As the U.S. economy improves, the question of where real estate will sit in the business cycle and how it relates to proptech is a matter of speculation with no clear answer.
Proptech entrepreneurs and investors who voiced their opinions on this topic in early 2024 asked whether their efforts were in sync with the real estate cycle, countercyclical, or even related at all. Opinions are divided about.
“I think the economy is definitely cyclical,” said Ryan Masiello, co-founder and chief strategy officer of the Manhattan-based global real estate CRM software platform. VTS. “As the market suffers, proptech will suffer greatly. The reality is that unless you save someone money, If you want to develop a product that is completely new and uniquely valuable in this market, frankly no one really has the money or resources to spend time with a lot of companies. ”
But the equation may be changing as the office market begins to gain some traction, Masiello said.
“There is positive momentum in the office market,” he said. “It's obviously more pronounced in some markets than others. But at the end of the day, we know it doesn't work for everyone. So we think a down market is good for VTS. We say it's a market, but the reality is we still have a long way to go in terms of recovery in terms of getting back to a point of equilibrium where landlords actually start to stabilize.”
But even during the downturn in the real estate cycle, there is some upside for proptech, Masiello added. The idea for VTS was born after the 2008 global financial crisis. That's when the company's founders realized that a brutal market provided an opportunity to create a platform to address many of the serious issues facing landlords at the time.
“The down market presents an opportunity for audiences who may not have been very keen to listen before to now really willing to listen,” Masiello said. “And if your story is actually true, and we have unique data that helps us think differently about investing and leasing, then I think people are willing to take the leap of faith.
“It's the same thing in terms of cost consolidation. When leases are good and people are making a lot of money, there's not as much pressure to cut costs. I think if you're really offering a service that really allows you to integrate systems, I think people would be willing to try and find the budget in-house. But there are so many products out there that there's more scrutiny. is also being carried out.”
Because PropTech's companies and services are so diverse, it's difficult to pin their fortunes on macro-level real estate cycles, said Michael Broder, CEO of PropTech. Rckrbxa data mining platform for multifamily real estate assets across the ownership lifecycle.
“I think we need to look at it at a more micro level,” Broder said. “Things that have more technology in place, such as buildings that have the potential to create efficiencies or improve the living experience, are more fully connected to market realities and are therefore likely to become more cyclical. .
“And today we have trades that are sluggish in terms of volumes and speeds of trade, and given the current economic constraints, we are probably seeing a delay in starting new developments. , while perhaps more broadly influenced by current market conditions, what allows people to have greater confidence in their decisions, where are the unmet needs in the market, and where are those needs located? “This is something that could give us greater insight into the future. The opportunities do exist and are probably countercyclical.”
As a former consultant, Mr. Broder believes the most important thing in an economic downturn is having better data to make better-informed decisions when risks are elevated. He said he wants people to remember that. “The risks are greater, but if you understand things in a more actionable way, you obviously have more confidence in your decision-making abilities,” he explained.
For RCKRBX in particular, Broder sees signs of growth even as multifamily faces a bleak high-interest rate era.
“We are a growing company within the larger proptech environment in that we provide very powerful predictive analytics and data models to help developers and investors more accurately predict the performance of assets in the market. We’re in a bit of a unique space,” Broder said. “This means that in a recessionary or austerity environment, the ability to actually stress test assumptions and quantitatively understand how that product will ultimately perform is critical information in a tougher financial economy. I go back to that idea.”
Broder said that's why his platform can survive. “And as the situation starts to ease and activity starts to pick up, there are some pretty significant transactions, especially given the amount of distressed assets on the commercial office side that could eventually be repositioned or converted into multifamily assets. “I think it will become widespread later this year,” he added. “We are doing everything we can to prepare for onboarding for all of these opportunities.”
The link between Proptech and the multifamily housing cycle will depend primarily on geographic markets, said Lindsey, co-founder and CEO of Tours, a rental analytics tool for multifamily property owners and managers.・Mr. Martinez stated.
“If you look at the multifamily side, I think this is a little bit irrelevant because proptech performance is influenced by a lot of factors,” Martinez said. “And I don't think it's going to be all good or bad, up or down. Real estate and proptech are connected, but they're not all that interdependent. The impact of market conditions on proptech companies is , it really depends on the specific market and what the supply and demand will be in that specific market.”
Yet another perspective is market lane advisoris a Manhattan-based proptech advisory startup that works with real estate owners, operators, and developers across 50 million square feet of offices and more than 12,000 apartments.
“I think they're pretty positively correlated,” Kanfer said of proptech and real estate cycles. “As I see it, the real estate industry needs proptech and innovation in good times and bad. Business owners need to understand how they can innovate within their businesses during good times. They need to keep up with their colleagues.
“In difficult times, we are focusing on much more pressing needs than proptech, but it depends on the platform. Unfortunately, some owners have had to downsize, but what they've been thinking about is, “If we had to reduce the team from six to three, then if we had to reduce the team to five, What technology can we replace it with so we don't have to go up to six or even seven people?' I can see that the owners are frowning at this. ”
Kanfer said Market Lane's proptech advisory capabilities are in demand as the office and multifamily sectors continue to struggle.
“In my business, I see a strong need for owners to have the time, bandwidth, and resources to consider the myriad proptech opportunities that exist out there and make informed decisions. And they don’t even have any particular expertise,” he said. “I was on the phone with an asset manager this morning and he said, 'I know how to lead, I know how to manage assets, but I don't know as much as I do when it comes to technology decision-making.' .It's my real job.''
Beyond the US real estate market, opinions on the cyclical relationship between proptech and real estate are also somewhat unclear.
“We don't believe the proptech market is cyclical at all,” said James Deersley, CEO of Europe, Middle East and Africa. Verveis a London-based proptech startup with a focus on sustainability. “I think the real estate market is obviously important when you talk about deal size, valuations and deal closing.”
Dearsley likened proptech to Gartner's Hype Cycle, where a market undergoes a massive explosion of branding activity and then declines. In this way, proptech reached its highest level in the global market in 2017 and peaked out in 2020 or 2021. But it wasn't because of the pandemic, he said.
“What we are seeing now is a transition and transformation from core real estate technologies to more nuanced technologies such as climate technologies, energy technologies, sustainability technologies, contech and planning technologies,” Dearsley said. said. “I think proptech is seen as something very common, so we are trying to get into more micro-sectors. Technology is not the answer to the digital transformation of the real estate industry; It's much more widespread than that. Technology is purely one aspect of that change.”
Proptech companies are now becoming more specific about what they are, he added. Although the umbrella term proptech still exists, the field is more specific and the sector is less cyclical. “It goes through the exact same hype cycle as anything else. And entrepreneurs are now slowly coming to understand that they need to label it correctly to make it more relevant to the buyer. I am.”
But over the past 18 months, when Dearsley has traveled to various real estate markets around the world to discuss proptech, he has seen a change that he said:
“For the first time in over a decade, we're seeing the language spoken by technologists actually on the same level as the language spoken by founders and real estate leaders,” Dearsley said. “Before that, engineers spoke a different language than real estate founders. [innovation] By the way, this is not only about sustainability, but also about affordability and productivity. They finally matched where they needed to get to. That's why I'm incredibly bullish about the next five years in three core drivers of change: affordability, productivity and sustainability. For the first time, everyone seems to be on the same page. ”
Philip Russo can be contacted at: [email protected].
