Using the start of Spring as an excuse to reflect, I thought about the past in an attempt to identify emerging pockets of opportunity across the built world. As the wise Carl Sagan once said, “you have to know the past to understand the present” and understanding the present is key to understanding the future. In Carl Sagan fashion, I went down the rabbit hole studying PropTech’s history and discuss here where we’ve been, where we are and where we’re going.
Before traveling back in time, it’s important to set the stage. Real estate is the largest asset class in the world and the industries that interact with it are massive trillion-dollar markets. These industries are complex, involve myriad stakeholders and have traditionally operated offline in paper, pen and spreadsheet environments, resulting in higher costs and lower productivity compared to other areas of the economy. Although the built world was already experiencing a transformational shift from offline to online over the previous decades, COVID-19 accelerated the rate of change.
COVID-19 finally shifted the mindset of real estate owners to realize that technology is no longer an option, it’s a requirement, and condensed adoption into months what otherwise might have taken decades. In the past, as most real estate operations teams operated from a single “central command” post, technology was often seen as a nice to have, not a need to have, and the initial capital requirements were often too high. However, now that employees are operating remotely in distributed teams, needs have changed and they require new cloud-native, integrated software solutions. And that’s not all. Users are changing too! Baby Boomers who have dominated key decision-making positions and the broader real estate workforce are nearing retirement age. A “changing of the guard” so to speak is underway and the Millennials, who are more comfortable interacting with online interfaces, who take over for their Baby Boomer counterparts, will further contribute to the market’s adoption of software. As a result, owners have no choice but to adapt or seriously risk being left behind (or worse!). Although COVID-19 has upended the world, including many areas of the built world, technology has the opportunity to be the real estate industry’s modern-day antidote. Without further ado, let’s travel back in time!
Where have we been? Contrary to popular belief, and although pen, paper and Excel work environments traditionally have and still do dominate the built world, technology is no stranger to the real estate industry. Large incumbent firms, such as Autodesk, Black Knight, CoStar, Duck Creek, and Yardi, among others, have built successful businesses over the decades leading up to the 2010s. However, success was limited to a small number of firms resulting in low competition and slow innovation perhaps leading to minimal market penetration compared to other areas of the economy such as IT and Healthcare. Most of these incumbents are valued at >$10B which is certainly nothing to sneeze at, however, they provide on-prem, closed-ended, bundled solutions that may no longer solve the needs of today’s built world remote workers. It’s important to note that some have adapted to include cloud solutions in their product suites organically and/or inorganically but some more than others continue to rest on their laurels leaving potential areas of opportunity up for grabs for startups.
Where are we today? Fast forward and we’ve witnessed an explosion of PropTechs over the past decade. Technical entrepreneurs, frustrated with their own experiences dealing with expensive and slow status quo paradigms and incumbent software, decided to take matters into their own hands and “unbundle” previously bundled banking, insurance and property management legacy software, upgrading from on-prem, closed-ended software to mobile-first and/or cloud-native, integrated software. Although new startup technology has advantages over legacy alternatives, it was and still is challenging trying to disrupt entrenched, decades-old platforms. This is why newer up-starts, more often than not, went and continue to go to market and attack incumbents initially with point solutions but with the idea of building a platform and taking market share and building wallet share over time.
The dynamic between Yardi and Juniper Square is a great example. Yardi has been and still is widely considered to be an “untouchable” piece of core property management technology. Property managers hate the software because it doesn’t integrate but have to use it because decades of information and firm-wide workflows are managed in it – everything from leasing to maintenance to investor relations, among many others. So when Juniper Square was founded in 2016, rather than try to rebuild Yardi’s entire platform with next generation infrastructure, it focused on building a bigger, faster and stronger investor relations “point solution” product that was better than Yardi’s. By attacking an area of the market that wasn’t a core, day-to-day integration with existing management solutions, Juniper Square has been successful at stealing meaningful investor relations market share away from Yardi.
On the flip side, a challenge for any upstart that is selling a better alternative to an existing product is always around cost – switching and overall savings are critical elements to make the change happen for incumbents. However, if an existing solution isn’t in place yet, than it can be argued that the next generation of real estate owners and managers could have an advantage with a digitally-native operating backbone out of the gate. These new operators could keep overhead low, streamline operations, improve resident/tenant experiences, reduce maintenance burdens, and make payment processing simple and fast. The relative difficulty for an incumbent to adopt and change with new technology is high in terms of cost and time, and many incumbents simply won’t make a meaningful step-change fast enough. They aren’t capable of it. This is likely why we’ve seen InsurTechs explode, as they’re starting from scratch and aren’t limited by the size and engrained, non-tech-enabled ways of many. It’s also why these same incumbents should care about PropTech and where it’s going.
So where are we going? Over the next year and well into the next decade, I expect the rate of offline digitization to increase, particularly as real estate owners continue to prioritize cost optimization technologies. The number one priority for every owner is NOI (net operating income) which is the output of revenue minus costs. In the COVID-19 environment, owners have more control over their costs and because technology enables higher productivity and unlocks new efficiencies leading to reduced costs and higher NOI, technology will remain absolutely critical for a very long time.
PropTech startups will also benefit from this increase in new demand. As a result, I expect those startups that have been able to enter the market and gain adoption with a point solution to actually “rebundle” the on-prem, closed-ended platforms they originally “unbundled” in the form of cloud-native, mobile, integrated platforms by growing horizontally and offering new products and services (ie SaaS, FinTech, marketplaces, etc) on top which I wrote about here. This paves the way for the creation of a whole new generation of category defining companies, such as Built Technologies for construction finance, SmartRent for access management, Bowery Valuation for appraisal, Steadily for insurance, Finley for debt capital management and so many more.
The future is bright for PropTech considering the myriad opportunities that exist across its vast landscape comprised of asset lifecycles, asset types, target markets and end users. This is only the beginning and we’re just getting started. If you’re a founder, investor or user and would like to discuss, please reach out! We look forward to co-stewarding this exciting potential together with you.