Prior to March 2020, a disruption in the tech world was viewed as innovative, bold and creative. Back then, VCs viewed those tech disruptors in much the same way.
Then the pandemic came, illustrating just how essential these tools had become to commercial real estate.
“Broadly speaking, in the narrative arc of the real estate market as the end market, the short answer is almost everything changed in terms of disruption and flux,” laments Zak Schwarzman, general partner of MetaProp. “But juxtaposed with PropTech, what’s changed is much, much less.”
Indeed, during the initial weeks of the crisis, timely capital supported new business intelligence tools tailor-made for the moment. In short, many sectors within the commercial real estate industry turned to remote tools to maintain continuity during the pandemic, causing investors to double down on PropTech.
“PropTech companies are in a unique position to help shape the new normal of our post-COVID world,” says Allison Xu, investor at Bain Capital Ventures. “Tech companies have the opportunity to help property owners determine how to create and maintain safer spaces for the public. This includes how buildings are designed, constructed and maintained on a daily basis. Data and insights will become increasingly important, and the rise of IoT solutions and other smart building technology will likely accelerate to monitor safety compliance.”
In the ensuing weeks after the pandemic began, MetaProp crystalized what the opportunity set looked like, particularly in the near term and somewhat in the medium term, says Schwarzman. This exercise resulted in classifying opportunities into three key categories.
METAPROP’S PROPTECH OPPORTUNITY BUCKETS:
- First category: A group of companies that were in motion and showed early signs of acceleration. This healthy activity was not only on the investment front but from the real estate customer side as a whole or a fraction of the consumer marketplace (if direct to consumer). These were categories within asset-level technologies that provided smoother operations in the COVID context.
- Second category: The companies that were in motion but faced headwinds.
- Third category: Firms that were not previously in motion but shortly thereafter were part of an explosion of activity in vendor-ready tools. Those services were the topic of conversation at the initial onset of the pandemic, enabling control, efficiency and flexibility while providing for the customer experience.
“Many of these vendor-ready technologies are not the stuff we would target for an investment but could be interesting to the real estate community as applicable for a potential customer,” Schwarzman said. “Some of the areas that were accelerating earlier this year we would envision extending into the long term. In other words, what we were interested in yesterday, we would be interested in today. When you look at brick-and-mortar retail, food and beverage, and hospitality, those are attractive in the long term but were not during the months following the pandemic’s start. But in terms of hospitality, you’d better be sure you were backing a company and team that had the wherewithal to survive.”
Other areas that found favor during the initial months of the pandemic resulted in real estate technology and sustainability colliding, says Kitty Sullivan, investor of JLL Spark.
“During the COVID crisis, there was an increased focus on improved indoor air quality and cleansing,” Sullivan says. “HVAC plays a central role in ensuring that basically the building’s lungs are functioning efficiently and improving the air, and decreasing the likelihood of pathogens spread by recirculating the air.”
One of JLL Spark’s portfolio companies, HubbleHQ, a flex space platform, released a survey earlier this year on what actions employers could take so employees would feel more comfortable in the workplace. Daily cleaning with antiviral agents and transparency about cleaning were by far the highest-rated responses.
Sullivan pointed out that the other force at play is the economic downturn as a result of COVID-19 that put pressure on building owners and operators to run more efficient operations at lower costs. This presented a key opportunity for owners to upgrade hardware and software in HVAC systems to achieve those cost savings. In the process, some areas of PropTech disruption were uncovered, she said.
PROPTECH DISRUPTION BUCKETS:
- Technologies that make environments more sanitary. This includes air quality but would also include robotic cleaners, janitorial services, etc.
- PropTech platforms that more broadly reduce the risk of contagion. Some platforms reduce contact with the physical building. i.e., keyless access controls where tenants enter buildings through smartphones rather than touching buttons or pressing badges to surfaces. Additional platforms such as VergeSense ensure employees and visitors are appropriate distances from one another.
- Technologies that improve communication and facilitate remote working. Cloud-based collaboration platforms make processes more efficient and effective. This allows distributed teams to communicate policies such as safety-related information, policies and building cleaning updates to buildings and tenants.
When evaluating PropTech opportunities, Schwarzman says landlords look at technology to serve immediate needs but also for certain requirements. These must-haves are based on usability, space scheduling and workflow staggering for use in tenant-facing capabilities or tenant engagement apps.
Another platform gained significant ground during the initial phase of the pandemic. Although virtual tours have been around for some time via 3D/virtual reality and augmented reality, this technology hasn’t been the norm in viewing space, especially for big-ticket leases, until the pandemic struck, says Sullivan. Elsa Ben Shimon, partner of New York City’s Stroock, agrees that innovations such as virtual tours and other technology are becoming increasingly used to address challenges presented by social distancing requirements.
“These tech-enabled platforms became an important topic due to COVID,” said Ben Shimon. “We realized how virtual site visits and tours were being used because of social distancing. Other examples were innovative solutions to replace traditional cash deposits. Companies such as Obligo provide much-needed cash relief to tenants by rendering cash deposits and paper checks obsolete.”
Perhaps a silver lining in the cloud was that the old ways of doing business were highly scrutinized during the initial onset of the pandemic. And, what popped out the other side were new ways of looking at the old methods in the real estate industry.
“There are a lot of tools in the operation of real estate. There are areas such as surveying, appraisals and insurance inspections but not a lot of modern software for these tasks,” Schwarzman says. “As a result, real estate firms as consumers of this tech have begun to build their muscle in a fairly sophisticated way in a short of time around how we interface with, inject and implement these technologies in organizations; to a degree, scale them out. That is a real advantage and not easy to do particularly when you are starting from scratch, but it is good that folks have been engaged in this and have done it well to meet the (COVID) moment.”
While the full impact on the emerging market ecosystem is yet to be seen, a more robust foundation for the start-up landscape is expected to emerge on the other side of the crisis. The bottom line in all of the discussion surrounding PropTech’s role during and after the COVID crisis is there is no one-size-fits-all approach for the needs in all property sectors. As such, Bain Capital Ventures is using a wide lens to evaluate all opportunities for all spaces.
“We are looking closely at technology that will shape all commercial and industrial spaces,” Xu says. “Just as hospitals are looking for safer processes, so will restaurants, retailers, manufacturers and more. Some solutions may be as simple as adding more touchless building features, i.e., doors, light switches, etc., while other solutions may require adjustments to building operations like tighter access control and occupant monitoring.”
And, where VCs and their portfolio clients leveraged greater cooperation during the pandemic, it may be logical to see a legacy remain in the form of wider engagement going forward, says Oxford Business Group. While specific projections for start-up financing vary by market and analyst, there is a consensus that those businesses and services which fulfill specific needs during stay at home measures are likely to remain safer options.
When the pandemic pandemonium is all said and done, some of these PropTech solutions will have stuck and some will no longer be needed. However, the PropTech sector will endure due to several key points, says Dror Poleg, author of Rethinking Real Estate, and co-chair of ULI’s Tech and Innovation Council in New York.
Technology investments have now eclipsed the high watermark set during the dot-com boom in 2000, but there is a demonstrable difference in at least one meaningful way. While the dot-com era was all about the online world, this time around, it’s physical.
As of mid-2019, seven of the world’s top 10 technology unicorns, venture-backed private companies with a valuation of more than $1 billion, were competing in offline industries with hard assets and complex regulation. This list included WeWork and Airbnb in real estate, JUUL Labs in nicotine, SpaceX in space exploration, and Grab and DoorDash in logistics and transportation. Uber and Lyft, two other companies from this category, graduated from the unicorn club upon going public earlier in 2019.
“Unlike their dot-com predecessors, today’s unicorns are not operating in a virtual Wild West, where the laws of gravity don’t apply and the laws of government have not yet been written,” says Poleg. “Instead, many of them are trying to change mature industries with entrenched competitors and complex regulation. It’s hard and it requires a lot of capital. But investors have limited options. The low-hanging fruits have been picked. The industries that could be easily transformed have already been transformed.”
Investors set out to identify new industries that were large enough to justify the risks and it turns out that real estate is an ideal candidate, he says. It involves trillions of dollars in assets, is highly fragmented and is rich with inefficiencies and untapped value. Moreover, the new normal has provided new opportunities.
“Now with the softening of office and retail, we will see real estate investors finding their way into logistics and healthcare,” says Poleg. “And landlords will become more open to methods to cut costs and that involves real estate.”
In fact, in recent years, the biggest names in venture capital have shown a growing appetite for property-related ventures. Sequoia Capital, Andreessen Horowitz, Greylock Partners and Khosla Ventures have all made multiple investments in the space. Today’s investor pool includes Fifth Wall, MetaProp, Bain Capital Ventures and JLL Spark, which have all clearly made strides in the COVID environment.
As a result, the public is reaping those user benefits with respect to touchless entry, social distancing tools, telework communication software, smart HVAC systems and numerous other PropTech advances that came out of the healthcare crisis and accompanying economic downturn. Those disrupters took on perhaps the largest disruption in history and made the industry slightly better for it.