With Likely Recession Encroaching, Proptech Seen As Cost-Cutting Tool In CRE

A rolling series of challenges, from the pandemic to labor shortages to an unfolding economic downturn, have increased focus on performance, efficiency and cost-cutting within commercial real estate, leading to a push for proptech focused on streamlining work and for real estate firms to upgrade or risk being left behind.

A new JLL report delving into the hybrid office transformation found 78% of companies plan to adopt a majority of the so-called anchor technologies that will enable a more efficient workspace. Of all the industries covered in the report, the authors found that one of the fastest projected adopters of new technological solutions over the next three years was real estate itself, which is “planning to rapidly scale up its implementation.” 

“I think right now, firms are nervous,” Ernst & Young Americas Real Estate Leader Mark Grinis said. “In three months, I think the fear index is probably going to go up a little bit. People are looking at how to be more efficient.”

Brokerages, developers, owners and operators are scrutinizing their budgets in ways they haven’t for years, said Camber Creek partner Jeffrey Berman, whose VC firm focuses on proptech investment. A key focus of commercial real estate right now is creating more value with potentially fewer workers. 

“In this time period every dollar is going to count,” Berman said. “Those types of companies [that streamline work processes] are thriving, because any further insight into workflow and operational capacity will be prized. Knowledge is power, without it you’ll have a hard time competing.” 

Many firms, in commercial real estate and elsewhere, believe that software solutions, integrated operations platforms, analytics programs and even automation are part of the solution. Gartner analysis and projections suggests that the integration and automation market for office work could grow by $32B by the end of 2025, a growth rate of 50% in five years. 

Artificial intelligence and automation have been talked about as potential change agents within the CRE workplace for years. Last year, CEL & Associates CEO Christopher Lee told Bisnow 35% of the workforce will not come back to the office full time, and automation may play a big role.   

Many proptech firms that serve real estate have seen significant growth in the last year, despite economic headwinds and a shrinking venture capital funding market, due in part to an influx of capital from CRE itself.

JLL Spark, the firm’s technology investment arm, has invested $340M in 40 startups, mostly office-related.   

And VTS, an optimization platform for real estate operations that just received a $100M investment from CBRE, has seen “significant booking momentum” despite tough market conditions.

Kizen, a customer relationship management software tool that utilizes automation and serves real estate clients, has seen 400% growth in the last six months.

Kizen CEO John Winner says the combination of increasing wages and labor shortages, coupled with the current downturn, has pushed firms to get more efficient, and firms want to get 15% to 30% more efficient when it comes to customer acquisition costs. 

“It’s important that CRE firms recognize inefficient workflows and correct them,” VTS co-founder and Chief Strategy Officer Ryan Masiello said. “If not, that is going to cause their portfolio to fall victim to economic pressures.”

Berman said that as major brokerages figure out how to cope with rising interest rates and costs, and potentially slow hiring in response, the output needs from investment professionals or analysts needs to increase relative to the thinning of the workforce. This means adopting technology that makes deal and property analysis more robust, actionable and fast, and that can underwrite more quickly, create comps and distill disparate information sets more quickly. 

Examples include Unacast, a location data provider that analyzes foot traffic changes and population shifts, and Keyway, which helps analysts  understand the financial health of small value property transactions. Both companies are in the Camber Creek portfolio.

Part of a larger group of data and intelligence firms offering increasingly sophisticated analyses as processing power increases, these companies claim to speed up transaction processes and enable analysts and brokers to rapidly evaluate offers and opportunities.

Overall, there’s a focus on improving the efficiency of acquisition of leases, streamlining and automating contracting and onboarding and enhancing the tenant experience. 

Traditionally less tech-savvy and more based on personal relationships, CRE adopted new technologies at an accelerated pace because of the pandemic. That laid the foundation for more firms putting additional trust in these products to help them during the current recessionary period.

VTS’ Masiello said clients are using their data to “position their portfolios and insulate them from economic risk.”

Another aspect of real estate getting even more focus from an efficiency perspective is construction, which has historically lagged in efficiency gains and suffered during both a materials shortage and labor challenges during the pandemic. 

​​Era Ventures partner Raja Ghawi said pre-existing labor shortages and challenges in finding specialized workers were already hindering job sites. Now, there’s just more pressure, from supply chain snarls and rising costs, to keep up and control costs. Software that can help manage general contractors, automate material ordering and billing and tracking operations have become more popular. 

“I think you'll get far more efficiency by vertically integrating the industry in a thoughtful way,” he said. “A lot of solutions that we need call for a way to automate workflows.”

There’s also great value in automating the supply chain and allowing firms to place bulk orders and get more competitive pricing. Larger firms using these technologies make bulk purchases, securing better prices on  commodities like wood and metals.

Previously, larger firms with billions of dollars in the development pipeline wouldn’t be involved in procurement, with local contractors multiple levels down making orders for materials, diminishing procurement power. Now, these larger firms have much easier means of making bulk purchases at a discount. 

“Firms using the tools that allow teams to talk to one another, that help vertical integration, are going to win the next decade,” he said. 

The push toward efficiency and automation will impact the entire economy, but the disparate nature of commercial real estate, and relative level of technological adoption compared to other industries, might mean more impact from relatively small investments or process tweaks. 

“The fantastic gets so much attention,” Ernst & Young’s Grinis said. “But the real value will be in making the mundane work better.”