Valley Bank’s third annual report on proptech, which included collaboration from alternative investments firm GreenPoint and real estate tech-focused VC firm Metaprop, reports that there are some significant headwinds for proptech firms.
Obvious ones are tied to the difficulties that much of the CRE industry faces, including coming debt maturities, high interest rates, and the cost of construction. There’s also the uncertainty of rising taxes, utilities, and insurance. Companies worried about operating costs are less likely to pony up for more tech.
“Last year, the pace of dealmaking in proptech finally succumbed to the general slowdown that has been observed in virtually every other asset class,” they wrote. “Moreover, for proptech, 2023 saw the lowest count of completed transactions since 2017, albeit for a combined aggregate value of $2.9 billion that exceeded 2020’s total.” Venture capital deals tallied 144 for an aggregate of $2.7 billion. The bulk of the activity was in the final quarter.
“Although proptech dealmaking overall finally fell after an unexpectedly strong 2022, venture dealmaking remained historically healthy, signaling ongoing investment — even if at a subdued pace — into key arenas of innovation and technological deployment,” the report added.
However, lowered VC activity doesn’t necessarily mean strength for the proptech industry. Mergers and acquisitions and buyouts were also “more sluggish due to sheer capital costs and uncertainty around timelines for returns, anticipated delays, and costs of integration, and more.” The report said that there could be “occasional M&A in 2024, but it is difficult to see a more substantial resurgence.”
While VC deals had been focused on larger deals over the last few years, in 2023, 70% were $10 million or less. Median deal size was about $4 million, down from the $5.0 million of 2021 and $4.6 million in 2022. But there was increased caution about transactions, as the average and median time between financings for a company grew to 1.4 years.
Last year “saw an uptick in the proportion of transactions around property management and transaction solutions, while aggregate deal values were also proportionally concentrated in those same proptech segments,” they said. “This focus suggests that firms were prioritizing cost-saving and revenue-boosting implementations to costly, lengthy digital processes via automation. Physical property management, deployment of energy-saving devices and analytics packages also were prioritized. Reviewing a handful of select transactions further confirms the trend toward financial and physical sustainability, as well as opportunistic consolidation and investment in digitalization by more traditional real estate players.”