Real estate tech investment has gotten serious. Venture capital invested in the space tripled from 2016 to 2017, buoyed by major investments in co-working giant WeWork and brokerage Compass. Excluding those mega deals, real estate tech firms raised around $7.7 billion last year. This compares to less than $500 million just a few years ago.
During the 2018 NMHC Annual Meeting, a panel discussion brought three real estate tech investors together to discuss where the money was going in commercial real estate and how it might affect the multifamily industry. The discussion, moderated by Randall Jenson, CFO of Berkadia, included participants Clelia Warburg Peters, co-founder and partner at MetaProp; Jacob Mienert, analyst with Navitas Capital; and John Helm, managing director at RETV Management.
Panelists discussed the growth of investment in the sector. Noting that start-ups had already pillaged most every other tech investment category, RETV’s Helm said investors saw the real estate sector as the “last frontier in venture investing.”
Moreover, despite the significant investment growth, panelist said the market was far from tapped out, noting that in 2016 there was roughly $70 billion in venture capital floating around and yet just $2.5 billion found its way into real estate tech. “We’re still relatively under invested,” said Helm.
“The broader venture capital community has discovered real estate tech,” added Warburg Peters, “But the smartest money is coming from the people sitting at the intersection of new tech and legacy real estate know-how.”
To that end, the group noted a lot of interest in trying to leverage artificial intelligence (AI) and predictive analytics to improve efficiency and transparency in business decision-making. More specifically, the group identified six areas of focus for real estate tech investors and providers.
Leasing. Everyone loves the idea of AI-powered chat bots, around-the-clock digital rental agents that can help start a customer relationship by answering simple questions and providing common information. But beyond that, real estate tech investors are looking more closely at companies that use web-based software to essentially scrape social media outlets for data that can pre-qualify prospects.
Helm said such digital solutions help accelerate the sales cycle by pre-populating pertinent information, reducing the need for manual data entry. Moreover, by automating the process based on a set of universal pre-qualifying guidelines, real estate companies may be able to reduce Fair Housing-related risk. “It’s better because you can put in decision rules and have a safer system,” he said.
Warburg Peters added that investors are also seeing opportunities in short-term rental platforms like Airbnb or Home Away. She noted the emergence companies like Flip, a subletting platform, in creating a more liquidity marketplace for leases. “But that’s the Wild Wild West,” she said. “It’s still unregulated. But a lot of younger people aren’t interested in making even a one-year commitment.”
Investment analysis. Similarly, investors are very interested in companies that are working to harness data in the public domain-everything from geospatial data to consumer data to zoning regs and beyond-to help identify, evaluate and close potential real estate deals faster.
Warburg Peters said that investors’ interest in these solutions “is very focused on retail right now.” Many are looking for solutions that can essentially predict the value of a retail site as well as provide critical insights on everything from identifying the right retail client and optimizing the site for retail down to determining which corner you should be on.
However, she said she was also interested in companies like Envelope, which “focused more on the enormous regulatory burden that is borne particularly in urban environments.” This could include zoning restrictions, subsidized housing requirements, air rights and more. “What used to take months and millions of dollars in lawyer fees can be done in hours or a few days,” she explained.
Construction. For Navitas Capital’s Mienert, the construction space is an area ripe for tech disruption and that’s where his company has focused a lot of its dollars. The company invested in Katerra, a tech company that aims to drive efficiencies through the design, development and construction process to drastically reduce the time it takes to bring apartments to market.
“This is a really unique company that is changing multifamily,” said Mienert.
While there’s been some controversy around how solid the company’s reported $3 billion pipeline is, the panel agreed that there were opportunities to better leverage technology in the construction space. Panelization and pre-fab construction and more efficient supply chain managements are areas in need of tech investments, but panelists also noted how tech advances are fueling growth in arbitrage companies-Why Hotel being an example-that can help stabilize properties faster, reducing financing risk and carrying costs.
Amenitization. Real estate tech investors are also intrigued by companies that use technology to enhance the resident living experience, be it through a network of service providers or crowd sourcing for insights into the most desired amenity packages. Top picks include companies like Hello Alfred that allow residents to digitally outsource household chores. “I also really like tech companies that are focused on bringing activities to unused space in a building,” added Warburg Peters.
Some are making the case that short-term rentals could be considered an amenity, both as on-site hotel space for visiting guests and as income-producing amenity for residents. Helm noted that there are still investor concerns about how these companies can perform over the course of a full real estate cycle.
“The regulatory environment is still very scary,” he added. “There are a number of municipalities like Berlin, where they just kicked Airbnb out of the city.” However, he also noted that many of these companies have already evolved, allowing property owners to set limits and have more control over the process.
Smart homes. Without a doubt, real estate tech investors are seeing huge potential in the smart home space. However, it’s not just about satisfying young millennials need for more consumer technology. Investors also are interested in smart home operating systems that can deliver value to the property owners, be it through additional revenue, cost savings, operational efficiencies or transparency.
For Mienert, “it’s really about finding centralized solutions that are already pre-installed,” he said. That’s why he’s looking at companies like Iotas, which provide a turnkey suite of networked smart home products that provide data and learning to the property owner on the back end. He provided an example of a Class B property in Texas where the company was able to boost rents $45 a month by installing smart thermostats, locks and Alexa in the units. “We were able to get the integration of all the functionalities without having to install anything,” he said.
Brokerage businesses. With no real automated approach to automated valuations, the panelists saw a big opportunity for real estate technology in the businesses operating under brokerage models, with the appraisal, insurance and mortgage industries being obvious starting places. All also saw the emergence of Blockchain technology, which offers a digitized, decentralized public ledger of transactions, as potentially revolutionary in the so-called “PropTech” and “FinTech” spaces.
Several said that they had made investments in online real estate insurance and appraisal companies, as these areas of the finance and transaction market have largely been untouched by tech advancement. “CBRE probably has a couple hundred appraisers and like five tech people,” noted one panelists.
The idea is that technology can help automate some of the more vanilla-flavored transactions, whether they be small or simple executions; the end results would be speedier and more consistent results. “High complexity deals will need human intervention,” explained Warburg Peters, “But those folks still need a strong tech background.”