Last fall, I posted my thoughts on what was happening in the accelerating Commercial Real Estate Tech (CRE Tech) investment world and the megatrends influencing it, where I stated that this CRE Tech 4.0 hyper-investment cycle would have a more lasting effect than the previous rounds. What’s amazing is that the last 6 months have truly been a microcosm of everything that’s unique and different within the CRE Tech world these days. Last week, Fifth Wall went public with their Real Estate specific venture capital firm, announcing their $212 million fund that started investing last fall. CBRE is a major LP and strategic partner, along with Hines, ProLogis, Equity Residential, Lowes, Host Hotels, Rudin, Lennar, and Macerich. On top of Fifth Wall’s fund announcement, the tech merger and corporate tech buying spree has gotten heavier. In the biggest CRE merger in a long time, VTS and Hightower merged in November. I got to know Nick, Brandon and both of these teams well while at Shorenstein, and I always believed they’d be stronger together. Though not a true liquidity event, the merger was a very positive sign for the industry.
Then in January, The News Funnell purchased the CRE // Tech Intersect conference brand. Also in January, CBRE purchased Floored, an innovative company that let’s owners and corporations visualize, model and collaborate on their office build-outs of every size and taste. I also got an opportunity to see Floored’s potential a few years ago when we were preparing to completely remodel a large office building in Houston. The product seemed perfect for letting prospective tenants visualize how a space could look 18 months in advance with different fits and configurations, and what the views would look like from various floors and directions. You could even grab an Oculus Rift and feel immersed in the space while sitting in your chair. CBRE purchasing the company was yet another eye opener on what’s different now in this investment cycle. Lastly, just last month CBRE made another purchase, acquiring Mainstream Software, a leading SaaS based CMMS application.
I can also say with first hand experience that the interest in these new technologies from the commercial and corporate real estate community is broader and deeper this time. Owners, investors, occupiers and everyone else involved are feeling the change all around them as tenant and employee working environments, expectations, and tastes are changing, while whole asset classes are being transformed.
In my previous post, a big theme was the CRE Tech 4.0 story, which highlighted the latest wave of CRE tech investing, while keeping a wary eye on the littered past. In line with the large amount of investing in startups overall, the CRE tech investment levels have skyrocketed over the last few years. Real estate technology investments across all asset classes ballooned to $2.7 billion in 2016, compared to $451 million in 2013. If you consider that 2013 was a record year by miles, the money flowing in has been astonishing. But with a history of few survivors from the previous cycles, the question was whether this cycle will be different. I stated then that this was different, and that belief is even stronger now. As Jim Young recently pointed out in his recent posting, there are both positives and negatives with this recent cycle. I still see risks in the disparity between the dollars flowing in and the exits, but the investments have helped push the CRE tech industry forward permanently. There will be a correction and many of these companies will fail, but the best will survive and the industry will be better off.
The other part of my earlier post focused on the disruptive trends that are taking hold within CRE. Those influences have only gotten stronger in the last 6 months. The categories are still the same; artificial intelligence, robotics, autonomous cars, AR/VR, IOT, data analytics, and blockchain, but the influences are more profound. These are all trends that are also included as part of the “Fourth Industrial Revolution”, a book and related articles from Klaus Schwab and the World Economic Forum. I highly encourage anyone who is interested in these trends and their influences to read the book. In this new industrial revolution, we are moving from the basics of computers, the internet and software automation, to more advanced cyber physical influences. These megatrends are also highlighted by Jim Young and the Realcomm team as the next CRE Tech wave, or phase 5. No matter how you classify them, these are the trends that will have long lasting effects on how we work, play, travel, interact and live, and they will impact society at large.
Related to the Commercial Real Estate industry, here is an updated high level summary of the trends that are taking hold. Pages could be written on each subject, but I’ll just touch briefly on their CRE impact:
- Artificial Intelligence – AI continues to garner the most attention with a significant amount of investment flowing in. The CRE use cases are endless, particularly as you combine it with IOT. Whether it’s automating lease abstraction, predicting building system equipment failures, automating first level security monitoring, analyzing occupancy foot traffic, the advent of bots and conversational AI, or learning from tenant or client feedback, we’re early in this journey. Leveraging machine learning with sensors and IOT, robotics is growing, as are autonomous cars which will have a profound effect on commercial real estate. Specifically within AI:
- Machine Learning– Leveraging massive amounts of data and the computational advances powered by GPU’s, machine learning algorithms trained by data scientists can help owners and occupiers make better decisions on where investments should be made, how space can be better utilized, where personalization might increase customer engagement, what equipment should be replaced in advance of disruptive failures, and how bots might improve customer support. The hurdle though for many companies is not only the amount of data needed to make informed decisions, but the quality of the data. As I stated in my Data Quality posting recently, your results will only be as good as the quality of your data. This can’t be underestimated. Though a few real estate companies are now getting their feet wet with AI, every company should be starting down this journey, looking for pilots where they can learn how to best leverage these technologies throughout their organization.
- Robotics – Last 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. Since then, I’ve had the opportunity to see a few of these in action, and I also had a chance to speak with the Knightscope team. Their current product is focused mainly on security, but there is new interest for customer service support at malls. Capturing 90Tb of data/year, it can recognize 300 license plates a minute, it has sensors with a range of 300 feet, it can grab MAC addresses for anomaly detection, and it learns via IBM Watson to improve interactions. While this use case is more intended for office campuses, the general AI powered robot is here to stay.
- Autonomous Cars – Driverless cars and their effect on real estate in general continues to generate lot of attention. The reality is that they’re already here in some form, so it’s no longer an if. I previously mentioned Uber’s purchase of Otto and their roll out of pilots in various cities, along with NuTonomy’s autonomous car launch in Singapore. Again, a lot has changed in 6 months. Otto did a beer delivery test run, Apple applied for an autonomous car permit, Uber continued more roll-outs, autonomous vehicle startups continue to pop-up everywhere, and on it goes. The industrial and shuttle use of driverless cars will become more prevalent quicker than on the consumer side, but autonomous vehicles in some fashion will be mainstream sooner than later. When self-driving cars become the norm, what will that do to all the parking lots in urban areas and office buildings? Gensler and other design firms are recognizing this, and new office building designs are starting to incorporate the eventual reclaiming of their garages and parking spaces. What about commuting patterns? Will people become more accepting 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. This is just the tip of the iceberg as a major real estate disruption is ahead.
- Augmented Reality and Interactive Software – This isn’t brand new to CRE, and it’s becoming a mainstay in residential real estate, but the tools are still in the infancy. Floored was one of the first to demonstrate the value with CRE, but others are pushing these technologies into the local design process, providing an enhanced collaboration process within construction and space design. Some, like ECCO are looking at interactive software to help find buildings in a community that appeals to selective clients. Augmented reality will help facility managers “see” manuals connected to their equipment, in addition to leveraging remote, visual support. I also believe these technologies will transform how we all work and collaborate in our everyday jobs over time. This is the “Future of Work”.
- IOT – The Internet of Things (IOT) has been around even longer, but because of the fragmentation of the solutions previously available, the short-sighted ownership mindset and the varying levels of user sophistication, there is still a lot of untapped potential. As the cost of sensors continue to drop, the implementation of industrial IOT will continue to accelerate. Security still needs to be addressed, but that will come over time. Today, energy monitoring and management are the biggest uses, 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 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 within industry domains. A pre-set understanding of “space” or “leases”, as an example, is a big jump over starting from scratch. It’s universally agreed that data is now the new oil, an asset that is extremely valuable and highly worth investing in.
- Blockchain – Here too there have been many developments over the last 6 months. In October, Cook county announced a pilot with Velox for property transfers. In February, the Republic of Georgia committed to using blockchain to validate property related transactions. There have also been new consortiums announced on the IOT/smart contract side of blockchain, a category that I personally think will become more pervasive sooner than some of the other areas. It’s still early, but the blockchain is being tested and adopted in the financial industry and there is a significant place for it in the real estate industry. Think about the titling process or the end to end transaction 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 do need traction before you can really make great leaps forward for some use cases. Additionally, all those legacy records need to be accounted for. Still, having seen firsthand how long the commercial buy/sell process takes, there is a need for it in real estate with 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 still equate the blockchain only to bitcoin. The bitcoin was just the first major use of the blockchain distributed ledger, but the scenarios spelled out here don’t face all the same issues.
For those of us who have lived through previous CRE Tech cycles, it’s understandable to be cautious. However, the nature of the technology in this investing 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, attacking a problem is quicker and more efficient 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 improved user interfaces and simple approaches were leaps and bounds ahead of the current options. Add in the megatrend influences affecting all industries, and the hundreds of other startups that have sprouted up with shoestring capital budgets, you get a real ecosystem of quality companies that are addressing real needs today.
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, merge with others (VTS/Hightower), or get bought by the big Corporates (Floored) 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 still here to stay and we’re all better off for it.