A few weeks ago, the Altus Group published a survey of 400 CRE executives about innovation in commercial real estate. Some stats that stood out to me are that 89% of respondents said that significant consolidation is needed for PropTech to more effectively deliver on the needs of the CRE industry, with 43% indicating that consolidation is already underway or will occur within 12 months.

These numbers are a bit surprising to me – with the nascency of the PropTech space overall, it feels a bit early for any significant consolidation to be required. Venture-backed PropTech companies are driving commercial real estate into the digital age with strategies to build so many different products (hardware and software), services, and platforms that target various geographies, building types, and customers that it feels a bit premature to think that – broadly speaking – the industry is anywhere near needing consolidation.

An analysis of 1,345 mergers led to the creation of something referred to as the “consolidation curve” that progresses through 4 stages of consolidation:

If you believe that PropTech companies are creating new industries, it feels like we’re still clearly in the 1st stage, and that there are green fields of opportunities for companies to grow into subsequent stages before meaningful competition and fragmentation may occur (I won’t rehash all of the stages here, but ‘Opening’ tends to refer to companies starting in a new industry, while the ‘Scale’ phase focuses on capturing marketshare. Smaller-scale consolidation occurs in the ‘Scale’ phase, with deals becoming fewer and farther between, but much larger in scale, in the Focus phase.)  

The report does hit on some of the more ‘mature’ digital verticals that may be candidates for consolidation – namely property and tenant management, and transaction and listing services – but overall it feels like we’re in the very early stages across the broader landscape. My guess is that CRE executives are feeling like they’re being pitched by an endless array of startups offering similar products and services, and therefore may benefit from more consolidation, when in reality, many of those companies are likely bootstrapped and/or very early to be meaningful players. The result is the illusion that there’s an established pool of companies plowing resources into building similar tech. Rather than consolidation in the near term, many of those companies may peel away from a surviving pack of companies that establish meaningful distribution channels and scale.

Between the time of the ‘consolidation curve’ publishing and today, however, it does feel like the playing field has changed. With major tech players sitting on massive balance sheets, small companies are likely to be snapped up for either 1) talent or 2) tech that can be leveraged across a larger platform (for example, RE/MAX’s recent acquisition of Nine Four portfolio company First.io). In these cases, a large customer base of the acquirer can be leveraged to deploy a new product or service. Conversely, native technology companies may also acquire PropTech companies to leverage the target’s customer base to deploy incumbent technology solutions or initiatives. Different interests (acquiring the tech versus acquiring the customers) imply different acquisition multiples and sizes, which will also be indicative of the impact and magnitude of consolidation.

Regardless of where things shake out in the next 12-18 months – and with the current coronavirus fears and mass selloff in the markets, things can go any which way – I’m pleased to see folks believing the industry is maturing. It speaks volumes to adoption in the industry and the entrepreneurs building great companies.

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