Success in commercial real estate often means having more information than your counterparties and controlling costs at every stage of the process. Having more information about a strategy, market or property gives industry players an edge. This was true 30 years ago, when learning a particular city’s office vacancy rate might have required multiple phone calls to brokers in the market. And it is true now, as artificial intelligence and machine learning are expanding possibilities for investment decision making.
Building owners are rolling out a variety of tools and sensors that can improve operational efficiency, measuring everything from water flow to electricity usage. Architects can use virtual reality to model designs for developers, investors and planning commissions — saving time and money in the development process. Online platforms have given landlords new ways to manage leases, allowing for the rise of more flexible lease arrangements, such as co-working in the office sector or pop-up stores in the retail sector.
All of which means there may never be a greater time to launch a real estate technology startup than now. The proptech market, as it has come to be called, has seen an increase in investment and new company launches in the past few years. With the rising interest in proptech, traditional real estate players have started to look at the sector, identifying the emerging players and technologies that may become ubiquitous in the years ahead.
Of course, the joining of real estate and technology is not new, and there have long been technology companies working in the real estate space, such as Yardi Systems, which provides investment and property management software, and Altus Group, which provides advisory services, software and data solutions. But proptech startups have seen a surge in venture fundraising, while traditional real estate companies have displayed an increased interest in technological solutions.
“One of the things that’s interesting about commercial real estate or institutional real estate is the level of IT spend in commercial real estate has for a very long time been significantly lower than other financial services verticals,” says Michael Crook, senior vice president, product management, of Altus Group.
The question for real estate is: Will the real estate industry achieve the benefits of productivity gains other industries have reaped from increased reliance on technological solutions?
WHAT INVESTORS WANT
Many point to a growing interest from investors driving the adoption of new technologies by the commercial real estate industry — and, with it, a surge in new real estate tech companies to meet that need. Investors and asset allocators have the opportunity to ask what technologies are being used by their partners.
“Often this is a component overlooked during the due diligence process,” says Matthew Shaffer, managing partner of Radical Galaxy Studio, a startup focused on augmented and virtual reality for the commercial and residential real estate industry.
But that may be changing.
“The reason that we’re seeing things change in investment management is … because their investors are demanding more information, and [managers are] struggling to find a way to meet the needs of their investors,” says Brandon Sedloff, managing director and vice president of sales at Juniper Square, a maker of real estate investment management software that streamlines fundraising, investment administration and investor reporting.
In many organizations, the real estate investment groups are overseen by senior people whose experience is in other asset classes, such as private equity, public equity and public debt. “Those people are used to much more sophisticated technology tools to run their portfolio,” says Crook. “The tools that are available in public debt and equity markets are much more robust. The analytics and datasets that are available are much more extensive. We’re starting to see senior people overseeing commercial real estate groups bring those expectations to bear on the real estate business.”
The real estate industry has been slow, historically, when it comes to adopting and integrating new technology, but signs indicate the cycle is changing, and a number of new companies and technologies are emerging.
“One of the ways that emerging managers are differentiating themselves is turning to technology because investors are starting to care,” says Sedloff. “They don’t just look at your returns, they look at your infrastructure.”
That has encouraged a number of emerging investment managers to integrate technology thoroughly into their processes.
“Half our company, it does look like a tech company; half looks like a real estate investment manager,” says Tom Stults, managing director, investments, at Cadre, a technology-enabled real estate investment platform backed by Andreessen Horowitz and Goldman Sachs, among others.
“The idea is to transform real estate investment from art into science, and allow real estate investors to make better and more profitable real estate investment decisions,” says Guy Zipori, co-founder and CEO of Skyline AI, a real estate investment platform backed by Sequoia Capital that uses artificial intelligence to drive investment decisions.
Established investment management companies also will need to look at emerging technologies and find where these products and platforms can make their processes and businesses more efficient.
That’s easier said than done.
“What a lot of real estate people struggle with is the fact that they don’t feel like they’re as savvy from a technological perspective as some of their peers in other industries,” says Sedloff. “The ones that will come out the winners are the ones that don’t divorce this concept of technology and real estate, and realize the two are not mutually exclusive.”
But it is not simply a matter of buying all the available software or using every platform on the market. Instead, the real estate industry needs to focus on finding solutions to existing problems.
“Having more systems doesn’t mean you’re more tech savvy,” says Sedloff.
Simply investing money in technology does not guarantee you will get a benefit from the outlay. General Motors Co. notoriously invested billions of dollars into factory automation in the 1980s but failed to achieve its original objectives because management and workforce organization were not updated concurrently.
“Technology is complicated, but it doesn’t need to be scary,” adds Sedloff. “We need to think about it more strategically, and organizations need to deputize somebody to do that. And they have to give them the space to be successful and to fail.”
A NEW VENTURE
Proptech has attracted venture capital funding from both dedicated real estate VC funds as well as more general-interest tech VCs. Fifth Wall Ventures, a VC firm based in Los Angeles, focuses exclusively on what the firm calls “built world technology” — real estate, hospitality, construction and urban infrastructure technology. MetaProp NYC is another property-focused venture source, with ties to Blackstone and Cushman & Wakefield, while Chicago-based Elmspring Accelerator has partnerships with Century 21 Affiliated, Harrison Street Real Estate Capital and Waterton Associates.
Fifth Wall has raised capital from a number of traditional real estate companies, including CBRE, Equity Residential, Hines, Host Hotels & Resorts, Lennar Corp., The Macerich Co., Prologis and Rudin Management Co. The firm recently launched Fifth Wall Ventures Retail Fund, which will target investments in retail-related technologies. The fund had raised $60 million, as of a May filing with the Securities and Exchange Commission, with a target of $200 million for investment in the sector. A previous fund, launched in 2017, raised $212 million and invested in companies including b8ta, ClassPass, Clutter Inc., Notarize Inc., Opendoor, States Title and VTS.
In addition, JLL Spark, a division of the global property services company, has launched its first venture capital fund. The JLL Spark Global Venture Fund will invest up to $100 million in early-stage real estate technology companies. The venture fund is focusing on early-stage companies and will make primarily seed and series A investments, ranging from a few hundred thousand to several million dollars. It is being funded by JLL as the sole limited partner.
WHEN THE CUSTOMER IS ALSO THE INVESTOR
Honest Buildings, which provides project management and procurement software, raised $30 million in its series B round this year, and investors included Altus Group, Brookfield Property Partners, C-III Capital Partners, DivcoWest Real Estate Investments, The Durst Organization, Oxford Properties Group, QuadReal and Rudin Ventures. The transaction is an example of a rising trend in the sector — traditional real estate firms offering strategic support to startups that provide a service the firm needs or uses. This can be an alternative to developing proprietary software, and avoids some of the pitfalls that can come with that approach.
“There are now a lot of traditional real estate companies with venture arms,” says Jordan Fishfeld, CEO and founder of CFX Markets, a secondary trading platform for alternative assets. “Every active real estate company must have somebody looking at innovative technology that can help them grow, or they will be left behind.”
“We have a very clear belief that technology is going to positively transform several aspects of how we deliver our service,” says Mihir Shah, co-CEO at JLL Spark. “And we know that the startups that are coming online now are going to help us do that even better.”
The JLL Spark Global Venture Fund is focusing on strategic investments that will support JLL investor and occupier clients, explains Shah. “We are certainly a focused fund,” says Shah. “We’re not investing in everything real estate. We’re investing in the things where we can actually help the startup because, as a strategic investor, that’s the key to success.”
In addition to funding startups, JLL Spark will support the portfolio companies’ growth with a dedicated team of experienced product marketers. And, for technologies focused on the built environment, JLL Spark will have “building labs,” says Shah — “a set of buildings in some of the big metros around the world that are designated as places where we can easily try new technologies quickly, without going through those long sales and decision-making cycles that typically bog these companies down.”
Bobby Goodman, co-founder of Truss Holdings, a tenant-side commercial real estate leasing platform, says such investment can make an “enormous impact” because such institutions “can drive success within these startup companies, as they’re providing not only capital but a feedback loop and a built-in customer base.”
Real estate companies need to keep on top of newly emerging technologies, and providing strategic support to early-stage startups is one way to have a comprehensive overview of the proptech sector, says Fishfeld. “Every proptech deal is going to come across your venture arm’s desk,” he notes.
Still, taking on a secondary role as a venture capitalist is not without its pitfalls.
“It’s going to be interesting to see how the industry players perform in their investment decisions because, on the one hand, they know they know their vertical inside and out, so they should be good at evaluating the investments they’re making. But, on the other hand, they’re generally not experts in the software or technology business, and so there’s risks that they might miss,” explains Crook.
Crook says there is a risk of disillusionment in the real estate industry becoming technology venture capitalists as a part-time gig. “The industry is getting really excited right now about the potential for technology, and they’re putting a lot of money behind it,” says Crook. “Given where we are in the real estate cycle at the moment and the amount of money that’s sloshing around in the tech space, if this cycle turns, people are going to behave differently with regards to these investments.” He says the potential exists for good ideas to be killed because investors need their money back, and for bad ideas to receive more money than they should.
“Unfortunately, when it comes to understanding technology, the industry is not always sophisticated enough to know how to separate a claim and hype from reality,” cautions Sedloff.
Irina Lenchuk, a consultant at RealFoundations, notes in a briefing for the European Public Real Estate Association on the impact of emerging technologies that real estate professionals will need to “beware of the hype. Develop a good understanding of emerging technologies — their limitations, the stage of their development, potential applications — to avoid deception.”
THE MARCH OF PROGRESS
Real estate is poised to benefit from substantial productivity gains driven by technological change, and the industry appears to be at an inflection point.
“The pace of tech adoption and implementation has accelerated meaningfully even in the past 12 to 18 months,” says Stults. “And so if you’re not thinking about it and aware of it … you are behind the ball.”
Commercial real estate is “one of the last untapped U.S. industries when it comes to integrating advanced technology,” says Zipori, “and I think it’s ready for a change.”
But challenges remain, whether a real estate firm is jumping into a new role as a venture capitalist or looking to improve its internal processes with new technology.
“Building tech and integrating tech into a traditional real estate function — whether it’s as an investment manager, an operator or whatever — is actually really difficult. We’ve found that building technology in-house is tough; integrating technology from third parties is really tough,” says Stults. “More than just a budget and a desire to do so, it requires a real cultural effort and commitment and dedication that, I think, is where, frankly, today a lot of groups fall short.”
Loretta Clodfelter is editor of Institutional Real Estate Americas.