Real Estate is the world’s biggest asset class, worth a whopping $228 trillion – more than 12 times the GDP of the US.
But today, the Real Estate sector is facing significant challenges, including inflation and rising interest rates, net zero objectives, and the continued impact of COVID-19.
Luckily, PropTech is on hand to drive innovation and help a notoriously old school industry to respond to the changing times.
As part of our annual magazine, The Measure, we spoke to some of the key experts in the PropTech and Commercial Real Estate sectors. Read on to get their take on where things currently stand, and where the industry is headed next.
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Ivo Van Breukelen, Managing Partner, The Proptech Connection
Ivo van Breukelen is one of the Managing Partners of The Proptech Connection, the leading global PropTech advisory which helps global VC funds, Real Estate companies and PropTechs by sharing global market insights about the PropTech ecosystem. Ivo is a global leader and has one of the most sophisticated networks globally in sourcing some of the best technologies in PropTech, allied with his extensive international experience, gives him an unrivaled vantage point to what’s going on in the market. Ivo has also presented guest lectures at MIT (2022), Harvard (2019) and keynotes at some of the leading global PropTech events and private c-suite gatherings.
What we're seeing in the market and what we hear a lot from our institutional relationships is that it's not necessarily about investing in the next best deal. It's more about implementation, finding solutions for clients tomorrow.
How can we leverage technology as a customer, to use it in our assets, to find efficiencies and solve (commercial) problems. Real Estate is bespoke and needs curated solutions.
PropTech is very broad and is hard to define due to the number of elements within it, which is a challenge from an investment point of view, meaning there is a lot of wasted time from PropTechs approaching funds that don’t invest in that technology or at that stage.
We’ve started to see a lot of corporate venture capital firms coming in. There’s obviously a lot of well established and well known PropTech venture capital funds, but we’re starting to see a lot of large Real Estate companies, as well as other corporates, actually setting up their own in-house investment arms where they're looking for strategic investments.
2022 has been shaped by a lot of volatility in the (public) markets. That obviously has a direct impact on VC funding as everybody is ‘“risk-off’”, thus decreasing the likelihood of receiving capital from LPs. We are seeing a lot of interest, primarily from Asia Pacific wanting to enter the PropTech market.
We really think the MENA region is fantastically placed to drive some of the next waves of innovation in PropTech. Supply chain costs (shipping costs earlier in the year were at 5x what they were last year) plus energy usage plus digital construction techniques, we feel will be next on the immediate horizon. The MENA region has some enormously innovative and large enterprises who can fund and deploy solutions to overcome these issues.
A lot of what we would call the high quality deals are looking not only for next funding rounds, but are oftentimes also running a second trajectory for an M&A play should they not be successful to raise funds (in a timely fashion). We at the PropTech Connection are increasingly being approached to extend the network reach for strategic growth initiatives. We always highlight to our clients that there’s always pockets of capital or relationships that you do not know, or do not have access to. That’s where we step in and make a difference.
We’re starting to see the first ‘“category winners’” presenting themselves. That means that there will be significant consolidation opportunities across the market. PropTech is highly fragmented and you’ll start to see that some large players are going to bring it together.
We believe that some of the very well-known Silicon Valley corporates looking to make a significant play in the PropTech ecosystem.
We always look at the PropTech market from a macro lens. Europe is effectively on a very tough trajectory, and still has some pain in the foreseeable future. We’re seeing excitement in the APAC region, India for example has almost 3000 PropTechs. This is going to be one of the more promising markets.
Investors are looking at fundamentals more closely than ever: longer run rates, looking into commercials/revenues etc. You want to make sure those metrics are extremely solid.
It's really important to be prepared and start in a timely fashion. We think it’s important that you need to make sure that you have a network with advisors and other relationships that can help you widen your reach.There’s a lot of ‘“2nd or 3rd tier capital’”, not by function that it’s less relevant, but simply less known and you want to find the best possible partner for your growth trajectory considering your strategy.
Make sure that collateral is impeccable: we still see a lot of decks and financial models that are poorly executed. We always remind our network that you only get one shot in front of an investor or customer, to leave that first impression.
Make sure you have the runway, make sure that everything is lined up correctly, make sure that you have that wide reach as well and work on the fundamentals.
Michael Beckerman, CEO at CREtech
Michael Beckerman is CEO at CREtech, the largest global consulting, media and conference company devoted to technological innovation in the Real Estate sector. CREtech’s mission is to help the industry embrace, adopt and future-proof their businesses to inspire the next generation of ideas, processes and people to champion the world’s largest asset class. Beckerman also leads CREtech’s newest initiative, CREtech Climate, which is the ‘voice’ of the Real Estate industry’s commitment to climate tech.
According to PwC’s ‘Emerging Trends in Real Estate 2023’, the Real Estate industry is currently facing opposing forces – certain segments of the industry are reverting to pre-pandemic norms, while others are coming to accept the new norm, with potentially permanent shifts.
Some of the most impactful trends are workforce transformation – whether workers will return to the office or continue with a hybrid, or work from home format. How these ultimately play out are likely to result in office asset repurposing at scale. Forecasts indicate that between 10-20% of offices may either need to be repurposed or face redundancy.
Rising high up on the agenda is climate change. The Real Estate industry is coming under increasing pressure from regulators, investors and corporate occupiers to take action and place sustainability at the fore.
On a positive note, this presents an opportunity for Real Estate to address:
1. Carbon emissions from operations
2. Physical asset protection and risk mitigation measures from the ravages of climate change
Whilst these sustainability principles may be broadly categorized under ESG, the latter is focused mainly on the ‘E’, or environmental aspect. Tying into this equation is the ‘S’, or societal element.
The global housing affordability crisis is also increasingly gaining prominence – rightfully so, as it too needs urgent addressing. Reverting back to Economics 101, while there are many reasons underscoring housing affordability, the most fundamental is a critical shortage of supply. Although this is a massive challenge, this too presents itself as an opportunity to the Real Estate and PropTech realms, with innovation in 3D printed housing, modular (off-site) construction and many other great examples of ingenuity presenting themselves in the marketplace.
Throughout 2022, capital markets generally favored other asset classes, such as equities and bonds. This is a result of the high probability of an impending global recession, and factors fueling Real Estate industry headwinds – such as rising interest rates and record high energy prices culminating in lower expected returns from Real Estate.
A few other noteworthy trends emerging in Real Estate include the use of blockchain technologies, the metaverse (for good or bad?) and construction technologies.
Holistically, three main clusters of the built environment require addressing:
1. Carbon
2. Waste
3. Water
When it comes to carbon, the sustainable building market is often viewed as bifurcated, with solutions either addressing existing buildings through energy efficiency retrofits, or targeting embodied carbon through the construction and design of net zero carbon buildings.
Building decarbonization tools are continually gaining breadth and depth through innovation, and these tools can be understood by categorizing them into passive and active solutions. Passive solutions include double or triple glazed windows, insulation, and thermal aspects, such as solar photovoltaic panels. Active solutions include HVAC system upgrades, geo-thermal and air heat pumps, as well as the replacement of inefficient energy appliances.
It should not go unmentioned that a range of smart building software solutions that address energy efficiency optimization, for example, through artificial intelligence and machine learning, are also establishing their market presence.
Advancements in sustainable buildings and building materials for the construction of green, new buildings range from eco-friendly, carbon- neutral concrete, to mass timber, prefabricated modular construction and 3D printed homes.
While ESG principles have emerged and indeed are being embedded into the Real Estate industry, broadly, by virtue of the nature of their operations, Real Estate companies are profit seeking entities.
According to a 2021 survey conducted by Yardi and the European Real Estate Association (EPRA), nearly 50% of Real Estate companies that have adopted PropTech tools cite a lack of ROI as their biggest barrier in considering further investment and implementation.
Other key takeaways include:
1. In-house digital strategies
2. Lack of champion users – with the two operating symbiotically, hand-in-hand, tend to improve the impact of adopting technology on company performance
3. Around 25% of respondents claim that they would rather opt for in-house solutions to address pain points
4. Platform approaches are preferred to point solutions – typically representative of the broader, disparate PropTech ecosystem
5. The biggest hurdle (46%) is simply due to competing priorities, and PropTech adoption is often a lower priority than other business activities
Considering the current economic climate, the Real Estate sector is facing many headwinds. From tightening monetary policies, high rates of inflation, and a global energy crisis, compounded by investor and occupier pressure to decarbonize, the sector as a whole is transitioning from growth opportunities to operational efficiencies.
PropTech will also not be immune to the larger tech market correction, and is in fact more susceptible to economic shocks because it's such a young, fragile sector. The impact will likely transpire through increased M&A and consolidation, which serves to benefit end-users of these tech solutions as there are simply too many disparate solutions competing for still relatively small market share.
Conversely, early stage funding remains strong as the next wave of innovation is emerging in the marketplace led by the ConTech and ClimateTech sectors. I remain, however, bullish about the future of the Real Estate tech sector. As a result of the tailwinds facing the Real Estate industry, the demand for technology will likely remain buoyant to help solve the myriad of challenges facing the sector.
The slow-down in venture funding in Commercial Real Estate tech we are experiencing today can therefore be viewed as a natural and healthy market pricing adjustment, but is unlikely to cause adverse impacts on the long-term prospects for this global ecosystem.
Some of the key Real Estate tech categories we at CREtech predict to make waves in the coming year include: ClimateTech, ConstructionTech, Property Management Tech, RenTech, FinTech, OpCo/PropCo structures, Data Analytics, and Flex Space, Spatial Analytics and Tenant Experience.
Want to get more content like this? Check out ‘The Measure – Sizing Up PropTech, Commercial Real Estate and the Modern Workplace’, where these articles were originally printed.