Having participated in a few Commercial Real Estate (CRE) technology conferences recently, there are a few themes that tend to stand out. From an investing perspective, a big topic is the CRE Tech 4.0 story, which highlights the latest wave of CRE tech investing, while keeping a wary eye on the past. In line with the large amount of investing in the general tech industry, the CRE tech investment levels have skyrocketed over the last few years. But with a littered past of few survivors from the previous cycles, the question whether this will be different. I believe so, though the exit path options remain limited.
Let’s first cover some of the topics that have stood out this year:
- Artificial Intelligence – The hottest topic is around artificial intelligence and its use in the real estate industry. Some of the concepts applicable to CRE are robotics and driver-less cars but there are many more. The AI investment theme across all industries is getting a lot of capital coming to it, and rightly so.
- Robotics – Earlier this year at Realcomm, a great deal of attention was on robots. They were found not only in the exhibit area, but they were around many of the session rooms and throughout the halls. I hadn’t paid too much attention to them in the past, but seeing them move around impressively well got me thinking about their potential. Robots are currently being used for 1st level security monitoring at some buildings. There’s already been the consumer home vacuum available for years, so there’s definitely a place for cleaning. Recently, I’ve also heard more buzz about utilizing robotics in the construction process, where their value is quickly identified for automation of the repeatable parts of the process.
- Driverless cars and their effect on real estate in general is also generating a lot of attention. The reality is that they’re already here, so it’s no longer an if or when. Just recently, Uber announced it had bought the self driving truck startup Otto and created a partnership with Volvo. That was already two major announcements. But Uber also announced that they’ll begin letting customers in downtown Pittsburgh request self driving cars in the very near future. Shortly after that was announced, NuTonomy beat Uber to the punch by officially launching in Singapore the first self-driving car service. It was no longer fantasy and had begun. Although there will be an actual driver behind the wheel as a precaution, these are amazing first steps in what will be a tremendous real estate disruption. If self-driving cars were to become the norm, what will that do to all the parking lots in urban areas? What about commuting patterns? Will people now be more acceptable of longer commutes, and will this push up rents in suburbs? Assisted living and multi-family communities will also be impacted as the elderly take advantage of this new freedom and communities may rely less on car ownership. Industrial hubs will change as driving patterns shift with autonomous driving trucks. That’s just the tip of the iceberg and major disruption is ahead.
- Interactive and 3D Software – This isn’t brand new to CRE, but the tools are still in the infancy, with Virtual Reality a part of the solution in many cases. Floored was one of the first to demonstrate the value, rolling out an innovative view of unleased space, giving potential tenants a way to create and visualize the space with various layouts, material finishes and colors. You can also view it in an Occulus Rift, getting a more immersed view of the same space. Others are pushing into the local design process and the back and forth of updated drawings, while some (ECCO) are looking at interactive software to help find buildings in a community that appeals to selective clients.
- IOT – The Internet of Things (IOT) has been around even longer, but because of the fragmentation of the solutions available today across the end-to-end process (sensors, data collection and aggregation devices, monitoring and interaction points), along with the short-sighted ownership mindset, and the varying levels of user sophistication, there is still a lot of untapped potential. Today, energy monitoring and management is the biggest use, but asset inventory, reactive maintenance alerts, better preventative maintenance schedules, enhanced employee experiences, and occupancy cost forecasting highlight just some of the other areas ripe for change.
- Data Analytics – new startups are coming up that not only focus on faster data storage and retrieval, but also more on how to make the information actionable, meaningful, and usable in the hands of the business user. I see industry specific alternatives cropping up that let you hit the ground running from an industry domain perspective. A pre-set understanding of buildings, as an example, is a big jump over starting from scratch.
- Blockchain – It’s still early, but the blockchain is being tested and adopted in the financial industry. There is also a place for it in the real estate industry. Think about the titling process or the end to end transnational process. There are huge inefficiencies built into today’s model and anything that removes barriers adds value to all parties. Unfortunately, this is one of those situations where you need traction before you can really make great leaps forward (you can’t do it yourself – you need to include others to solve the real problem). Additionally, all those legacy records need to be accounted for. Still, having seen first hand how long the commercial buy/sell process takes, there is a need in real estate and a potential remedy available for reduced speed and greater efficiency. Note that the technology itself also has an unfounded stigma attached to it as many people equate the blockchain to bitcoin. The bitcoin was just the first major use of the blockchain distributed ledger, but the scenarios spelled out here don’t face the same issues.
Getting back to the CRE Tech 4.0 theme, CB Insights reported that an amazing $4.8 billion dollars has been invested in CRE tech since January, 2014. That’s barely a blip on the radar within the broader technology investing world, but it’s a monumental leap for the CRE industry. Having been through a few of these cycles in the startup world, it’s easy to be skeptical about the chances this time around, but I do believe there is more staying power with the current set of CRE startups. After the last cycle where many firms disappeared, the CRE technology buyers moved over to platforms like Salesforce to build out some of the leasing, fundraising, investor management, and other related customer related solutions.
But the nature of technology in this cycle is much different. It’s much easier and less capital intensive to start a company today. Fully leveraging the cloud and the lower cost of capital that comes with it, makes it quicker and more efficient to attack a particular problem than in the past. That’s exactly what VTS and Hightower did. The two poster children of this latest cycle were both able to quickly address a need that was screaming for help. Companies realized that they didn’t need to just rely on Excel, and the User Interfaces and simple approaches were leaps and bounds ahead of the current options. Add in the dozens of other startups that have sprouted up with shoestring capital budgets and you get a real ecosystem of quality companies that are addressing true needs.
The real question is what will happen to these companies in 3- 5 years? Will they survive a downturn in the economy? You can count on one hand the number of CRE startups that have gone IPO, so the founders need to either be content in staying private or merge with others if they want to continue their growth trajectories. The IPO route is unlikely, so we’ll more likely see a wave of consolidations as this growth cycle matures and the founders look to either cash out or further scale their business opportunities. In either case, with an abundance of quality companies gaining attention, the advances in CRE tech are here to stay and we’re all better off for it.
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