'It's Going To Be A Reckoning': Proptech Survey Finds Drop In Confidence From Startups, Investors

Despite the commercial real estate industry's increased adoption of technology during the coronavirus pandemic, many proptech founders and investors have lost confidence in the industry's strength. 

A new survey from venture capital firm MetaProp, which received responses from more than 2,500 proptech executives and investors, found a significant drop in their confidence in the market.

The survey's Investor Confidence Index fell to 5.9 out of 10, a 33% drop from the same time last year, while the Startup Confidence Index fell to 4.7, a 35% drop from six months earlier.

"You can’t stick your head in the sand and pretend like there wasn’t going to be some impact on proptech, given that we're in a huge macroeconomic recession, the worst we've seen in our lifetimes, a real estate cycle affecting all asset types and a health scare," MetaProp co-founder Aaron Block told Bisnow. "The question is: How long is this going to be bad, and how bad is it?"

The drop in confidence comes even as many segments of proptech have experienced increased adoption during the crisis. Virtual leasing technologies experienced a surge when brokers could not provide in-person tours, and the reopening of offices has created demand for tech solutions such as touchless building access.

MetaProp's survey found that 84% of proptech startup founders believe the coronavirus is accelerating the adoption of technology in the real estate industry. Block said this gives industry participants long-term confidence in the market, but it does not erase the pain some companies are feeling in the short term. 

"The bifurcation is that the short-term confidence has taken an enormous hit," Block said. "We knew the next few months are going to be really tough, and I think that’s what we’re seeing here with the 33% and 35% dip in confidence. But I also think very clearly here there’s consensus that this vertical is here to stay and may very well be accelerated in the medium-to-long-term."

The crisis has made it harder for proptech companies to raise money, investors and startup executives responding to the survey said. Just 33% of investors expect to make more proptech investments over the next 12 months compared to the previous year, down from 64% at this time last year. And 56% of startups expect it will be harder to raise capital over the next 12 months, compared to 19% who said that at the end of 2019. 

MetaProp's deal flow has returned to pre-crisis levels, Block said, but it is now being more selective about the companies in which it invests, a common trend he has seen throughout the industry. He said the three main factors MetaProp looks at when evaluating startups are the reputation of the team, the size of the market they are entering and the quality of the product. 

"The cream rises to the top," Block said. "If you’ve got a good team going after a huge market and have a good solution, it sells itself to investors. That business sells itself, and there’s always going to be appetite for it. If you don’t yet have those three tuned well, it's going to be an order of magnitude harder than it was, because there's no dumb money."

Block said many investors are also waiting because they expect valuations will continue to fall and they can sign better deals. He said the failure of WeWork's IPO last year and the slashing of its valuation brought proptech valuations back down to earth, and the drop in startup confidence this year means they could continue to fall.

He said proptech companies that were overvalued and have struggled to maintain revenue this year could have a hard time securing funding to keep operations going. Some founders that are unable to raise money may be more likely to sell their companies, Block said, and many proptech experts expect a rise in merger and acquisition activity this year. But he said other struggling companies may be forced to go out of business.

"There’s going to be blood in the water over the next 12 months for sure, but the great companies are going to continue to perform and continue to get funded," Block said. "The pretenders, the wannabes are going to get moved out in this cycle, whether they are investors or innovators. It's going to be a reckoning over the next year and the strong will survive."

Contact Jon Banister at jon.banister@bisnow.com.