our team is trying to look at it and say ‘how do we make this a tool for prospective tenants and brokers so it’s not just something they utilize for the duration of the work-from-home period, but in general how can it be a tool to help market and promote their properties long-term?’”
Putnam, the co-founder of VC firm Navitas, also said he sees the adoption of these technologies becoming a permanent fixture in the industry.
“It was inevitable that these tech solutions were going to become standard,” Putnam said. “This current environment is accelerating adoption and forcing adoption. Once the industry sees the benefits of having it, they won’t stop using it, they’ll just use it more and accelerate the use of it across their portfolio.”
