PropTech’s Continued Rise, and Real Estate’s Emerging Response

In the span of a few short years, real estate and property related technology (“PropTech”) has rapidly emerged as one of the most active and fastest growing segments within the broader tech sector. This Quick Hit will provide a snapshot of the current state of today’s PropTech market, discuss key trends and themes to watch as the sector continues to mature, and examine how real estate leaders are positioning their firms to capitalize on this unprecedented period of opportunity.

Speaker: Zak Schwarzman, Partner at MetaProp Ventures

Zak Schwarzman, Partner at MetaProp Ventures, leads MetaProp’s venture capital funds, investing in high-growth PropTech startups that are transforming the way we conceptualize, utilize, build, transact, interact with, and manage physical space. Zak manages MetaProp’s investment activities and works closely with portfolio companies to move their businesses forward.

Mr. Schwarzman provided an overview of his firm’s business model as a venture capital firm that invests in early-stage stage technology companies, all of which relate to the real estate market. He defined PropTech as a subdomain of the broader tech market, consisting of real estate and property-related technology. MetaProp’s model begins by first looking for tech that touches each and every asset type or transaction within real estate. Then, they break down the entire life cycle of a real estate asset or transaction and look for tech that touches each and every function or task that a real estate firm or professional performs throughout the life of that very asset or transaction. The technology they are finding both helps today’s professionals do their jobs better, faster, and cheaper in addition to fundamentally changing the nature of how those jobs are performed, either today or in the future.

Zak spoke to the rapid acceleration of PropTech growth over the last five to six years, calling it a “global phenomenon.” Activity is often measured by the amount of dollars going into innovation within a said sector. While less than $100 million in venture capital was annually invested into PropTech before 2013, approximately $4 billion was invested in 2018 alone. MetaProp often draws an analogy between what is happening within the real estate world today and what has happened within the financial services world, aka FinTech, in the past. FinTech was roughly – from a funding standpoint – where PropTech is today five years ago, with $3.8 billion of funding in 2013. The sector grew fourfold since then and PropTech is expected to have the same trajectory over next 5 to 7 years, still very much being considered in the early innings of its extreme growth.

Innovation is truly occurring across every category, or subdomain, within the “bucket” of PropTech. Schwarzman mentioned he would wager there is not a function or job category within real estate without a group of entrepreneurs building tech to help those professionals, or fundamentally change the nature of how they do their job. Given how large real estate is, the breadth of entrepreneurial or innovative activity has never happened before in any prior, albeit smaller, mini-cycle other than the real estate technology space.

Zak goes on to explain how the recent PropTech wave is experiencing a healthly maturation. The proportion of capital going into the earliest-stage PropTech companies is decreasing (52% in 2016 vs. 34% in 2017) while the overall amount of capital continues to rapidly increase. This is very healthy because it means that the companies who raised their first rounds of funding a couple years ago are

getting larger and larger rounds of funding, translating into some form of commercial traction. As more money continues to flood in and more enterprise value is created, leading names across the real estate spectrum are leaning into innovation and engaging the startup community in a way that was historically not done. Many incumbents have intensified their investment strategies by transitioning from simple sponsorships all the way to where we are now, with an influx of full-on mergers, acquisitions, and companies building their own technologies for in-house needs.

Schwarzman continued the presentation with some words of wisdom from Ferris Bueller saying, “Life moves pretty fast, if you don’t stop and look around once in a while, you could miss it.” Zak explain this quote through explaining that there’s a lot of activity within this sector that’s happening at a faster pace than it’s ever happened before. He cited examples like WeWork recently announcing it will go public, and it being last valued at $47 billion while not being around before 2010. Another included Marriot, a leader in hospitality, who is now launching an alternative to Airbnb just so they can continue to compete in their own field. Zak conveys an interesting trend where large incumbent players are now looking at the startup world for what’s coming next and launching internal, well-publicized and well-resourced initiatives to compete with the business models of insurgent challengers who, again, were not around a couple years ago.

As Zak neared the end of his presentation, he discussed with audience what makes MetaProp nervous about PropTech’s funding climate and what makes them excited. Some of the issues included the possibility of rapidly increased funding potentially distorting valuations, many low quality products or companies arising, and there not being enough companies that can scale compared to the demand. However, when it came to what made them excited, he was quick to note that the rapidly increased funding is a “double-edged sword” increasing the supply of high quality capital from more savvy investors as well. Schwarzman continued to explain the improved ability for companies to grow faster and the overall quality of entrepreneurs within the PropTech sector rising. Proof of the increased caliber can be found in the rise of “full stack startups,” who are not trying to sell software, but harness the power of their own software to directly compete with incumbents in that space.

In conclusion, Mr. Schwarzman gave a positive forecast over the next 12-24 months. He stated funding will continue throughout all stages, additional billion dollar companies will seemingly come out of nowhere, growth trajectories will continue to increase, and the incumbents who haven’t invested in innovation will soon begin to flood in.