Building and owning a home has been part of human life for as long as civilization itself. But in the past few decades, the lens through which we view real estate and property development has slowly blurred.
It’s not a huge stretch to say that today, as tech increasingly permeates property development and housing, few except those operating in the sector can truly pinpoint what’s happening in the fast-developing world of proptech.
So in order to pull back that veil, toward the end of 2022, we decided to take an in-depth look into the trends and tech in property development and construction. We spoke to a diverse array of investors about finance-focused proptech and the move toward greener proptech.
But since we can’t get a full picture of the proptech space without delving into the tech driving so much of the change, we interviewed Momei Qu, managing director at PSP Growth, and AJ Malhotra, managing director at Insight Partners. They spoke extensively about the latest tech in property and housing development, where the next disruption is likely to happen, and other trends.
(Editor’s note: This interview has been edited lightly for length and clarity.)
TC: There’s a lot of overlap between construction tech and proptech. What would you say is the difference between the two? And where do they overlap?
Momei Qu: We did not coin this term, but we like to use “built world” or “built environment” to capture both categories. Traditionally, we’ve referred to construction tech as solutions that touch things as they are being built (i.e., jobsite, field-level technology targeting AEC as an end customer) and proptech as solutions that touch things after they are already built (i.e., tenant engagement for office buildings, property management for rental properties).
They overlap when there is something of value that applies to the entire lifecycle — construction data around plumbing that can be used for facility management or outfitting a unit as a “smart home” during the construction phase.
AJ Malhotra: I think of construction tech as a subset or segment of proptech. In my definition, proptech is any technology that touches the full lifecycle of a physical structure, including land acquisition, construction planning, construction execution, financing, leasing, property management, insurance and repair.
Construction tech would fall into the buckets of planning and execution in the examples I just gave and could also touch financing (for things like construction loans) and repair.
What is your investment thesis for proptech in 2023? What sort of growth are you expecting in the sector?
Qu: The sector has been hurt in 2022, in some ways disproportionally more than others, by the broader tech market reset. Several proptech companies were valued at over $1 billion in private financings or via SPAC, and virtually none of them have maintained a valuation above $1 billion today.
I think part of what made it worse is the double whammy of general inflated multiples in tech/software, coupled with the fact that many proptech companies have a physical component that shouldn’t have allowed them to be valued like a software company to begin with.
I think investors and companies in 2023 will exercise much more discipline and likely won’t raise too much capital until they have really found a product and sales motion that works. As a growth-stage investor, we typically don’t get involved until we see significant traction anyway, and if they can show momentum and traction in this environment, we are more than happy to lean in in a big way.
Malhotra: I think proptech in 2023 will certainly be challenged, mainly for two reasons.
First, I think technology broadly will be challenged and proptech won’t be an exception.
Second, I think there are real estate-related macro factors that will create short-term headwinds for proptech, including high and increasing mortgage rates on the residential side and continued uncertainty about what occupancy rates in offices look like in the near future and longer term.
Given these market factors, my investment thesis for 2023 is consolidation. I think you’ll see players in the market with more scale and more access to capital use both of those to play offense and make acquisitions, whether that’s pure in-line consolidation or acquiring into adjacent product areas to create more holistic platform solutions.
I think you’ll also see, on the customer side, that a lot of buyers will want to work with fewer, and more established, vendors on the technology side.
I expect to see minimal growth in the sector in 2023 given the factors above. That said, I am still positive on proptech’s future in the long term. People need homes to live in, places to work, spaces in which to meet and connect with others. This is still a massive, global asset class with relatively low technology penetration and a continued need and incentive to drive down cost, increase efficiency and create better outcomes — all of which technology can drive.
Virtual reality (VR) and augmented reality (AR) were of interest to many in the proptech world even before the pandemic. How far has adoption of VR and AR come in proptech since 2019? What are some of the more interesting applications of VR and AR in proptech?
Qu: VR/AR have enabled multiple stakeholders to view, manage or collaborate on a physical space without actually setting foot in it. We are still in the early innings, but the pandemic has definitely accelerated the adoption of these technologies.
Limits on travel forced people to work and view spaces remotely, but most experienced the benefits and did not abandon the technology when the world opened up again. It only takes 21 days to form a habit, and two years formed plenty of tech-forward habits!
As a consumer, I now expect it to be table stakes to be able to view a new home through a Matterport model.
On the commercial side, our portfolio company VTS allows potential tenants to view live inventory of spaces and transact immediately. Another portfolio company of ours, OpenSpace, automates construction job site capture and progress tracking. It started as a tool for owners and developers to track a construction project, but now insurers and lenders are using the tool to influence premiums and payment schedules. And we recently met a company that projects an AR model of what needs to be built on a construction site before cutting into anything.
Malhotra: AR and VR were not very prevalent in proptech in 2019 in my view, and I think we’ve seen some progress in their adoption in the past few years. That said, I think we are still in the very early stages of adoption and expect to see further adoption of existing use cases and new use cases emerging in the coming years.
One interesting application of AR and VR in proptech today is virtual showings of both residential and commercial spaces to potential buyers or tenants. This alleviates the need for coordination between potential new tenants and the folks currently working or living in a space, brokers or owners to schedule a visit.
Another interesting application, similar to the one mentioned above, is in allowing potential owners or renters of space to test out different configurations and outfittings. This includes everything from how to lay out a floorplan, where to place conference rooms and desks, and seeing how different furniture will work in a space.
AR and VR are relevant on the insurance and repair side as well. The technology is being used to better analyze damage to structures and determine how best and most cost-effectively to repair damage.
We’ve heard that blockchain is working its way into proptech, especially in relation to listings and smart contracts. Does bringing decentralized ledgers into proptech lead to better products or product experiences? What other potential applications of blockchain in proptech do you foresee?
Qu: I’ll be the first to admit: I probably read over 200 articles on blockchain and still do not fully understand it. That, combined with the fact that most proptech blockchain solutions are still pretty nascent, likely means it may be awhile before we make our first investment there.
That said, from what I could tell, blockchain seems to be positioned to make real estate more transparent, secure and efficient, all of which are critical and relevant. We’ve seen a ton of innovations around making the real estate transaction process online and instantaneous, but in practice, there are still many hurdles (regulations, integrations, security, etc.) that stand in the way of making it ubiquitous.
Malhotra: Candidly, I think it remains to be seen if decentralized ledgers lead to better products, services and experiences in the proptech space. We have seen an increase in the use of decentralized ledgers in proptech broadly but have not seen any of these use cases hit massive scale nor have we seen their adoption play out long enough to know if there is truly any meaningful improvement.
The biggest potential application of blockchain in real estate is the fractionalization/tokenization of real estate. Blockchain technology can be used to fractionalize the equity ownership, debt or even the cash flow generation of a property or collection of properties.
The main benefit of this will be better access to real estate ownership and broader real estate investment exposure across a larger population of people. It will also further enable co-buying and co-investing in real estate. Property owners may be able to get better visibility into who owns the debt related to any properties they own as well.
As borrowing costs and lending rates have climbed, what opportunities have you seen in modernization/aesthetic retrofitting? What advice would you give your portfolio companies to capitalize on a modernization boom?
Qu: It’s hard to say. While I’ve certainly heard predictions of an increase in remodeling/retrofitting due to the current environment, it has its own challenges. Supply chain disruptions and labor shortage mean things consistently take longer and cost more.
My advice to companies would be to make sure you have a resilient supply chain and cost-effective labor source to capitalize on the potential increase in demand. Also, invest in better tracking and delivery of materials — so much is wasted due to poor management of materials, which then trickles down to higher costs for other stakeholders in the ecosystem.
We’ve also seen companies circle around the idea of “rebuilding” — so, somewhere between retrofitting and new. Some of the most valuable land still belongs in city centers, where most people want to live and work. Companies are brainstorming ways to tear down existing structures and build for more density as opposed to building farther away from the city and introducing new problems in transportation and congestion.
Malhotra: Higher borrowing and lending rates are pulling both buyers and sellers out of the market. For people who already own a home and have a mortgage at an attractive rate (which they can’t take with them to a potential new home purchase), an alternative to moving is now to improve or change their existing home to better fit their needs.
From a technology investment perspective, we’ve seen some opportunities on the data side, namely in better understanding how certain types of modernization or retrofitting of homes changes the value of the property.
In terms of portfolio companies, I think it depends on where in the property value chain a company sits. Some that already provide data and information to market participants can also be providers of data specifically around modernization.
Companies that sit more at or near the point of sale of a transaction can help buyers better understand what is possible with a home they may want to purchase in terms of changes or improvements they can make. That could affect how buyers think about what to offer.
For companies servicing owners/operators in the rental market, whether that is single-family residential, multifamily or short-term/vacation rental, I think there is a similar opportunity, namely around data and information on changes or improvements that will drive the best increase in value, with the best value measurement here being rental rate.
Which areas of proptech are still ripe for disruption? What do you think will be the biggest development in proptech by 2030?
Qu: Interestingly, proptech companies have largely focused on the correct problems to solve over the last few years but not always with the most attractive business models. I think there will continue to be demand for more flexible leases, streamlined and safer construction methods and more instantaneous lending and transactions.
You’ve seen companies shift from capital-intensive, risky models (high burn and unreasonable valuations) to software or managed service providers (good business model, but longer sales cycles) to propco/opco structures (theoretically the best of both worlds but not without its own challenges).
The biggest development in proptech in the next few years will be companies figuring out the best business models, because there are plenty of problems to solve.
Malhotra: I still think almost all areas of proptech are ripe for disruption. If you look at some of the more well-penetrated areas in terms of adoption of software and technology broadly, a lot of the vendors of scale have legacy technology that has not been updated. They are ripe for disruption by players with newer, better technology and user experience.
There is still plenty of usage of more modern but non-purpose-built software in this market as well, which can also be replaced by better, purpose-built technology.
Lastly, computer spreadsheets are still widely used tools in this market, and I think technology to replace these use cases in property will continue to be built.
On top of all of this, plenty of technology is being built and deployed for new use cases. One of the biggest developments in proptech is the vast proliferation of the amount and different types of data produced in and around properties.
This is everything from real-time occupancy and foot-traffic data, temperature, air quality, water flow and energy-efficiency data, just to name a few. AI and ML technologies can be applied to these datasets to drive ROI across a variety of use cases, including a better understanding of how space can be used for retrofitting or design. Taking this idea a step further, this data can be enriched with other data — think local economic or climate data — to aid in other use cases, such as climate resiliency.
Another big development will be the further digitization of the purchase and rental transaction process and all the other processes around it (mortgage lending, moving, inspection, among others). Today, a lot of these processes are very manual or use basic horizontal technology (electronic signing and basic online forms).
There is a large opportunity for technology to increase efficiency, save time and reduce cost throughout this process.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
Qu: Email me! As mentioned above, since we are growth-stage investors, we do look at traction as a gating item to judge if a company is a fit. I know some founders like to send a teaser or a blurb with no quantitative information, but difficulty in assessing fit generally leads to lower, not higher response rates.
Malhotra: I always prefer to receive a short overview or written presentation in advance of any live pitch to help determine if it’s a fit so as not to waste founders’ time.
Best way to reach me is email.
Is there anything we didn’t ask about that you want to comment on?
Qu: As many investors and entrepreneurs have said, 2023 is a terrific time to build! Cost and availability of talent is so much better than it was a year ago, and you are more likely to acquire sticky customers if they still deem your product important in a recessionary environment.
Malhotra: I generally also think about other types of physical infrastructure when I think about proptech, including things such as bridges and roads. I think a good number of [my] thoughts mentioned above are applicable to these types of physical assets as well.
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