Proptech Investment Will Help Innovate how the Corporate Real Estate Industry Works


Proptech Investment Will Help Innovate how the Corporate Real Estate Industry Works

Proptech Investment is Growing: Here Are the Corporate Real Estate Sectors VCs Are Funding and Their Potential Future Growth

 Corporate real estate is an industry that largely does business the traditional way, i.e. the way it’s always been done. It’s never been known as an industry that’s on the cutting edge of technology, but it has been valued at around $1 trillion in the U.S. alone.With so much money to be made, it was only a matter of time before digital disruption started changing the way the commercial real estate industry works. There’s no exact start date for Proptech, but Proptech as we know it today has been slowly gaining traction since 2012. It hasn’t reached the level of Fintech funding, but the trajectory looks good. Currently, the U.S. far outpaces other countries in Proptech investment. In the first half of 2021, there was $3.11 billion in Proptech investment. The total amount invested in 2018 was $2.87 billion. Right now, technology, software, and venture capital investment are converging, and it’s going to innovate the CRE industry from corporate real estate asset management to how those assets are built and acquired.

Disrupting the Corporate Real Estate Transaction Process

IBIS World’s latest analysis of the commercial real estate industry has it sitting as #4 in market value for all industries in the U.S. But that silver lining is dimmed when you dive further into the data and see growth has been slow in the last five years. Recovery after the pandemic may take some time, but the CRE and Proptech industries are expected to rebound, and growth should be better than the previous five years. One way Proptech will do this is through innovating the corporate real estate transaction process. IBIS World cites real estate transactions as one of the sectors of CRE with the biggest potential for growth. Key Proptech changes include:

  1. Technological updates to financing
  2. Vertical integration capabilities
  3. Eliminating fees and transactional artifacts through modernization
  4. Allowing for more remote transactions

A perfect example of the remote transaction point is Knock. The Proptech company secured $20 million in funding earlier this year in part for its centralized, remote leasing platform that gives agents the ability to work seamlessly from anywhere. You can call it one of those capabilities that COVID made essential and is now expected. Tom Pentry, co-founder of Knock, told TechCrunch “This transformation and modernization became a huge tailwind for our business in 2020 . . . Not only did we have a record year in terms of new customers, revenue growth and revenue retention, but our customers outperformed market averages for occupancy and rent growth as well.” It’s the last part that gets VCs interested in Proptech. Many Proptech companies are proving to make transactions more profitable. When CRE stakeholders see clear bottom line benefits, that’s when adoption begins and investors stand to make huge returns with the right company. The CRE transaction process holds a lot of opportunity for Proptech investors. Even in residential real estate, the transaction process has been largely untouched by Proptech, although there’s interest in reforming it. Proptech investors are wise to keep an eye on companies like Ribbon that digitize real estate transactions, making them simpler as a result.

Addressing Corporate Real Estate Usage Intelligence Needs

When Deloitte asked experts in the commercial real estate industry about their post-COVID strategies and outlook they had a lot of interesting insights. The digital transformation of the CRE industry was at the top of their minds. CRE executives said they had three key challenges:

  1. Fewer than half of the companies surveyed feel that digital tenant experience is one of their core competencies.
  2. Just 41% of CRE companies and investors have updated their processes and skills to include technological tools.
  3. Only 33% of CRE execs feel that they have the skills and resources needed right now to operate in a digitally transformed industry.  

The number of CRE execs that are prepared for Proptech may be low, but the majority are aware of the need. These challenges aren’t all a result of the pandemic, but they have compounded as a result of the global events in 2020.

Now more than ever, technology is needed to overcome challenges in an industry that’s entering a transformative period. Digital tenant experience is of particular interest among CRE portfolio owners. Some of the latest innovations are providing insight into occupancy and usage of their properties that were previously unavailable. Proptech is allowing building owners to track the utilization of a property at all levels and giving them a way to analyze the data to improve efficiency and maximize value.

Currently, most CRE companies rely on labor-intensive manual processes to collect and examine corporate real estate data. Smart devices that automatically collect data have existed for a while, but the cost and skills needed to gather data on a building has been prohibitive for a lot of companies and portfolio owners. As the technology expands and comes down in price, more buildings are expected to be outfitted to intelligent data collection systems. The tools needed to analyze all the data are also getting more affordable and easier to use while providing even more information.

RefineRE’s FLEX analytical tool is an example of how tech innovation is helping CRE stakeholders. As workspaces transition to meet the needs of a more mobile workforce, FLEX helps investors and occupiers determine which lease spaces are best suited for flexible working environments. In-house and automatic is the way things are moving with all forms of CRE data analysis, including data on the occupancy and usage of a property.

However, the question is, are CRE companies ready for all of the new solutions and tools Proptech companies are creating? It’s up to the organizations to update their technology strategies, identify the best Proptech tools for their needs and put the right talent in place to use them. Without putting those pieces in place, it’s very difficult for CRE companies to properly implement Proptech and use it to their full advantage.

Vertically Integrating the Entire Commercial Real Estate Lifecycle

The COVID-19 pandemic taught us that private nonresidential construction is more susceptible to a global crisis than other real estate sectors. The significant decline in activity had a profound impact on the entire CRE industry.It’s not surprising that emphasis is on efficiency as development begins again. The shutdowns gave many real estate developers time to evaluate their projects that were put on hold. The way CRE projects were developed in the past was very fragmented. The many steps between researching properties to acquire to optimizing usage after construction involve a lot of moving pieces that can be difficult to manage. Like CRE transactions, Proptech companies are stepping in to create solutions that consolidate everything and simplify the process while providing better insights. Bringing project management entirely online allows for vertical integration. Developers have more control over the entire process.

Having more control makes corporate real estate asset management easier even when a developer or real estate investment company has to oversee distinct business units. A vertically integrated real estate company is in a position to be more profitable. There are significant cost advantages when output increases. And the data that is gathered and analyzed during the process using Proptech software can help CRE companies apply cost-saving insights to their next project. The speed with which projects can be completed is another advantage of vertical integration that’s going to make it of interest to CRE investors. Streamlining the process and minimizing the need for outsourcing means that developers can get more done and close more deals. With vertical integration tools that bring everything together, some CRE experts believe we’ll see less niche specialization in a single component of the project lifecycle. Proptech is allowing for consolidation that wasn’t previously possible in the CRE industry, and it’s very likely many companies will move to that model.

How Much Will the Proptech Industry Raise in 5 Years?

All you need to do is look at the trajectory of technology in other industries. Once the VCs get behind the technology companies, funding tends to pour in as investors look to get in on the ground floor of the next big innovation. Even residential real estate Proptech has the potential for substantial growth in the next five years, which means CRE Proptech is far from being tapped out. Don’t be surprised if you see annual Proptech investment exceed $7 or $8 billion in 2022. Key segments that will likely see the most backing are:

  1. Building utilization, with emphasis on flex space and tenant experience
  2. Building efficiency optimization (the greener the better)
  3. In-house Big Data analysis
  4. Remote transactions that make buying easier and more secure
  5. Going all-digital with transaction documents
  6. Smart security for properties
  7. Enhanced virtual tours and property tours that can be guided remotely
  8. Fractional property investment
  9. Commercial to residential conversion tools
  10. Outsourced services for urban dwellers (i.e. grocery delivery)

Things may have slowed down in 2020, but so far 2021 has been record-breaking and is on pace to be the best year of funding ever for Proptech. But 2021 won’t likely hold its records for long. All predictors are pointing toward continued growth in the coming years. We’re in a period where Proptech has momentum. The more it innovates the CRE industry for the better, the more VCs will be willing to fund Proptech companies so they can keep on innovating.

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