The real estate industry — like so many other sectors — was forced to adapt this year.
Now, investors are ready to pour capital into the startups they believe are best-positioned in this new era, from companies tackling construction tech, financing and digital workflow tools to those finding ways to monetize vacant spaces, flex offices and yes, even co-living arrangements.
TechCrunch surveyed nine firms that are writing checks today for startups in the sector. Our first survey, published last week, provided a broad view of the residential and commercial real estate landscape, and homed into the trends that have emerged and accelerated in the past year. In short: Optimism still runs high for startup hubs as well as supercities like New York and San Francisco. However, the move toward e-commerce and remote work — a trend that started before COVID-19 upended the way people live, work and play — has accelerated.
This second installment of responses focuses on the opportunities and risks for startups that these investors are betting on (or not).
For additional context on where top investors believe the market is headed, be sure to check out our real estate and proptech investor survey from late March and the previous ones from late last year (when everyone thought 2020 would be something different).
- Clelia Warburg Peters, venture partner at Bain Capital Ventures
- Brad Greiwe and Brendan Wallace, co-founders and managing partners, Fifth Wall
- Zach Aarons, co-founder and general partner, MetaProp
- John Helm, managing director, Real Estate Technology Ventures
- Adam Demuyakor, co-founder and managing partner, Wilshire Lane Partners
- Casey Berman, founder and managing director, Camber Creek
- Florian Reichert, partner, Picus Capital
- Stonly Baptiste, co-founder and partner, Urban Us
- Andrew Ackerman, managing director, DreamIt Ventures
Clelia Warburg Peters, venture partner at Bain Capital Ventures
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
Because real estate is such a complex business, some of the investing trends we have seen around proptech are fad-based and not deeply rooted in fundamentals — and I do agree that some of these fads may not weather the challenges presented by the pandemic.
Co-living is clearly facing challenges, and likely will for some time as younger consumers have more flexibility to opt out of living in larger cities with supply constraints and high pricing. However, there are also a number of underlying trends that suggest that the way that we rent or own properties is going to continue to evolve. I believe we will see shorter lease terms, more amenitization (including a trend towards furnished apartments or renting furniture) and more options for shared community resources. This could extend into co-living, but in the short to mid-term, means that I think we will see more rapid growth in companies offering more hybrid short to mid-term stay innovation models (Sonder, Zeus, Kasa, Whyhotel, etc.) and companies servicing landlords or consumers who are doing this themselves (CasaOne, Feather, HelloAlfred, Hom).
Flex office is also an area that I think will be challenged in the short term but I believe could see a major recovery once companies start to think about their ongoing office commitments. In my opinion, premium players such as Convene and Industrious who have focused on building relationships with enterprise clients and increasingly use management contract models with landlords will likely see major growth 12-18 months from now.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
I don’t think these companies are challenged across the board. In fact, real estate fintech companies focused on disrupting the residential real estate transaction have largely seen a bump, not a decline, in their business during this time. Nationally, the residential market has remained brisk (with some obvious exceptions, like New York), and many of the companies providing equity-based alternatives to debt financing (mortgages or HELOCs) are seeing a big surge in demand. Obviously it’s also been a great time to refinance a home, so many companies in the mortgage space are seeing a big jump in demand as well. Even iBuyers, who many thought would be facing the ‘economic challenge which undermined their whole model’ have instead seen meaningful growth during this time. I think this moment may prove to be a watershed in terms of consumer openness to different tools to facilitate and finance the residential home transaction.
What are other big problems and solutions that everybody else is missing?
Increasingly, there is a whole ecosystem of really smart people working in and around proptech, so I don’t know that there are many big problems no one has noticed. (I would contrast that with five years ago when I don’t think much of the industry had woken up to the degree of disruption and innovation that was coming!)
With that said, I think we are primed to see a massive expansion of innovation in construction, and I am excited by the quality of entrepreneurs I see actively building in that space, as well as the engagement of industry-leading incumbents.
I think we are going to continue to see an evolution in the ways that we buy homes, particularly in how we finance those purchases. Up until recently, the innovation in the residential space was all focused on disintermediating the real estate broker, and I think the most sophisticated entrepreneurs are increasingly understanding that service is a core component of a home sale and the bigger opportunity is finding a way to leverage the position of the real estate agent (in whatever form) to sell affiliated products, including title, mortgage and home insurance or to innovate in those products themselves.
Finally, it’s worth mentioning that many of the ‘work-a-day’ challenges in the real estate industry still need addressing. It’s still harder than it should be to manage the full cycle of tenant leasing if you are a multi-family owner, it’s hard to optimize the management of your physical asset if you are a commercial owner, it’s hard to use tech to optimize retail decision making if you have retail assets. These problems haven’t changed during the pandemic, and they still need great entrepreneurs to help find solutions!
Brad Greiwe and Brendan Wallace, co-founders and managing partners, Fifth Wall
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
In the office and residential sectors, areas such as digital workflows (i.e. digital leasing, self-guided tours, click-to-close technology, property management, insurance, title, lending / capital market innovation), security & access control, air quality and space sensors were already well-performing areas, and now we’re seeing an urgent need for adoption as landlords prepare to welcome tenants back to their buildings and address increased customer service expectations. And while retail brands and retail technology have been heavily impacted by stay-at-home measures, we’ve seen an incredible boost in companies that touch the e-commerce, logistics / supply chain and food delivery spaces. In terms of the broader startup ecosystem, we’re spending our time focusing on more mature companies within these areas that are forging a strong path, particularly those in a position to capitalize on opportunistic scenarios often presented during volatile times and amplified by the new trends stemming from COVID-19.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
We’re quite bullish on this space, as real estate fintech companies have gained traction over the last few months in particular due to social distancing measures and customer demand for increased digitization. On the other side, the real estate incumbents that have been apprehensive about innovation are suddenly eager to pursue digital transformation efforts in earnest. While the instability of this period will spell the death of some old-world companies, others will adapt and innovate, and we expect to see much-needed consolidation in the space, including a slew of potential acquisitions.
What are other big problems and solutions that everybody else is missing?
Brendan Wallace: For years, the real estate industry has escaped the spotlight as a key perpetrator of climate change, even though real estate is both one of the worst offenders and the largest asset class on earth. Real estate is responsible for 40% of the world’s consumption of energy, 30% of the total global greenhouse gases and 40% of the world’s raw materials. That’s more than transportation, more than single-use plastics, more than any other industry that has caught the public’s attention.
But a confluence of events involving regulators, large tenants and public/private markets are finally causing real estate and sustainability to converge, and forcing the industry to find solutions. Massive companies — like Amazon, Microsoft and Google — which require real estate for their offices or to house data centers are demanding aggressive carbon performance from their suppliers, landlords included. In order to secure these premier tenants, owners and operators need to find sustainable ways to operate their buildings.
And regulators in U.S. cities like New York, Los Angeles and Washington, D.C. are beginning to demand cleaner buildings, imposing aggressive carbon taxes that focus on the real estate business, just as large capital allocators are instituting explicit low-carbon or decarbonized allocation mandates.
All of these forces, converging together, mean the industry needs to address sustainability head-on. To combat climate change, the industry will need to reduce its carbon emissions from nine gigatons to zero by 2050, a goal that we believe will only be achieved through significant advancement and investment in the technology that does just that.
Zach Aarons, co-founder and general partner, MetaProp
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
The vast majority of proptech companies have transitioned from nice-to-have solutions into have-to-have solutions in a matter of a few short months. Real estate has been forced to adopt tools to transact without in-person interaction. Certain technology products that sell into sectors like retail and hospitality will struggle in the short term as their customers struggle to find their footing; however, the long-term thesis on those sectors is bright as well for technology.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
The capital markets definitely froze for a significant period of time in the wake of the onset of the novel coronavirus. However, markets are beginning to thaw, bid/ask spreads are finally narrowing and transaction activity on the commercial side should bounce back in 2021.
John Helm, managing director at Real Estate Technology Ventures
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
Looking specifically at the hottest proptech categories, there’s no question that co-living and several others have struggled. While there is clearly less stability in these sectors now than there was a year ago, some companies in the space may pose interesting investment opportunities for opportunistic funds seeking depressed valuations with high upside.
At the same time, there are other hot proptech startups that have been more resilient. While the short-term rental space has largely struggled amid the pandemic, we invested in one company in the space that counters this trend. This firm has a much more sustainable business model than most of its competition, which actually allowed it to increase its unit count during the pandemic.
More broadly speaking, it should be stressed that the strongest investment opportunities are not necessarily in areas that are considered “hot.”
Because of the nature of our relationship with our LPs, who are real estate owner-operators and managers, we tend to focus most heavily on technologies that help owners and operators run their businesses more efficiently and provide a more enjoyable experience for renters. With the economy struggling, solutions that can have an immediate impact on property expenses (e.g. utilities) and/or revenue (e.g. rent collection technology) are very appealing to landlords, making them compelling investments for us. We’re actively considering several companies that fall into these buckets.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
Transaction-driven business models are, by their nature, impacted by the ebb and flow of the market, and this is clearly a challenging time for most of these companies.
That is another reason why RET, as a fund, tends to gravitate more toward technology that improves real estate operations (marketing, leasing, communications, etc.), which are more stable. In fact, some of these technologies are even counter-cyclical, as many building managers double down on reducing operating expenses during a downturn.
What are other big problems and solutions that everybody else is missing?
It flies under the radar in most discussions of proptech, but one of the biggest annoyances for landlords and tenants alike is package delivery. The e-commerce revolution is well underway, and building teams have long been grappling with the challenges of becoming couriers and package security in addition to all of their other responsibilities. Many buildings have installed package lockers to deal with this reality. But e-commerce activity is growing every year — and is propelled further by the pandemic — and these lockers are often over-capacity.
There are a variety of possible solutions that have been proposed, but all of them are essentially interim solutions. To really solve the problem once and for all we need to enable delivery of the package directly to the resident’s unit — our portfolio company SmartRent is working on doing just that through their partnership with Amazon and Ring, which combined with their smart locks will enable secure in-unit package delivery when the resident is not home.
Adam Demuyakor, co-founder and managing partner, Wilshire Lane Partners
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
So the data we’ve seen (from one of our portfolio companies, Common) actually suggests that co-living is not the worst-performing asset class. Their delinquencies last month were less than 2% and they were at an all-time high for new lease signings. Across proptech categories, we believe that the demand continues to be there. Young people still want cheaper, faster, more tech-enabled solutions when it comes to how they eat, work, play and live. It’s the business models where people need to take a deeper look. I think the struggles with WeWork, for example, have shown that overly depending on long-term Master Leases with cumbersome levels of TI’s and buildouts is a bad business model (whether it’s in Co-Working, Co-Living, Short-Term Rental, Storage, wherever). For us, we like companies that rely more heavily upon Management Agreements (or Revenue Share Agreements with landlords) in lieu of Master Leases — for example, Common is already at 92% Management Agreements across its portfolio, which insulates the company very nicely in a downturn. We think increased usage of Management Agreements is where the future of real estate-related, venture-backed companies is headed.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
We believe that companies that can consistently cut down processing costs and increase transactional efficiencies will continue to do well, even in a downturn. Real estate-related fintech businesses that focus on these areas stand to do very well in the coming months as more and more of the real estate transaction process becomes necessarily digitized.
What are other big problems and solutions that everybody else is missing?
One of our key areas of focus is new ways to monetize underutilized / vacant spaces. Something that this pandemic has made clear is that the way we’ve historically thought about real estate is on the precipice of dramatically changing. And what we know for certain is that technology will play a key role in whatever new use cases that existing real estate gets transitioned to. For example, we’ve recently incubated a company called Stuuf. Stuuf takes the tens of thousands of square feet of idle basement spaces that are available in parking structures and commercial building basements and converts them into tech-enabled, premium self-storage facilities. We like this approach because it’s a win-win for all parties involved — landlords get to easily make money from their unmonetized, empty basement spaces and consumers get better, cheaper supply of storage right in their local neighborhood. We’ll continue to look for great, innovative solutions like this in the market.
Casey Berman, founder and managing director, Camber Creek
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
Speaking for our portfolio, COVID-19 is not necessarily posing challenges so much as creating opportunities. Take Notarize, for example. Notarize offers online notary services for title companies, mortgage lenders and other B2B enterprise customers. Demand for Notarize grew exponentially since March. To capitalize on the demand, Notarize shifted from all in-house notaries to a marketplace model where they employ highly vetted but independent “Notagigs.” With the Notagig program in place, and a number of other innovations, Notarize grew revenue by 400% in the second quarter. Depending on a company’s niche, real estate fintech companies are performing equal to or more strongly than other proptech categories.
Florian Reichert, partner, Picus Capital
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
Obviously, the real estate industry, which is still mostly reliant on direct human interaction and revenue models that are based on the occurrence of transactions (sales, brokerage or renting) are currently being hit hardest. Also, many proptech companies still rely on some kind of physical interaction and face lower demand due to the current pandemic. However, many of them are predestined to benefit resulting in continuously interesting investment opportunities. This includes companies leveraging technology to facilitate property transactions, thereby reducing physical interactions through remote appraisals, 3D viewings and digital communication (e.g. Compass, Opendoor, Casavo, etc.) as well as new hospitality concepts operating staffless facilities allowing their customers to check-in/-out and access rooms/services digitally via their platform (e.g. Sonder, Limehome, etc.). This is especially applicable to the latter category, as it is often also categorized as travel tech and hence suffered collateral damage during COVID-19 in terms of valuation multiples, even though the effect on them was limited or even non-existent, which makes the opportunities even more interesting. However, co-living will also remain an interesting sector even though it is currently under pressure due to the physical closeness of the community, as the aforementioned trend is causing a more remote way of working making these communities increasingly important considering the reduced social interaction on the job.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
The need for adaptation is certainly unique to each company and dependent on the underlying business model, the maturity of the company, the availability of funding and runway as well as respective views on the sustainable, post COVID-19 impact on the given sub-industry / solution. Having said that, we see founders successfully striking an appropriate balance between rethinking the long-term implications on the business model while making short-term adjustments to limit burn and prioritize employee & customer safety as well as general well-being. In our opinion, founders and investors should look at business models with a 10+ year horizon, as it is important to not pivot the core business model too quickly but rather pivot thoughtfully while evaluating the changing environment based on constant reflection of customer feedback but separately from short-term measures required to navigate through this time period. Looking at examples of real estate fintech companies that are transactional and carrying the price risk of properties on their balance sheets (i.e. iBuyers), we have seen them making adjustments when it comes to non-core elements that facilitate transactions (e.g. 3D viewings and remote appraisals) while sticking to their core business model and being more selective in terms of price stability/discount and short selling cycles when buying properties.
What are other big problems and solutions that everybody else is missing?
We see many investors forming their investment theses quite radically on trends that have been accelerated through COVID-19, like a full shift towards remote working or digital models. As mentioned previously, we strongly believe that the current trends are bringing the ecosystem to a “new normal” rather than reversing it completely. Hence, we see a lot of problems arising when companies and consumers need to adapt to this new normal considering the impact of COVID-19 on existing business models.
This, of course, opens up a multitude of opportunities that are partially disrupting quite saturated markets. For instance, when it comes to workforce/office management, the challenges arising from the interplay of working on-site and from home/remotely mainly revolve around setting up offices flexibly in order to facilitate this hybrid model, managing capacity and access within offices as well as facilitating collaboration and culture between on-site and remote workers. This opens up opportunities for software companies that tackle office and workforce management with an integrated approach providing employers with the flexibility and tools to manage a hybrid model of on-site and remote work (e.g. Rippling, Lendis, etc.). Also, outside of the proptech sector, in retail and health, we don’t see a full shift to e-commerce or telemedicine and hence a lot of opportunities when it comes to omnichannel management for existing players. Looking, for example, at healthcare, COVID-19 clearly increased awareness for the importance of telemedicine. However, in our view telemedicine is an enabler for existing infrastructure and therefore we see a lot more potential in tech-enabled clinic models (e.g. One Medical, Avi Medical, Meddo Health, etc.) in the long-term.
Stonly Bapiste, co-founder and partner, Urban Us
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
As an investor in Starcity, I’m biased but I also have asymmetric information indicating that co-living is performing better than traditional multifamily in this environment. Jon Dishotsky, the CEO of Starcity, has shared that their marquee assets are outperforming traditional multifamily during the pandemic in all three major fundamentals; occupancy, collections and net operating income.
To quote Jon directly: “The pandemic has reinforced the need for social connection and so long as folks are following the appropriate protocols, they can reduce their anxiety about the current state of the world by connecting with roommates.”
Furthermore, Starcity’s new demand is now higher than it was pre-pandemic. I think this shows that the social isolation of the pandemic has exacerbated people’s loneliness and they’re looking for more human connection, which is easier to find in co-living communities than in traditional multifamily.
Regarding investors, as the asset class shows recession resilience, Starcity has been able to capitalize on multiple projects during the pandemic with institutional grade investors. Though they’re risk-averse, these investors are now more open to investing in the asset class due to its counter-cyclical performance, so long as it’s built and operated affordably. This makes us believe more in the category so long as it remains affordable.
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
Not much comment here, as we don’t invest in transactional real estate tech, but July data indicated a rise in new home sales.
What are other big problems and solutions that everybody else is missing?
The environmental impact is also not to be ignored. As a result of COVID-19, we’re seeing an increase in car ownership, which leads to traffic and consequently, lower quality of life and higher carbon emissions. This will spur a reimagining of solutions at the intersection of real estate and mobility from parking to amenities, including EV charging and shared, but COVID-safe, transportation options.
Andrew Ackerman, managing director, DreamIt Ventures
How do current trends translate to opportunities and problems for proptech companies? For example, co-living is among the worst-performing asset classes with a risky tenant demographic. Are there still worthy investment opportunities in previously hot areas like this?
When the crisis hit, one of the first questions we asked all of our startups was, “is the expected new normal better, worse or about the same for your startup?” In many cases, the future is better. Many startups struggle to find the more innovative customers who are willing to embrace rather than fight trends. With resistance to remote work, telehealth, distance learning, etc. crushed by COVID, startups like these have an easier, rosier future.
In most cases, the underlying needs and/or customer base that a startup is addressing have not meaningfully changed, and once they get through the curve ball that COVID threw them, they’ll be more or less back on plan.
It’s only when COVID creates long-term changes that the startups should be worried. For instance, while DreamIt never invested in co-living directly (we felt it was more of a real estate play than a tech startup play), you would have to believe that younger people will, moving forward, shun cities and/or shared spaces for co-living to be in long-term trouble. Judging from how many (although far from all) young people are less concerned about COVID and continue to socialize more than other demographics, I am not convinced that co-living is dead. The short-term will be brutal for many of the current players but the long-term is still up in the air…
Real estate fintech companies have a unique set of challenges in this time, given limited real estate sales and higher costs. How do you see these companies successfully adapting?
That’s actually not true. Some real estate/fintech startups are hit hard from lower transcation volumes but there are many more models in this sub-space than i-Buyers and discount brokers. For example, NestEgg helps small-scale landlords manage their cash flow better by spreading costs over longer time periods, rent advances, giving tenants more payment flexibility, etc… their business is booming right now.
Refocusing your question on real estate startups with business models that are driven directly or indirectly by sales and rental volumes (whether or not they are fintech-y), it’s going to be a rough quarter or two, but eventually volumes will go up, regardless of where the prices end up.
And, of course, startups whose business models are very sensitive to asset values and rents (e.g. i-Buyers, co-living startups who own their own assets) are particularly screwed right now.
What are other big problems and solutions that everybody else is missing?
The global pandemic interrupted filming of The Walking Dead and I’m dying to see how the current season ends. Honestly, how hard is it to film a zombie show safely? Would someone please get on this ASAP?
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