Several months ago, we surveyed more than 20 leading real estate VCs to learn about what was exciting them most in the real estate tech sector and hear their opinions on proptech trends like co-working, flexible office space and remote office space.
Since we published our survey, COVID-19 has flipped the real estate sector on its head as more companies move toward mandatory remote work, retail businesses are forced to temporarily shut their doors and high-traffic properties thin out. Suddenly, the traditionally predictable world of real estate is more chaotic and unclear than ever.
What are the short and long-term impacts of pandemic-induced volatility? Does this open up opportunities for proptech startups or shutter them? What does this mean from an investing point of view? We asked several of the VCs that participated in our last survey to update us on how COVID-19 is impacting real estate startups, non-proptech companies in general and the broader real estate market overall:
- Christopher Yip, RET Ventures
- Nima Wedlake, Thomvest Ventures
- Merritt Hummer, Bain Capital Ventures
- Micah Kotch, Urban-X
- Andrew Ackerman, Dreamit Ventures
- Stonly Baptiste, Urban Us
Christopher Yip, RET Ventures
Despite its banner year in 2019, proptech will not be immune to the pressures venture-backed companies face in a market pullback, and we are preparing ourselves and our portfolio companies for a bumpy year.
The unique dynamics of the COVID-19 pandemic will likely be acutely felt in the co-working and co-living spaces, but the effects on the consumer will likely also have an impact on businesses linked to continued home price appreciation and leisure or travel. Proptech startups with capital-intensive growth models will unfortunately also see continued pressure.
The single and multi-family rental sector which RET Ventures focuses on has historically been fairly resilient to recessions, so we remain bullish on startups within “rent tech.” Rental property owners today are undergoing a major digital transformation with a focus on driving operational efficiency and better resident experiences.
Many of the categories we’ve invested in, including tech-enabled amenities, smart apartment technology and digital workflow and management, generate significant operational savings and drive productivity for rental property owners in an economic downturn and will likely see continued strong investment.
Nima Wedlake, Thomvest Ventures
COVID-19 has adjusted our relationship with the spaces we occupy — our homes, offices, schools and neighborhoods. As venture investors, we are asking the following: first, will companies be able to survive the short-term demand and supply shocks associated with the virus? And in the long term, how will the virus initiate or accelerate fundamental changes in how we buy, sell and utilize real estate?
In our view, the short-term impacts to real estate are highly varied by asset type. Office space tends to be safer during market disruptions simply due to longer lease terms and a corporate tenant base. Hotels, restaurants and retailers are particularly vulnerable as a result of widespread travel bans and social distancing policies. We also expect home sales to decline as potential buyers typically do not transact during periods of economic uncertainty (even as mortgage rates hit near historic lows).
What does this mean for the set of venture-backed technology companies operating in the real estate vertical? Many will experience their first sustained negative economic cycle — and the models that thrived during a period of rapid home price appreciation will be tested. WeWork’s very public recent struggles cast a negative light on “asset heavy” proptech models, and COVID-19 may exacerbate fundraising challenges for such businesses.
However, there are many startups that may see their business accelerate during this period. For instance, companies that have helped digitize the transaction process (like Blend, Qualia and Snapdocs) may see increased adoption necessitated by recent work-from-home policies.
We expect that COVID-19 will shed light on business models that have not been designed to survive during recessionary periods. However, it will also accelerate behavior changes that may create long-term opportunities for real estate technology companies.
For instance, the coronavirus outbreak has triggered a trial run for remote work at a large scale, one that we’ve never seen before. What we learn in the next few months could help shape the future of work, and have downstream impacts on how we utilize office space in the future.
Merritt Hummer, Bain Capital Ventures
Our world has changed practically overnight with the emergence of the novel coronavirus, and the impact on the investment landscape will be profound, not only in the proptech sector but also more broadly.
The last recession spurred two trends that will exacerbate the current crisis:
- Re-urbanization as millennials and young, educated workers preferred city living to suburban living;
- Consolidation of space — as greater demand for city living led to affordability challenges, many startups emerged to help manage housing affordability in various ways, including co-living providers like Common and short-term rental platforms like Airbnb.
Ironically, reurbanization and space consolidation are now amplifying and exacerbating the novel coronavirus that economists agree will usher in the next recession. The exponential spread of the highly transmissible virus is tied to the density of populations.
Questions for proptech companies to think about:
- What will the coronavirus do to society’s perception of shared spaces? Co-living and co-working have transformed our social and economic lives in the last decade. Will the benefits of shared spaces prevail, or will there be a “new normal” that undermines our traditional sense of community?
- Death of retail was the headline of the last decade. Will a prolonged coronavirus outbreak lead to the death of other types of spaces, too — Office spaces? Public space? Entertainment venues?
- Will coronavirus catalyze a period of “de-urbanization” whereby social distancing becomes the cultural and social norm going forward? What does this mean for society and the real estate infrastructure that exists today?
- Economists are predicting that the economic fallout from the coronavirus could rival that of the Great Depression. The impact on real estate valuations will be profound. Companies that rely upon space arbitrage business models, especially those that are locked into fixed rental rates in the near term, may suffer significantly.
Micah Kotch, Urban-X
I have a feeling that the world that emerges from the COVID-19 pandemic will be fundamentally different. The impact on real estate, culture and shared values is difficult to overstate.
People who analyze the economy seem to be aligned with the idea that we’ll enter recession in 2020; I’d imagine that new construction starts will slow dramatically despite the deep need we have for affordable housing. At the same time, portfolio companies like Versatile Natures and Toggle that streamline construction and facilitate cost-savings through automation will be in greater demand.
Cities, in particular, will be hard hit from new demands on services and programs and declining tax revenues. The pandemic has clearly revealed a societal fault line around remote work and much-needed protections for hourly workers, including paid sick leave. The bigger point has to do with new patterns of consumption: how we live, work, travel and entertain ourselves is changing, with implications for new value creation and long-term global ecology.
Despite the short-term upheaval, the best investors are still open for business and are thinking about this crisis with a long-term time-horizon. Entrepreneurs who are resilient and decisive — those who can adapt and improvise, will be rewarded.
In the near-term, capital calls for new funds will become more challenging, and startups that don’t aggressively manage their burn rate will find themselves out of business. What follows will be a time of reinvention: We may see the growth of more self-contained live-work-play offices and solutions geared for more productive remote work.
I’m curious to see how long it will take for people to return to the community of co-working or traditional offices, once they figure out they can be productive working remotely. I’m hopeful that we’ll respond altruistically as a society as this slow-moving crisis unfolds, and that we’ll invest in a stronger safety net for those for whom working remotely is not a possibility.
Andrew Ackerman, Dreamit Ventures
One thing is certain: The coronavirus is the tipping point of “tele:” telemedicine, telelearning, telecommuting, etc. all just went from nice-to-have to must-have.
The impact on proptech is far less clear. In the short run, startups should expect their prospective customers to go silent as tenants, landlords, property managers et al. wrap their minds about the immediate adjustments to a persistent pandemic.
Access control for tenants, guests, vendors, construction staff, service people and brokers all need to be rethought. Health protocols for staff need to be put in place, and simply maintaining staff levels when employees struggle with childcare and commuting may be difficult. This will be especially acute on the multi-family side where demand for services (and you thought the package room was out of control before the virus?) is especially high as tenants work and learn from home.
Once the immediate adjustments are made, there will be winners and losers. Absent extensive bankruptcies (and missed rent payments), traditional commercial landlords may take the lightest hit as companies still need office space, but the WeWorks of the world are in for tough times as struggling startups and small businesses look for cheaper (or free) options. Startups that are cost-advantaged relative to traditional co-working spaces (e.g. KettleSpace*, Croissant) or that provide work-at-home solutions may come out ahead.
Deal syndication platforms may go into a holding pattern as developers conserve capital. The outlook is likely the same for crowdfunding platforms like Fundrise and RealtyMogul, but there is an outside chance that this sector can take off as real estate begins to look “safer” and more lucrative than the stock market to individual investors.
Startups targeting residential landlords and property managers could be big winners. Anything that makes tenants more comfortable like residential tenant amenity platforms (e.g. Amenify) or automates maintenance requests (e.g. Travtus, Aptly), simplifies maintenance itself (e.g NestEgg) or eases operations like package receiving (e.g. Luxer One) are suddenly top of mind.
VC investors have a saying, “Don’t make me think,” and right now, we are thinking hard about what COVID-19 means for our portfolio, so don’t be surprised if we are a little slower than normal to write checks. That said, we are acutely aware of the fact that some of our best returns came from investments made during difficult times. Fortunately, we think quickly.
*Dreamit portfolio company.
Stonly Baptiste, Urban Us
COVID-19 will have a lasting impact across the economy, including the startup ecosystem and especially real estate / prop tech startups. We know from 9/11 and 2008 that we will have a window of severe impact, but there are going to be lingering consequences.
We discuss this with data in our COVID-19 for startups document, available for public comment. For the real estate / prop tech sectors, we see some more specific impacts.
With more states issuing orders to stay at home and shutter businesses that are not deemed essential, many startups are working to minimize the impacts on day to day operations. For startups who directly work in the construction space, while some cities are already shutting down construction sites, others are making exceptions and deeming them as necessary to remain open.
From sales pipeline and active customer projects to supply chain and contractors, we’re seeing startups push to keep the momentum going through this period. Startups are pushing to keep R&D, development & permitting for projects, software development, finance, and product development efforts moving forward at full speed. The slowdown the pandemic has caused is being replaced with an increase in engineering, BIM modeling, and ERP and supply chain integration.
What we hear from our startups is that work that must take place in-house also continues, though they have adjusted their processes to reduce the risk of virus spread. For example, supply chain, fabrication, product implementation, and safety teams, as well as subcontractors are working in smaller teams with less direct contact and interaction.
Nonetheless, 2020 will bring, at a minimum, significant supply chain disruptions and delays in projects getting completed and sales getting closed.
Real estate & prop tech were already difficult categories to raise capital in but since the construction industry is expected to suffer in an economic downturn, new funding may be difficult in the year ahead. Startups with recently closed or closing rounds are grateful but still being cautious by reducing burn by cutting non-critical temporary staff.
Many of our companies have begun 2020 budget reviews to identify areas for cost reduction in the coming weeks and to prepare for a different funding environment for the balance of the year. Some are moving financial assets around to ensure the security of resources. We can’t accurately predict the duration or severity of the coming supply chain disruption, and the funding environment will likely get harder universally, so we’re advising our startups to delay or eliminate most new hires and expenditures to extend their runway.
There are potential long term implications for the industry that gives us hope. The COVID-19 crisis may lead to new standards for buildings such as upgrades and new standards to reduce the spread of infectious diseases.
These may include a renewed focus on air quality as a component of removing viruses from the air, an area where our portfolio company, Metalmark Innovations, has the potential to help. We also may see a new emphasis on touchless controls, including voice, gesture, proximity-based controls of lights, and doors, to reduce the tactical spread of germs.
There are also some broader implications for the use of space in the near term. We have a strong hunch that co-living is built for a potential recession. For portfolio companies like Starcity, which is priced in the middle, folks needing to reduce their burn, will find flexible lower cost living in co-living spaces an appealing option.
Delivery based shopping and dining are experiencing massive adoption right now, but long term people will return to the restaurant and window shopping experience of physical venues. Work from home will see some new adoption as firms realize that it doesn’t mean the end of productivity, but the majority of workers will choose to get back in the office to maintain work-life separation.
While temporary changes like Walmart parking lots being used for testing and NYC repurposing ports and hotels for medical needs will return to normalcy. Real estate and prop-tech, in many ways, will never be the same, especially for startups.
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