Futurist Stewart Brand famously warned, “Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.” When it comes to emerging real estate technology, institutional investors can and should step into the driver’s seat.
In the past decade, technology became central to the real estate industry across all asset classes, moving from the “nice to have” category into “must have” territory. The growing field of proptech covers all real estate asset classes and includes the use of novel forms of data collection and analytics, artificial intelligence, workflow software, and internet of things–enabled hardware, among other technologies. Investors that closely track and leverage proptech are creating outsized risk-adjusted returns across their portfolios by (1) more quickly identifying thematic investment opportunities, such as critical shifts in tenant preferences and geographic trends across asset classes; (2) better assessing the technological capabilities of general partners and real estate managers, a leading indicator of a firm’s competency and efficiency; and (3) supporting their partners’ journeys toward being more tech-forward and leveraging new technologies that maximize shareholder returns.
Simply put: Tech-forward investors drive stronger returns.
In many ways, investor interest in proptech today resembles the rise of real estate debt fund investment from the early 2000s. Once considered an alternative investment more closely aligned with corporate debt investing, real estate debt funds gained traction as investors realized the benefits of the unique perspective and insight these investments provided to enhance their real estate strategies. Investors in debt funds were armed with information that allowed them to make better investments in real estate operating companies, driving higher returns.
The first way investors benefit from proptech is access to new, independent data sources on macroeconomic market trends that can inform investment opportunities. By adopting or participating in technology platforms that collect, aggregate and evaluate market data, investors can better understand the patterns that will shape the performance of real estate assets. There has been significant growth, for example, in institutional-grade single-family-home aggregators. Single-family-home aggregators must select geographic markets in which to focus, pick homes within those markets for purchase, and then rent and manage those properties either themselves or through a third-party manager. By leveraging new, independent data sources and having a deeper understanding of the factors that impact the single-family rental market, such as shifts in demographic data or accessibility to quality property managers, investors in the space can make smarter decisions when choosing among strategies or modeling potential allocation decisions.
Similarly, tech-forward investors are able to tap into resources that provide data on rental yields based on factors such as product type, location, age and proximity to good schools. In some markets, single-family rental homes achieve greater returns when scattered throughout a particular region; in others, single-family homes outperform when clustered into smaller communities. With better data on the economic impact of these characteristics, investors can ask better, sharper questions and assess the strategies of general partners and owners.
Investors who are “invested” in technology are also better positioned to see how new technologies create new possibilities for real estate utilization and how they impact customer preferences. Let’s take one obvious example. Historically, people invested in real estate under the view that “they’re not making any more land.” But while the market is not making more land, it is finding more ways to utilize and monetize land, for example, through short-term rental platforms. Starting with the rise of Airbnb, a whole new source of real estate supply was created in hospitality, residential, commercial and retail. These new short-term uses disrupted sector after sector. The success of Airbnb depended on a convergence of multiple factors: the use of online platforms that could sharply reduce the transaction costs for finding short-term rentals, the rise of social media and peer reviewing to help hosts build reputation, the broader rise of a sharing economy that helped consumers grow more comfortable with using the personal spaces of strangers, and even the use of mobile phones to take and post digital pictures quickly and easily. Those who were closely tracking the technology market could see how these trends together created radical new possibilities for real estate utilization and were better poised to engage, plan, respond and adjust investment strategies accordingly. Similarly, those paying close attention to the rise of online commerce foresaw the surge in warehousing and demand for light industrial space.
Today we are seeing a dramatic shift toward remote work. New technology companies are popping up to provide remote offices that could encourage even the most traditional companies to maintain a permanent distributed, digital workforce. This will accelerate residential shifts away from dense cities and toward exurbia and communities with significant outdoor amenities and quality-of-life features. The speed of this shift will depend, in large part, on the quality of the new remote-work technology that emerges and how employers integrate these new technologies into their organizations post-COVID. Institutional investors should be closely monitoring where these technological currents are heading and the potential impact on allocation decisions.
Institutions that are more fluent in proptech are also able to more effectively evaluate potential real estate managers and general partners by critically analyzing their technology adoption and deployment. A command of the emerging best practices enables an investor to evaluate companies against those standards across asset categories. Is a large commercial real estate owner adopting a tool like Measurabl to track and report on energy usage and sustainability metrics? On the multifamily side, the growth of Latchable Inc. is suggestive of consumer demand for package management and mobile, remote access control. Are companies taking steps to meet these needs? And are multifamily property management companies adopting Flex to help tenants manage cash flow and payments, and to keep them in place? Are they adopting small but meaningful tools, such as PetScreening, to reduce liability related to growing tenant demands for pets and service animals? Are they using tools like Funnel to lease apartments virtually and more efficiently? In addition, as real estate managers increasingly invest a greater percentage of their annual budgets in these technologies, investors need to be attuned to the various solutions in the marketplace so they can effectively support and understand the ROI of these investments.
For all these reasons — new sources of data, trend forecasting, command of best practices — investors with insight into emerging technology have advantages that help them drive higher returns. The challenge for some investors is identifying access points to the best, most carefully vetted and curated proptech information and opportunities. Because proptech is a relatively new category — the word “proptech” only became widely adopted by the industry in the past 10 years — it can sometimes conjure the Wild West for newcomers exploring the landscape. There are a multitude of conferences and websites, and a universe of competing products and opinions. One good option to gain insight is to invest in venture firms that provide a clear perspective on the technologies shaping our industry. Venture firms with a track record for success and deep expertise in real estate operations can help institutions both incorporate best practices into their investment approaches and get into the driver seat of the steamroller that is technology — and not be steamrolled by it.
Jake Fingert is a general partner at Camber Creek, a venture capital firm providing capital to technology companies focused on the real estate market.