By Elliot Golan
Over the past few years, there have been more than a few topics du jour within the real estate industry. Among the top three is proptech, along with the long-term outlook for commercial office space and everyone’s favorite semi-definable acronym ESG (more on that later). Also known as property technology for those not attuned with the lingo of the built environment, proptech is one of the industry’s fastest growing trends.
But there seems to be a little trouble in paradise. According to the 2022 PropTech Venture Capital Report from The Center for Real Estate Technology & Innovation, VC-backed proptech companies raised $19.8 billion in 2022, down 38% from 2021. Monetary policies, rising inflation and interest rates, and concerns over a looming recession that dominated the latter half of 2022 all certainly played a big role in this.
The dip follows what could be called more than decade-long arms race, with investment continuously on the rise, and not by small percentages. Data from Statista clearly illustrates the rise. While the space has seen a steady increase in investment dollars from its 2010 estimate of $600 million, things really picked up and hit critical mass just a few years before the COVID-19 pandemic. According to Statista, investment in proptech leapt from just below $10 million in 2017 to more than $15 million in 2018. Needless to say, more than 50% increases in financial investment in a sector are quite rare after the early days.
Few in the real estate industry are closer to these technology companies looking to make an impact than Michael Beckerman, CEO of CRETech, the largest global conference and media company in the proptech sector. He noted the challenges technology has faced within commercial real estate, specifically as it relates to adoption from an “old school” industry. Still, he sees a clear silver lining.
“As painful as it is for many early-stage companies, the current funding challenges in the proptech marketplace is one that is also healthy and necessary as it will inevitably lead to consolidation in this highly fragmented ecosystem,” he said. “This in turn will create fewer but larger tech platforms that will also lead to greater adoption as a result of more integrated solutions that the commercial real estate industry has been seeking for quite some time.”
Much of the momentum in the proptech industry ties into that acronym mentioned earlier: ESG. Environmental, Social and Governance discussions remain massive topics in the industry, as both users and investors get more interested in what owners do to make the world a greener and more equitable place.
Without question a good thing. But it’s not that easy.
Colliers U.S. President of Real Estate Management Services Karen Whitt told us ESG often carries with it a significant administrative burden.
“For large firms, this isn’t an issue. The capability to process information and create policies is typically already on staff, and if not, hiring is simple,” she said. “Small firms, who are already feeling squeezed by adverse economic conditions, will likely have a much more difficult time satisfying agencies and clients. Don’t expect this to be the end for small and hyperlocal companies, but it will have a chilling effect on many.”
Indeed, commercial real estate has been somewhat concerned with “green energy” for years. As far back as the early 1990s, there were LEED (Leadership in Energy and Environmental Design) standards, a program that comes from the U.S. Green Building Council. Now, in certain cities, Seattle and San Francisco as prime examples, being LEED certified isn’t a big deal or even noteworthy. It’s table stakes and more newsworthy if buildings aren’t.
Beckerman sees this part of the real estate, and proptech, industry as the ripest and most needed.
“Commercial real estate is the single greatest source as an industry of greenhouse gas emissions globally, and by some estimates it will cost $20T to decarbonize the sector,” he said. “The climate crisis poses the single greatest threat and opportunity to ever face the real estate industry. However, it also represents perhaps the single greatest wealth creation opportunity in history. The real estate companies, startups and venture firms that are embracing this challenge will reap extraordinary financial benefits.”
But a lot of this is likely in the Class-A space, where budgets are less of a concern, according to Whitt.
“For B and C level assets, budgets are frequently small, and margins are thin,” she said. “The cost of quantifying ESG impact alone will have an outsized impact on owners in that space, while capital investments for factors that don’t meet market expectations could have significant long-term impact on their profitability. Making things more difficult, tenants may shy away from buildings that aren’t able to publish positive ESG results and reduce cash flow.”
A challenging environment for fundraising will have an obvious outcome: The cream will rise to the top. Because of that, proptech firms that offer solutions so compelling that the industry cannot remain cautious and frugal, despite the current economic climate, will produce true and lasting impact. Dare I say it, that word that dominated the early 2000s but typically evokes a smirk or eye roll today: disruption.
Elliot Golan is a senior vice president and senior leader in the Allison+Partners Real Estate Practice and has spent more than a decade as an industry watcher. Prior to joining the agency, he led public relations and communications at a publicly traded global real estate services firm and served as Managing Editor of Bisnow, one of the country’s largest real estate news and events platforms