Nine Four Insights

Nine Four Ventures 2019 Outlook

To say that the economy ended 2018 on a rocky note would be an understatement. Q4’18 hit the public markets hard. Since hitting all-time highs in September, the Dow Jones, Nasdaq, S&P 500 and NYSE erased all gains generated in 1H’18 and all their performances finished below where they started the year. This correction was influenced by myriad drivers including concerns around interest rate hikes, trade war threats between China and the US, and a slower growth outlook for the US and the broader global economy. One particularly relevant driver slowing down the economy is an evolving real estate market.

The rising prices of real estate assets (already at all-time highs) combined with increasing mortgage rates, which touched nearly 5% late this year (the highest level in over a decade) have priced some buyers out of the most desirable, fast growing markets. Second, a steep reduction in foreign purchasers contributed to a reduction in activity specifically across California and New York. This slowdown has started a “trickle down” effect. A potential slowdown in real estate activity could have an adverse impact on other tangential real estate related sectors, such as, 1) home or tenant improvement spending as well as 2) construction and mortgage lending, among others.

Given the uncertainties surrounding the recent broader global economic performance and real estate market outlook, PropTech is at an interesting fork in the road. There looks to be a divergence occurring between the ambiguous outlook for and performance of traditional real estate assets and the increasing number of exciting real estate software or tech-enabled companies being created. Although the broader real estate market could be entering a gradual slowdown, Nine Four Ventures continues to be excited for the future of real estate tech.

First, and for the first time, deep technical founders are being drawn to the industry and inspired to build companies in the space. Obviously talented founders have been drawn to PropTech in the past, but we’ve never seen this many technical founders entering the space at the same time. Second, we’re noticing traditional real estate stakeholders (lenders, owners, operators, etc) with a real genuine excitement for and curiosity in PropTech which is leading to more pilots, faster sales cycles, and larger contracts. Previously, long sales cycles made it difficult to quickly (more specifically at the same rate as other industries) build a large, sustainable software company in the space. Given feedback loops are becoming shorter, founders could be becoming more comfortable with the dynamics of the industry and is potentially why PropTech is experiencing increased interest from technical founders. Third, real estate represents the largest asset class in the world. To put things in perspective, annual construction spend alone totals $10 trillion dollars per year. This industry is massive, to say the least, and also represents one of the last existing green field markets yet to be fully impacted by software.

Going into 2019, there are a few specific sectors we’re particularly excited about:

Hospitality is broadly defined. It can include many different use cases including everything from short term vacation rentals (ie Stay Alfred) to long term traditional rentals (ie corporate housing, co-living, co-working). However, the two main themes we’re paying close attention to are 1) management-as-a-service and 2) existing aging real estate supply.

Whether you are a renter, doctor, or tech company, real estate is not your core competency and there is a need (and opportunity) for intermediaries to manage real estate on behalf of the leasor and leasee. Further, the traditional hospitality companies (Marriott, Hyatt, Intercontinental) have failed to keep up with relevant trends and are no longer meeting the expectations of rapidly changing millennial consumer preferences. As a result, next generation hospitality companies, such as, Stay Alfred offering short term vacation rentals, Zeus & Blueground offering corporate housing and Bungalow and Starcity offering co-living are taking advantage of this consumer preference shift and creating brands around living. This new generation of brands is connecting travelers and renters more closely with their local surrounding environments and communities with the amenities they’ve come to enjoy and expect.

Repurposing Existing Real Estate Supply
The US faces an aging real estate supply problem. Many houses and buildings were built 50+ years ago and were not optimized for how humans work, live and play today. As a result, we’re excited to invest in companies helping to revitalize the United States’ aging real estate supply. Two possible solutions include the use of co-working and co-living. For example, companies, such as, Spacious and Out of Office are partnering with restaurants and hotels, respectively, to revitalize idle, underutilized properties by increasing foot traffic or repurposing older assets with new use cases for a growing distributed workforce. Companies, such as, Bungalow, are partnering with large (5+ bedrooms) single family home owners and transforming those homes into multi-income properties. More specifically, Millennials are waiting longer than ever before to get married, start a family and buy a house. Further, Millennials are having smaller families that do not require five bedroom homes once built for baby boomer families with 3+ children in the 40s, 50s and 60s. As a result, demand for those larger homes is decreasing and alternatives are needed to repurpose them. One solution is to transform them into co-living homes to help house the many single renters in their 20s and 30s who previously would be married and starting families by now in generations past.

Vertical SaaS
The real estate industry is plagued by inefficient, monolithic workflows typically consisting of pen, paper and Excel. The worst negative biproducts of the existing paradigms are not higher costs, lost time, and unstructured data. As a result, real estate tech startups helping real estate companies (lenders, owners, operators, etc) transition from pen, paper, and Excel to software stand to gain the most. By leveraging software, customers will now be able to increase their employees’ throughput whereby increasing efficiency, reducing costs and increasing margins. Employees do not have to be threatened as many of the new software solutions are meant to enhance existing positions, not replace or disrupt them. However, the biggest and most important impact software will have on the industry is its ability to aggregate and structure data in a way that was either previously possible, very difficult or manual. Software will enable real estate stakeholders to analyze performance and make better data driven decisions in real-time not only taking the burden of manual processes off of employees but also helping to ensure better and faster customer experiences.

In conclusion, and although 2018 ended on a tumultuous note, we all have a lot to be thankful for. Heading into 2019, Nine Four Ventures can’t wait to get to work and help build the next generation of real estate technology companies defining the industry.

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