Unmuted: Why Proptech Boomed During the Pandemic
By Chava Gourarie May 17, 2021 9:00 amreprints
One day last May, about two months into quarantine, my nieces and nephews were playing with Magna-Tiles, the newest iteration of building blocks, in the living room of their Brooklyn apartment.
But, instead of building houses, or trucks, or rocket ships, they had formed the colorful tiles into makeshift laptops. They were playing Zoom school. After some negotiation over who got to play the teacher, the five-year-old began goofing off in front of his Magna-Tile screen, and his three-year-old sister threatened to put him on mute.
It was a telling moment, one that showed how drastically life had changed in a short period. It’s easy to forget that now, with things closer to normal than not in most areas of life.
But those changes will have lasting effects. Reluctant online shoppers have been converted to Amazon addicts, Instagram is awash with newly minted home cooks and cyclists, and people may never share the salsa dip at office happy hours again. Not only that, but after such a reset to their daily lives, many people are looking to a cleaner, healthier and more sustainable future.
And with great uncertainty comes great opportunity.
The last year has, therefore, uncovered tremendous opportunities for companies ready to meet the rapid shifts in behavior and demand, and for the investors who finance them. That played out across the proptech space, where startups addressing many areas of real estate — everything from fintech and data platforms, to management software and foot traffic tracking, to smart locks — saw tremendous growth, increased investor appetite, or both.
In 2020, venture capital dollars into protech totaled $24 billion, a decline from the previous year, during which $31.6 billion was invested, but still far above all the years before that, according to the Center for Real Estate Technology and Innovation, a think tank. Of the total in 2020, more than half was invested in commercial real estate, with roughly $11 billion allocated to residential.
Those dollars came from generalist venture capital firms like Bain Capital Ventures and Sequoia Capital. They also came from proptech-focused VC firms like Fifth Wall and Camber Creek, as well as from institutional real estate players, such as Brookfield Asset Management, Tishman Speyer and JLL, among others.
Not to be left out of the fun, Japanese conglomerate SoftBank Group made the biggest investment into proptech of them all: $700 million for REEF Technology, formerly known as ParkJockey, which is turning its network of leased parking lots into last-mile logistics hubs in urban centers.
At first, the categories that investors underwrote tended to be companies that digitized formerly analog behaviors, like online notarization software Notarize, or mediated between physical and online space, such as tenant platform HqO.
This also includes many fintech companies that cross over with proptech, such as lending, insurance and investment servicers. Better.com, a digital lending company, raised $200 million in 2020, then another $500 million from SoftBank this year, before announcing a deal to go public via a special purpose acquisition company.
More recently, proptech investors have been pouring money into companies that promise to make buildings healthier, cleaner and more efficient. That ranges from data and software companies that track a building’s energy use or streamline operations; to companies that are innovating with building materials, such as Solidia, which makes cement that produces less carbon; as well as startups like Eden Health that offer on-site health care as an amenity.
Some VC firms have also raised funds during the pandemic, some with an eye to climate tech, and other more generalist ones. MetaProp, a New York-based early-stage investor, began raising a $200 million fund in August; Camber Creek closed on a $155 million fund; Fifth Wall launched a European proptech fund in addition to a climate tech-focused fund already underway; and Canadian VC firm GreenSoil Investment announced a $100 million proptech fund in March.
Aside from venture capital, the last 12 months were a busy time for proptech companies entering the red-hot public market, with many choosing to take advantage of some very favorable valuations, via SPAC or otherwise.
Airbnb is probably the most recognizable company in the real estate space to go public over the past year, while WeWork sidestepped the public scrutiny by going the SPAC route, nabbing a $9 billion valuation in a merger deal that is not yet complete. In fact, very few of the announced proptech SPAC mergers have been completed. Opendoor, which went public in a deal with SPAC champion Chamath Palihapatiya last September, is one of the few that have.
And, while there weren’t a slew of mergers and acquisitions, the ones that happened were high-profile. Global brokerage Newmark agreed to acquire struggling workspace company Knotel out of bankruptcy for $70 million, while CBRE purchased a 35 percent stake in Knotel’s rival, Industrious. Meanwhile, leasing and asset management platform VTS — one of the larger proptech companies to not go public this year — acquired Rise Buildings for $100 million.
One area within proptech — if you can call it proptech at all — with mixed results is the short-term or flexible space providers, both office and residential. While the pandemic walloped companies like Knotel and WeWork, many have insisted that flexible office space providers will be crucial infrastructure in a future of hybrid-work models. On the residential side, while short-term rental companies like the Airbnb-backed Lyric folded, similar firm Sonder ascended and is now set to go public at a $2.5 billion valuation.
And, as real estate is not a walled garden, there are a number of trends in other areas of innovation that are likely to change how we live, work and travel. Electric and autonomous vehicles are having an incredible SPAC-fueled moment alongside micro-mobility and last-mile logistics, all of which are likely to transform urban transportation.
On the finance side, the trends around cryptocurrencies, retail investment and, yes, even non-fungible tokens, could transform the way we borrow, invest and transact.
While the proptech world is fragmented and covers a tremendous amount of ground, with no single mover or shaker, there’s no question that its influence has solidified over the last year. Despite our collective Zoom hangover, not only are all physical spaces becoming more integrated with the digital and online worlds, but many digital-first players are likely to play alongside incumbents in a more flexible, connected and mediated world.