Today, technology matters more than ever in the real estate industry. Covid-19 is sweeping away the last vestiges of the pre-digital property old-world of international flights, business lunches and back-of-a-napkin calculations.
But the proptech world too has seen its share of pandemic-provoked disruption. Venture capital investment into new technologies for the real estate industry fell from $14 billion in 2019 to $8 billion in the first 10 months of 2020, but it has also changed its focus, says James Dearsley, co-founder of Unissu, which connects buyers and sellers of built-environment technology.
“While the amount of investment in the proptech sector has decreased overall, M&A activity has increased, and the size of the median funding deal is increasing rapidly. Investors deploying capital right at this moment are saying they want to invest in proven business models, proven viability and money generation,” he argues.
However, proptech-backers are also looking to identify the technologies that will shape the industry’s post-covid future. “What investors are predicting over the next 12 months is telling a different story,” continues Dearsley. “They are saying that the catastrophe will produce new proptech business models into which venture capital will invest at an earlier, riskier level.”
The same dichotomy holds true for real estate businesses themselves. They must not only make sure that the technology they have right now is fit to support them through current market challenges, but also begin to think about the systems that might give them an edge in a world reshaped by the virus. PERE asked experts in the sector to identify five trends that will dictate the direction of travel in proptech in the coming months.
1 – Collecting data is proptech 101
“One thing everybody in the industry should be doing – some are and some are not – is getting to grips with their data. Investors who do not have a well thought out data strategy are already behind the game,” warns Professor Andrew Baum, leader of the future of real estate initiative at Oxford University’s Saïd Business School. He argues that even if property businesses cannot utilize or monetize their data yet, they must still devote effort to organizing it and making it compatible, and suggests that time-saving AI tools like Proda can be used to extract and update non-digital tenancy schedules that would otherwise be manually retyped.
The digital tools used by investors to organize data are evolving. “Fund managers are looking at the role of Excel in how they monitor dealflow and update it, how they report to their investors and answer their questions, and asking, ‘Is there a better way?’” says Mark Grinis, global real estate, hospitality and construction leader at consulting firm EY. “Our siloed view of functions within the investment role in real estate – acquisition, asset management, investor relations – needs to synch up from a data perspective.”
“By getting on top of your data you can get into a virtuous circle, like Google and Amazon,” advises Baum. “They grow because they have so much information that they can provide more information that makes them satisfying to use. In real estate, we have already seen signs of the biggest managers like Blackstone, Brookfield and Hines pulling ahead. That is not all down to digitization, but it is part of it.”
2 – Data analytics just became even more important
The next phase is exploiting that proprietary data, and combining it with outside data sets to make predictions about future asset value. Proptech firms like Reonomy and Cherre are developing tools to aggregate data and algorithms to analyze it to support the identification of investment opportunities, while several of the biggest private equity investors have teams of data scientists working on similar projects, says Scott Morey, executive director at One11 Advisors, part of Altus Group. “This is a category we are seeing a lot of money come into right now. Data aggregation, then the development of digital algorithms for developing unique insights into traditional and non-traditional data sources.
“We would have said the same thing a year or two ago, but the trend has been amplified by covid, because of the negative impact it has had on asset classes like retail. You have the same amount of money chasing fewer opportunities, so investors look to new markets and asset classes. That increases the risk because they are going places they have not gone before, so investors’ thirst for transparency and therefore data is greater than ever.”
Baum suspects that vertically integrated developer-owner-operators will have a built-in advantage when it comes to utilizing analytics. “Sector specialists like Prologis and Greystar hold all the data from soup to nuts, so you can see how they would make use of the information that is coming back from a building to make better decisions, provide better experiences and get into a positive feedback loop.”
3 – Digital capital-raising
“Using big data to make investment decisions is hard, but raising capital is pretty easy to digitalize, bringing investors and managers together in some sort of platform, so that you can distribute investment products much more efficiently,” suggests Baum. “At the moment a crazy amount of money is being spent raising capital.”
Grinis concurs: “Folks in expensive suits are flying around for six months meeting people to ask them to give up $200 million.
“Some tools have come out about how to automate the fundraising process, and covid is accelerating that disruption. It is forcing the suppliers of capital to accept a virtual engagement.”
Signing documents digitally has already become a widespread practice, further reducing the need for energy-inefficient travel, adds Baum.
Meanwhile legal software, or “regtech” will vastly reduce the cost of screening capital providers and ensuring that money-laundering rules are complied with, allowing funds to access more small investors. “When you have done that why not use digital platforms for secondary markets, so when investors want to sell they can advertise their units and invite bids? We are pretty early on that journey, but I am confident it will happen,” he says.
4 – ‘Building experience’ morphs into ‘healthy buildings’
“Before covid hit, some of the most active investments were happening around tenant experience. There was significant investment going into companies like HqO and Equiem. They have had a massive problem because there are no longer workers in offices. Those businesses have had to pivot from managing the tenant experience in the building to making the tenants feel safe going back in,” says Unissu’s Dearsely. “They have done it quite well. There is an alignment of building owners and technology suppliers around how can they help to make buildings safer and more secure.”
Baum says the post-virus health and safety agenda will be tied closely to the development and use of sensor technology. “The next killer app will be a healthy buildings center that feeds data back to users. Soon we will all have sensors on our arm that mean we will not be able to get into the building if we have an elevated temperature, and sensors will tell us about the air quality in a room before we enter.”
Nonetheless, the trend towards harnessing closer end-user engagement and an enhanced experience to drive value in real estate, typified by WeWork, will continue, argues Morey. “It will be amplified because as an employee in someone’s space you want a higher level of transparency around what is happening within that asset.”
5 – ‘Technology for flexible working’
A recent survey by EY and the Urban Land Institute on the future of work shows that 83 percent of global real estate players expect the remote working time offered to employees to change over the next three to five years. That evidence helps to support the frequently held belief within the property industry that flexible working arrangements will alter the relationship between the number of workers employed by office occupiers and the space they require.
“If I am coming into the office in New York City twice a week, when I come in I have to make that experience impactful. Who do I want to see and what teams do I want to connect with? As a company, how many square feet do we need? Is there any way we can manage and distribute people in a different way?” asks Grinis.
He believes that technology will provide the answers. “Recommendation engines will align activities with space. There will be hub and spoke locations so work is more distributed, and the only way to do that successfully is through an app that will, for instance, prioritize client meetings in the Times Square office where we pay $1,000 a square foot, but for the guy who just wants to fill in tax return forms there will be a WeWork reservation in their New Jersey facility.”
“One of the things we have learned from the current situation is that having flexibility in every aspect of the built environment is absolutely critical. There is going to be a lot of interest around co-living, coworking and co-retail,” predicts Dearsley. “Players who can manage that well are definitely going to be the winners in the next 10 years.”