Happy New Year to all of this column’s readers! I think I speak for us all when I say “good riddance” to 2020, and for this reason – and the fact that we’ve covered the topic of the ongoing effects of the COVID-19 pandemic on real estate, proptech and contech several times during the year – I’ve decided to eschew tradition and only focus on the future in my new year’s piece. Make no mistake, 2021 will be a challenging year. We won’t be free of the virus until the summer at the earliest, and the shocking events that took place in the first week of the year were enough to make many wish that we could skip forward to 2022.
This being said, I believe that 2021 will be a year of change and rebirth. Real estate was forced to embrace innovation once and for all in 2020, and this new year will only serve to cement this shift.
To delve into the outlook for real estate and its tech, I once again enlisted the help of several leading global proptech and contech VCs. They are Pi Labs founder Faisal Butt, Concrete VC founder Taylor Wescoatt, MetaProp cofounder and general partner Zach Aarons, RET Ventures partner John Helm, Camber Creek general partner Jeffrey Berman, JLL Spark APAC lead Anuj Nangpal, Taronga Group cofounder Jonathan Hannam and BuiltUp Ventures co-founding managing partner Oded Eliashiv.
What do you think the proptech and contech investment landscape will look like in 2021 and beyond?
The VCs all agree that the sector will continue to strengthen and become more mainstream, and that the pandemic played a significant role in boosting its growth. As Berman puts it, investment into real estate technology will increase in 2021 (and beyond) across industry verticals because “The billions of dollars that have already been invested in innovating ‘real estate’ is just a drop in the bucket. The pace will quicken as embracing technology and the digitization of otherwise banal workflows becomes routine. COVID-19 became a forcing function for technological adoption in the real estate industry – which has proven to be a boon to both entrepreneurs and investors. And it will continue into 2021 & beyond in key areas around solutions that ensure business continuity (think safety & remote operations), robust data ingestion and, of course, cybersecurity (as real estate companies introduce new technology) among others.”
Aarons concurs stating that, despite the massive economic disruptions that occurred during 2020, the proptech community still enjoyed a record year of financing, and there is still a lot of room to grow. Eliahsiv agrees, as he believes that recovery from the pandemic will be faster and stronger than that from past crises. While COVID-19 caused a hard stop to global activity, it also helped produce rapid changes and accelerated the adoption of new technologies; 5G and IoT will play an important role in this continued growth. Nangpal added that he has seen accelerated activity in proptech investments that are highly focused on narrow opportunistic themes which can harness the tailwinds provided by the pandemic, and pointed out three significant trends: flexibility, safety and sustainability. He reckons that 2021 will see significant private equity activity into proptech as scaling companies get better access to liquidity, and valuations will exponentially increase. As a consequence, proptech leaders will aggressively consolidate using their enhanced valuations as currency.
According to Wescoatt and Butt, this is tied to the growth of the venture capital ecosystem, with Wescoatt stating that “Corporate venture capital will expand as significant players realise they have real value to contribute via their portfolios, and they want to have some skin in the game. Europe-led investments will start to cross borders more meaningfully than they have in the past. M&A by larger proptech players will increase”. Butt added that “There are a number of new funds emerging either wholly or partially focused on proptech, so this is likely to help mature the ecosystem. The ideal is that there is cradle-to-grave availability of capital – where start-ups have capital pools to tap into at every step of the start-up journey”.
From Helm’s point of view, though we can expect the COVID-19 vaccination program to reach critical mass by mid-year and economies should start bouncing back relatively quickly from then, lockdowns and quasi-lockdowns will likely continue for months, impacting certain real estate asset classes such as those tied to travel and retail, and the technology solutions that support them. However, “other proptech companies — especially those related to single-family and multifamily real estate — will continue to prove alluring to users and investors alike. Even after the pandemic fades, many of the technologies whose deployment was speeded up to help deal with social distancing protocols such as online leasing and self-touring will stay as owners and residents alike have found them to be a better experience and operationally more effective.”
Hannam believes that there has been an erosion of internal barriers of resistance to tech throughout real estate in 2020, as a greater use of innovation and technology has become the only way of returning to some level of normality. He adds that “However, within the corporates, the major challenge remains implementation. Many corporates now want to drive change within their organisations but realise that change also requires a shift in culture and a different skillset. In order to address this, leading global real estate groups are now adding technologists to their boards and having innovation heads as a direct report to the CEO.”
What has changed in your thinking for the future compared to this time last year?
Saying that the global outlook today is radically different than it was this time last year is probably the understatement of the century. The VCs have varying views on how the past 12 months have affected their outlook for the future.
Wescoatt thinks more ‘tentativity’ in strategic moves driven by uncertain occupier behaviour will lend itself to more tech experimentation. As he puts it, there is “no more ‘business as usual’ and every aspect of the value chain is now thrown open for review.” Aarons agrees, stating that the adoption curve is much faster for customers than it was at this time last year.
Eliashiv told me he “now view[s] everything through the lens of the pandemic and believe[s] our way of life going forward will need to adapt to a new world of living, working, socializing, and communicating.” In line with this, Nangpal shared that the pandemic has shifted ‘use cases’ for proptech from being focused on cost efficiency to a people and employee focused application. He believes that “CFOs and CHROs are now at the centre of the enterprise sales cycle and have emerged as key influencers in the decision process.”
Looking forward, Butt is exploring the new and next-generation ideas and technologies within proptech and contech. “There are category leaders already established in some of the proptech niches, many of which are already in our portfolio. We are extensively researching new areas to venture into and invest in, in addition to supporting our growing portfolio of 50+ companies.”
Hannam believes that, in addition to current trends centred around safety, process digitalization and the creation of new revenue streams for sectors such as retail, there will be an ever-growing focus on sustainability.
Helm and Berman both feel that their thinking for the future has changed much less than might be expected. As Berman puts it, “We have a focused investment thesis that supports deploying capital into technology & business innovation that are ‘need to haves’ versus ‘nice to haves’. 2020 – and the COVID backdrop – provided the ultimate validation for our philosophy as a number of our companies experienced breakout growth due to the pandemic disruption. COVID-19 greatly accelerated adoption and there’s no going back from that. I’ll be surprised if there’s anything but a vocal minority that says ‘let’s go back to the old way of doing business.’”
Helm echoes this, stating that “Most of the changes that we’ve observed in these sectors were accelerated by the pandemic, not created by it. Prime examples are changes that relate to working from home, self-touring/online leasing, and the growth of e-commerce and attendant concerns in apartment buildings. Zooming out to look at the industry broadly, this has been a very dynamic year; some proptech companies have thrived and others have floundered. As a sector matures, you always expect a certain amount of consolidation: End-users begin gravitating toward certain solutions, creating winners and losers, and then mergers and acquisitions solidify these companies’ respective market positions. Within proptech, we saw this maturation begin in a limited sense before the pandemic, but it has accelerated in a significant way. In the coming year, I think we’ll get a much clearer picture of who the winners are in various proptech categories.”
What tech and what sectors are you most excited about for 2021 and beyond?
Perhaps unsurprisingly, as the VCs hail from different geographical areas and have a varied sectoral focus, their answers to this question are wide-ranging. One key trend they all agree on for the new year is that of sustainability.
Hannam shared that “Our pipeline of potential new investments includes construction technology, solar distribution systems that will be applicable for build-to-rent and residential owners, cleaning technology applicable to all sectors, marketplace creation for retail, as well as additional investments into vision systems and AI. We have focused on construction because it has so many implications for energy, sustainability as well as health and safety.”
Helm, too, is focusing on construction alongside his ongoing focus on residential management, explaining that “Our outlook on construction tech is now more bullish for several reasons. In the short-term, certain construction technologies are helpful in that they can simplify the on-site construction process, and can limit the number of trade workers onsite, facilitating social distancing. In the medium term, due to where we stand in the real estate cycle, many owners are increasing their focus on developing multifamily properties. With more shovels poised to hit the ground in the next few years, the market opportunity for construction technology is growing. We had never doubted the long-term opportunity for construction tech; due to present conditions, it now seems like a strong category in the short and medium-term, as well.”
Eliashiv favors IoT, advanced materials, and computer vision. Wescoatt believes in flexible offerings, for every category, as well as solutions targeting ESGs and sustainability. He thinks that “Facilities Management and Asset Management are pivotal activities that stand to gain a lot from better data-driven practices.”
Nangpal echoes Wescoatt, stating that he believes that tech which enables people to work flexibly and be fully functional and efficient will be a winner. “This would include portfolio optimization tools for occupiers to assess their real estate in a post-pandemic world, collaboration software, and platforms that enable workspaces as an employee benefit such as allowing the employee to choose where they want to work out of.”
Aarons is “excited to invest in hotel technology again, as we’re anticipating a post-vaccination rebound to the hospitality sector and massive “rip and replace” efforts for hotel software stacks, as they contemplate reopening with newer, more efficient systems in place. We are also excited about some of the dynamics we are seeing in the senior housing sector as it relates to technology adoption.”
According to Butt, “We recently published a research paper on the Future of Real Estate Investment Management, and off the back of that research, we are actively investing in start-ups that are digitalizing this space. Similarly, we have researched sustainability in the built environment and are very actively investing in start-ups that can help the real estate and construction sectors reduce their carbon footprint. This is, in fact, one of our key investment themes for 2021.”
Berman believes there is so much opportunity in every sector that it is hard to single out one. He is very interested in the potential at the intersection between proptech and fintech, stating that “There’s been a lot of press around fast-growing fintech companies that are proving out the adoption of digital finance. We’ve only started scratching the surface of what’s possible; add real estate applications into the mix and the possibilities are staggering. Companies tackling everything from DIY Landlord banking to multifamily payments will change the way businesses and consumers financially interact.”
What plays that worked in the past are now old news and off your menu for 2021?
It is inevitable that, in a maturing market that has seen such radical change over the past year, some investment categories will inevitably have lost their shine.
Aarons told me that tenant-experience technology was a major focus of MetaProp’s for years. Now, as they believe that the winners have been crowned in this space, it’s off the menu in terms of new investments, though they will continue to support our existing companies in this space. Butt shared a similar story about property maintenance and management platforms. As they are already investors in one of the sector leaders, they are not actively pursuing new investments in this niche at the moment. PiLabs are looking for start-ups that can scale globally so are unlikely to invest in local or regional start-ups that don’t have global ambitions. Eliashiv shared that BuiltUp Ventures has also cooled down on management tools.
Berman believes that some of the hype around blockchain-focused startups (specifically germane to the tokenization of assets) has died down. He added “That’s not to say blockchain won’t be incredibly impactful to the real estate industry. It will, but it’s early days yet. I’d also suggest that some (arguably not even appropriate to call ‘proptech’) lease arbitrage plays are slightly out of favor as investors look to minimize risk.”
Though it isn’t an area of major focus for RET Ventures, Helm feels that “capital-intensive investments, such as co-working, which always carry an element of risk seem particularly ill-advised in such an uncertain market. We have always gravitated toward technology that improves real estate operations (marketing, leasing, communications, etc.), which are more stable, and I think that approach has proven itself in the past year.”
Wescoatt added that hospitality and retail have far less ‘inevitability’ of consumption than previously, “so while Concrete VC is happy to back novel concepts at early stages, later-stage opportunities bear greater scrutiny.”
What is your main goal as an investor in 2021?
Proptech and contech have reacted counter-cyclically to the current crisis and are poised to grow exponentially from here, and the VCs are ready to act on it. Their main focus is to ensure they best serve their investors, partners, and portfolio companies.
Nangpal thinks the market will shift towards solving problems for the mid-market occupier and mid-sized real estate investors rather than the past focus on enterprise clients and large global investors only. Eliashiv wants to focus on technologies that will serve new market needs, be agile, and can adapt to disruptive events. “It starts with the “big idea,” continues to the team, and ends with the technology.”
Wescoatt wants to “help our portfolio companies see and respond to the changes that are coming,” as does Berman, who shared that his goal is to “maximize my ability to serve as a resource to and for Camber Creek portfolio company founders and limited partners and to continue to be mindful and thankful of how lucky I am to get to do what I love.” Aarons’ goal is to “work with a diverse and wonderful group of entrepreneurs who are interested in making real estate more affordable, accessible, and sustainable through technology.”
Butt added that “we have several portfolio companies that are maturing and reaching a stage where we, as the first VC investor in those start-ups, will have opportunities to exit and return capital and profits to our LPs. That will be a big priority for us. Additionally, we are actively broadening our investment mandate in terms of geography and are excited to be making investments in places where we haven’t invested before. Continuing to consistently invest in top-performing proptech start-ups is our main priority. We are an ambitious team, so scaling up Pi Labs is front of mind for us in 2021. Sustainability remains a key priority for Pi Labs, so investing in start-ups that can make a tangible sustainability impact at scale will be a priority.”
Helm reckons that part of what makes RET Ventures unique is how closely they work with strategic investors to identify the issues that are plaguing the industry and find and back technologies that will solve those problems. He expects to be at least as busy in 2021 as in the second half of 2020, which was a very busy and fruitful period.
According to Hannam, Taronga Ventures wants to drive further collaboration across the real estate sector and they will work to bring together regional governments, real estate corporations, emerging technology companies as well as universities and research institutions. Through RealTechX – Asia’s largest Growth Program, they continue to attract the world’s leading emerging technology companies and help them to expand into new markets – especially across Asia. Through the RealTech Ventures Fund, their focus is now on deploying capital and ensuring they continue to deliver for their investors.
What is your biggest wish for the proptech and contech sectors for the new year?
Finally, this is what the VCs hope the new year will bring to real estate technologies.
Wescoatt wants the nomenclature to go away, and for every part of real estate to automatically consider technology in what they do. Eliashiv concurs, hoping that more real estate players will adopt technological innovation.
Butt would like to see some big fundraising rounds in Europe, allowing category leaders to scale-up and have a real impact on their home turf, and in international markets. He added that “I’d like to see more proptech start-ups proving that they can scale globally. Exits are also top of my wish list. If we and the industry can demonstrate big, valuable exits, that will help bring more capital into the proptech ecosystem.”
Nangpal wishes for the sector to continue to be ‘use case’ driven. “There still are a lot of ‘good to have’ technologies out there. Given where we are in the adoption journey, I wish tech founders would focus on the ‘must-haves’ that solve people-centric problems in the real estate sector.”
Hannam’s greatest wish is that real estate assets can be used to support the transition back to some level of normalcy and that we can put 2020 behind us, learn from the challenges, and move forward with more efficient assets that are less polluting and driving higher returns. A second wish is that “Valuers take a more pragmatic approach to valuing flexible or collaborative workspace. In our view every commercial asset will have a portion of space, perhaps up to 30%, operating as flex space. Yet valuers currently discount this space significantly, when in many cases the flex space is more profitable and delivers a significant benefit to the asset or precinct.”
Helm thinks the most important thing for proptech and contech is a strong overall economy. Different business sectors are inter-connected in many ways, and bad employment figures or other issues will ultimately impact investment flow and tech adoption. Tied closely to that is the need for continued innovation. Over the past few years, proptech innovation has grown dramatically, and many compelling technologies have been introduced to the real estate space. He added that “These maturing companies are already improving operations across the industry, but we still need entrepreneurs to innovate to create fresh solutions for problems that have not yet been solved. A strong economy will make angel investing more plentiful and help support this entrepreneurism.”
Berman’s biggest wish for the proptech sector in 2021 is that the best and the brightest entrepreneurs from all walks of life continue exploring novel ways to transform the real estate industry for the better.
Last, but not least, Aarons wishes to see people in person again within the sector, stating that “I genuinely enjoy spending time with the friends and colleagues I have made over the years in the sector and interacting over Zoom is just not the same.”
Happy new year, and may 2021 be a fresh start for us all!