…in the context of a sometimes cynical and overwhelmed commercial real estate industry.

As of 20 July 2021, the website we started at the University of San Diego, Burnham-Moores Center for Real Estate, https://Propsolutions.tech, has 2,484 listings of PropTech firms. Admittedly, some are duplicates or not really commercial real estate (CRE). Yet, just within the US there are probably over 2,000 startups, along with a host of established firms we could classify as ‘PropTech’. Here we define Proptech as any firm that provides data, analytics, measurements or monitoring information, systems optimisation about property and does not provide any actual physical space.  PropTechs may need some infrastructure such as sensors and cameras, or drones and connections to servers that allow the data to be processed and displayed, or automatically used to tweak operational systems, and thus there is a requirement of computer data storage. The functions of PropTech firms can include inspections, marketing and leasing, building operations and energy management, investment analysis, valuation, risk analysis, security, financing, investor reporting, trade area analysis, sales projections, rent setting optimisation and many more. In this context, firms we never called PropTechs before can now be considered as fitting within the definition, such as CoStar, Real Capital Analytics, Compstak, Altus (ARGUS), YARDI, Zillow, Appfolio, Skyline, Redfin, Schneider Electric, Johnson Controls, Black Knight and Measurabl among them. Several information conduits or aggregators have also sprung up to help us focus on promising newcomers, including CRETech(cretech.com), Unissu (unissu.com), MIPIM Propel (propel-mipim.com) or tracking the PropTech capital trackers like GCA Advisors – A Premier Global Investment Bank (gcaglobal.com), or MetaProp at  MetaProp | Home and of course the grandfather of corporate real estate, facilities management and tech, Realcomm.com, started by Jim Young. Most of the PropTech aggregator websites are geared towards investors eager to bet their money on the next best thing that will revolutionise the real estate industry.

The pitch and the reality

Attend any of these PropTech oriented conferences, online or in person, and you will hear a familiar story.  

1. Real estate has barely integrated technology.  
2. Marketing, leasing, valuing, managing and reporting within the CRE industry is archaic with so many opportunities for greater efficiencies.
3. New sources of information and data are now available and nobody is using them.
4. We are using machine learning and artificial intelligence, neural networks and tools that have never before been applied to CRE.
5. No one else is doing what we are doing and all we need is 1% of the market to start making money.
6. You will be left behind if you don’t improve your efficiencies and tap into a whole new world of tech enhanced real estate decision making.

Some of these claims are true, but what some of the startups don’t realise is that it takes a long time for the CRE industry to adopt new technologies and the conversion cost is high. Even if a new technology and system is better than what you have, it must integrate with the rest of your systems for marketing, management, control and reporting. It is akin to the reason why we don’t tear down commercial buildings as soon as there is a higher and better use available. The conversion costs to tear down and replace a functioning building is too high to make it worthwhile doing so. If the site were empty, we could and would build a higher and better use, but with an existing building on it, it takes a huge gain in productivity before it is worth tearing down the old building and giving up that lower but adequate productivity.

Overwhelmed choices and the minimum requirements for success

At the Unissu website of global PropTechs there are over 9,000 vendors claiming to have products and services needed by the CRE industry. Of these, most will be gone within five years. Some will revolutionise the digitisation of the CRE industry. Yet potential CRE clients fear picking a firm that won’t be here in a few years, leaving them stranded with a non-supported application that will certainly conk out at some critical moment right after they hear about the bankruptcy of that great PropTech, the one with the charming founder who could tell profound and insightful stories. In fact, one example of the potential fallout is the example illustrated by the June 2021 bankruptcy of Katerra, a company expected to revolutionise the construction industry. More than a billion of investor capital will be lost from this bankruptcy.  

Investor interest in Proptechs remains high, in spite of Katerra. One way to invest in this market has been through SPACs. SPACs (Special Purpose Acquisition Companys) is another name for “trust me, give me your money and I will pick investments for you” that have sprung up, like FifthWall.com, which has successfully raised significant funds and invested in a few dozen PropTechs, at least one of which has already gone public.  

Innovation and entrepreneurship in any industry is an incredibly difficult process. It’s like trying to make an elephant fly. Success rates for early stage ventures are very slim. Studies tell us a typical VC’s deal funnel, for every 250bps they review, 60bps will move to team interview; 20bps to partner review, 13 move on to due diligence; five move on to term sheets and four to the final funding deal. That’s about a 1% funding chance for new ventures. Among those 1% which are funded, 49% will fail, 42% will make it to merger and acquisition and 9% will make it to IPO.  PropTech startups are not exceptions to the math for innovators and entrepreneurs. In the past couple of years, we had watched and advised a few of the Proptech startups. In order to have a better chance to survive, aside from needing a charismatic leader, a top-notch cutting-edge tech geek and a unique blow-me-away idea that advances the state of the art, the PropTech startup founding team must have:

1. An Industry veteran on the founding team or on advisory board who came from the CRE industry. It takes a long immersion in the industry to be an insider, to understand the subtleties of the competitive landscape and look through the propaganda of technical collateral and PR campaigns. 
2. A sales and marketing suits to cover, service and train clients for much of the national market in which they are located. Startups with brilliant ideas often forget that someone needs to sell them. Having a strong salesperson on the founding team helps minimise the risk.

The early 2000 dot com bubble burst taught us important entrepreneurship fundamentals from Silicon Valley’s legendary entrepreneurs such as Steven Hoffman, Steve Blank and others. Any new technology tends to go through a 25-year adoption cycle. Technology plays just one part in the innovation process and it’s not always the most important part for the entrepreneurs. Other must-haves include the timing and solving a real customer problem with a profitable business model. The value proposition is the life blood for any firm to survive and scale. 

Getting funding is an obsession for most startups with a great idea. Clayton Christenson teaches us that although the advice on how to get the funding is useful, it’s more important to know the type of money that a startup should accept. The type of money startups accepts define the investor expectations. Those expectations then heavily influence the types of markets and channels that the venture can and cannot target. Because the process of securing funding forces many potentially disruptive ideas to get shaped instead as sustaining innovations that target large and obvious markets, the very process of getting the money to start a venture actually sends many of them on a march towards failure. Christenson told us the best money during the nascent years of a startup is patient for growth but impatient for profit. The other category of capital – which is impatient for growth but patient for profit – is likely to condemn innovators to a death march if it is funded at too early a stage. The spectacular failure of WeWork, Sidewalk Toronto and Katerra in many ways provide some insights on good seed money and bad seed money. In another words, startups might need to survive at least five years and show modest but real revenue.

Last but not least, the technology adoption life cycle teaches us that any time a new innovation is introduced it will require a change in our current mode of behaviour or a modification in other products and services we rely on. The pragmatic and conservative mainstream market adopters demand a platform that integrates with existing systems and software, including building management systems, Excel, ARGUS, YARDI, CRM, standard accounting products and others. It also needs a platform that is scalable and can easily be expanded with new apps, from the micro level to the building or to the portfolio, and also to the investors, lenders and others.

How many of the 9000 or so firms listed at Unissu meet the above criteria? Not many. No wonder we are overwhelmed with the idea of integrating tech into CRE, even though all of us know this is an inevitable trend, just like climate change, larger weather risks and sea level rise. Most CRE firms will wait until the current investor-led eutrophication process becomes one of sufficient atrophy that the choice set becomes more manageable. That is, instead of being a leader, most CRE firms are happy letting others be guinea pigs and experiment with vendors and then subsequently learn from their experiences.  

Great ideas and some more well-known PropTechs

There are several PropTechs that have been around for a while, have established clients and seem well positioned to thrive once the shakeout of the less well capitalised and less CRE savvy has occurred. While there are hundreds of really exciting or established Proptechs – some that redefine trade market areas and potential retail rents, others that provide great facilities management software or automate appraisal updates – but, given that caveat, here are a few examples of promising PropTech startups:

• Cherre: data connecting platform for transactions, underwriting and investment.
• VTS: leasing and asset management
• RealPage: real estate and property management software.
• RealNex: CRM, listings, financial analysis, virtual touring with PIX and more.
• Juniper Square: investment management portals for all partners and automated analysis.
• HqO: tenant experience platform.
• OpenDoor: access and security control.
• Hover: automatically 3D maps space using several phone photos that are tied together.
• Reonomy: property intelligence and integrated analysis.
• Measurabl: SaaS based ESG platform for collecting, managing, disclosing and acting upon real estate ESG/sustainability data.

One success endgame for Proptech startups is to be acquired by larger established firms like CoStar, RCA, Black Knight, JLL Spark, CBREm, Compstak and others. For example, CoStar has acquired Loopnet and Apartments.com and several other firms that provided complimentary services. These were big wins for those Proptech firms and perhaps for CoStar as well. Generally, such acquisition is an indication that the startup firm is a potent competitor with some innovation and potential. In other cases, it may simply be a strategy aimed at eliminating competition.  

We should also note that market share does not equal success. Notable PropTech firms like COMPASS and WeWork have raised substantial capital, and proven they can expand and capture market share, but neither of them have proven that they can make profits with their existing or historical business models. This is not to say they won’t, but again, market share does not equal success.  

Conclusions

We live in dynamic and exciting times during which the CRE industry is exploring, digitising and integrating all sorts of new technologies. We have yet to have that inevitable shakeout of the survivors and winners, but investor appetite remains high and even some of those that fail will leave new ideas on the table worth pursuing by others.