The impending opportunity in real estate technology
This article originally appeared in TechCrunch on February 10, 2015.
Things are starting to simmer in real estate technology. The first phase of technology development in the category - primarily focused around listing services for the residential side of the market - has paved the way for industry leaders to broadly reconsider how technology can make their lives better. For those of us in the technology world with some background in real estate, the opportunity may seem obvious, but real estate is a sector of the economy that’s created immense wealth without changing their workflows or processes for many decades so there’s a predisposed lack of urgency to upgrade the ol’ tool belt.
The word ‘trillions’ gets thrown around a lot when people refer to real estate as an asset class. Broadly speaking, Real Estate is the largest asset class in the US worth an estimated $40 trillion according to this December 2014 report from the Federal Reserve. To get specific, residential housing is the single largest "tangible" US real estate asset, worth roughly $23 trillion, and commercial real estate accounts for another $15 trillion. To put this in perspective, as an asset class, real estate is meaningfully larger than other US heavyweight industries like fixed income, equity and health care. Real estate lending is by far the largest lending category, belittling credit card debt by orders of magnitude. Residential mortgages alone accounted for nearly $12 trillion as of December 2014 compared to $882 billion in credit card debt. $1.6 trillion in new real estate debt is issued each year - $1.1 trillion in residential and $500 billion in commercial. According to this report by Jones Lang LaSalle, annual commercial real estate lending is projected to reach $1 trillion by 2030. The National Association of Realtors is the largest industry trade association in existence with 1.25 million members and there are approximately 3 million active real estate agents in the US. There are roughly 500,000 construction professionals and more than 120 million actively managed commercial properties. In summary, there’s a whole lot of money changing hands in the sector.
Venture funding of real estate technology startups reached a peak in q4 2014 with 32 companies raising nearly $300 million. In total, venture funds invested $605 million in real estate tech in 2014 versus $241 million the year before - more than 2.5x growth. There are a number of signs suggesting the trend will continue through 2015 as the category moves from niche status to one that gains widespread attention. I believe the next phase of growth - and most exciting opportunities - will be fueled by products and services that serve the commercial side of the real estate market.
Residential versus Commercial
The first technology innovators to focus on real estate primarily addressed the residential market. Companies like Zillow, Trulia, Realtor.com, RedFin and StreetEasy showcased the power that technology can have when applied to a market as large and lucrative as residential real estate. Each of these companies operate, generally speaking, as residential listing services and this has proven to be the low-hanging fruit of the real estate vertical.
Commercial real estate encompasses office buildings, hotels, malls, retail stores, multifamily housing, industrial property, warehouses, medical centers, and garages. Thus far, technology innovation on the commercial side of the market has been limited, with two outliers being CoStar and LoopNet. This is partially the result of data that is tedious to gather and “dirty” - making it challenging to use, industry information that is opaque with incumbents who have incentive to keep it that way, and some of the early momentum that gathered in the mid 2000s being stymied by the financial crisis and subsequent pullback that commercial development and investment experienced. With the economic recovery in full swing and money flowing back into commercial development, some of these roadblocks have been lifted and the market is, once again, ready for new entrants to build upon the work of the early pioneers in commercial real estate technology.
Products and services that addresss the commercial side of the market are more exciting (versus residential) and represent a massive opportunity for a few key reasons:
- Higher transaction values mean there's more at stake for the players involved
- Given higher transaction values, the competition is stronger and so, the players are willing to pay up for competitive advantage
- Single transactions often involve multiple constituents - property brokers, mortgage brokers, lenders, developers, appraisers, builders - each of whom want an edge
- There’s lots of relevant commercial data available to parse which naturally plays into the wheelhouse of skilled data scientists and tech entrepreneurs
- Broader diversity of funding sources creates newfound opportunity for pricing and product optimization
- The market is antiquated and grossly underdeveloped
New York City: Epicenter of Commercial Real Estate (and Real Estate Technology)
Much the same way that the Bay Area has historically claimed the highest concentration of technology startup development, New York City is the epicenter of commercial real estate. According to Cushman and Wakefield, New York City has been the world’s largest commercial real estate market in every year since 2010. In 2014, New York City captured 7% of global investment with $55 billion. It’s only logical that the most important technology businesses serving commercial real estate will be built and headquartered in the commercial real estate capital of the world. We've already started to see this play out with more than half of the 2014 sector funding happening in New York City. Companies like VTS, Reonomy, Hightower, FieldLens, Honest Buildings, Floored, The Square Foot, Onboard Informatics, Nestio and Urban Compass - all based in New York City - are already well on their way to becoming important businesses.
The market of potential customers for applications and services serving the real estate market is global, with half the world’s top 12 largest commercial real estate markets outside the USA. London, Tokyo and Paris are among the top six. Toronto, a city that doesn’t appear on most global rankings based on transaction volume, has more industrial cranes installed right now than anywhere else in North America. India and China have been among the most active markets outside the USA for real estate technology investment. International startups like Housing.com, PropTiger, Fangdd, Anjuke, CommonFloor and HouseTrip have all raised substantial sums of capital already.
Biggest Areas of Opportunity
Opportunities for innovation using technology abound across the real estate industry. Some of the biggest near term opportunities for innovation are:
Property Management: Several companies are already competing for dominance in this category, most offering software that helps property owners and management companies oversee and easily track commercial real estate assets. Industry wide adoption is still sub-10% though so lots of opportunity for growth remains.
Research and Analytics: Traditionally, commercial real estate developers would hunker down with teams of analysts using HP calculators and gathering demographic research to evaluate an investment opportunity. Today, open data initiatives in municipalities across the country - combined with creative needle threading by software developers - is changing this landscape and much of the data is readily available via monthly SaaS licenses.
Listing Services / Tech-Enabled Brokerages: Contrary to the incumbents in the residential market, which are predominantly media businesses generating revenue from advertising, a real opportunity exists for tech-enabled commercial listing services that could level the playing field, acting as marketplaces, and replacing the less efficient relationship-driven model that still persists today.
Mobile Applications: By their very nature, real estate professionals are on the go, pound-the-pavement types. Brokers, landlords, appraisers, developers are constantly running around visiting properties. One can assume that many of the most successful applications serving this market will have a healthy and robust mobile component.
Residential and Commercial Lending: Regulatory changes have opened up opportunities for innovation in lending, and real estate lending is by far the largest sub-category. We’re starting to see a number of emerging companies target this area in different ways. Residential and commercial lending are different animals so my guess is that we’ll see a dozen worthwhile challengers going after each market.
The real estate industry is vast and we've only just begun to scratch the surface when it comes to opportunity for technology-enabled innovation. Given the dollars at risk and the proportion of the broader economy that real estate represents, there is every reason to believe the category will produce multiple ‘unicorns’ worth billions in enterprise value. The past two years have been the most exciting yet for real estate tech and I can’t wait to see what the next few will bring.