Proptech in 2023: Top Principals and Investors Sound Off
They foresee a dip in investment, more mergers and acquisitions — a lot more — and a continued focus on ESG
PropTech Insider asked a wide range of proptech CEOs, venture capitalists and other influencers about what’s in store for the industry in 2023. Their answers ranged from a continued heavy focus on ESG to a serious dip in venture capital investments to an increase in mergers and acquisitions (M&A) activity, among other prognostications.
The questions asked in late October were: What makes you most excited about proptech in 2023? What real estate sector will proptech affect most? Will startup investment and M&A decrease or increase? And what keeps you up at night about proptech in the coming year?
Respondents could answer any or all of the questions. The hot takes of those who responded follow, edited for length and clarity.
Gregor Watson, co-founder and head, 1Sharpe Capital:
We’re most excited about the potential proptech has to positively affect housing access and affordability. Supply remains the most persistent barrier to home affordability and ownership, exacerbated by high mortgage rates and inflation. In the U.S., we are still 2 million to 6 million units short in supply to support demand. We believe policy will play an important role in building up inventory, in terms of impact on zoning reform and subsidies.
We are most excited about technology’s role in enabling faster, more reliable ways to bring density to neighborhoods where zoning has been reformed; bringing speed plus certainty to permitting and approvals; changing the approach to rentership; and reducing the cost to build, in large part by easing labor constraints.
April LaMon, CEO and co-founder, Alosant:
We’re entering a time of increased competition. The market is tightening in many sectors. It’s exciting that developers are going to be looking at proptech to further differentiate their projects.
On the residential side, we are going to see the idea of creating community and community identity in the buying process. Proptech will be an important part of that. Creating branded experiences that live between residential sales and the resident experience will be important as builders and developers aim to cement contracts and reduce the rate of prospective buyers backing out. Proptech will also be vital in accelerating the resurgence of retail post-pandemic by helping create a sense of place.
There will be increased pressure on proptech startups to build sustainable businesses with a clear path to generating a profit. We saw a lot of proptech investments take a tough hit in the last 12 months. I think that’ll put pressure on founders to test their market fit and the willingness of the market to pay for the solutions they are providing. For solutions that have demonstrated a market fit and a strong path to self-sustainment, investments will increase. The appetite to download a growing portfolio of apps that each provide a single solution are losing popularity. There’s going to be more focus on integration and consolidation, which creates a great opportunity for M&As. The appetite in 2023 will be through consolidation through M&As, where proptech companies can achieve greater scale and provide a more cohesive solution to their clients.
Daniel Fetner, general partner, Alpaca VC:
We are in the midst of a unique inflection point within the sector. On one hand, proptech 1.0 has matured into a true institutional asset class and will continue to grow at record levels. On the other hand, new asset classes such as “PropCo” have emerged, representing “proptech 2.0.” We believe there are tremendous synergies between the two and are excited to see the value-creation continue to unfold.
Maurice Grassau, CEO and founder, Architrave:
What excites me most about proptech in 2023 is the continuation of consolidation in the industry. We will see bigger players emerge providing more value to clients. 2023 will inevitably induce a survival of the fittest scenario, where only the solutions with proven ROIs will succeed. These pressures will also likely create a wave of proptech mergers and acquisitions, with the aim of maintaining growth and momentum with additional resources.
I predict that the office, retail and industrial sectors will feel the most significant effects of proptech innovation in the future. After a prosperous 15 to 20 years of making money relatively easily, we are now experiencing something of a downturn. Consequently, the demands of asset management have grown. To succeed, asset managers must increase efficiency to stay ahead of the competition. Cost efficiency through technology and automation will play a key role in dealing with the cost pressures that asset management faces.
For 2023, investment in the proptech sector is likely to decrease. VCs will be inclined to preserve cash to help companies within their portfolios if needed. That said, deals are still being done, albeit less frequently. If growth and revenues are sustainable and a path to cash positivity is clear for these proptech firms, making deals and closing investments is still very possible.
Raffi Holzer, CEO and co-founder, Avvir:
Consolidation is likely going to be the overarching theme of proptech in 2023. At least in construction tech, customers have made it clear that they are looking for platforms rather than point solutions. While startup investment may be harder to come by, I think M&A will return with a vengeance. Public companies in the space are looking to put together unified solutions that speak to every stakeholder at every phase of a job, and that breadth of offering is going to be critical to winning customers going forward.
Travis Connors, co-founder and general partner, Building Ventures:
The fundamental problems of how we optimize the design, building, and operating of space to deliver the best possible experience to building occupants have not been solved. Humans spend 90 percent of our time indoors, and today our buildings are killing our planet. Our built environment must be created (and retrofitted) with dramatically lower carbon emissions, and with a much higher regard to deliver healthy sustainable indoor air quality while curbing overall consumption of energy and raw materials.
As CRE and Industrial deal with oversupply shocks from the pandemic and a fundamentally different interest rate environment, we believe the residential sector will lead the way in the adoption of many of the proptech solutions that can improve construction and real estate operations.
Earliest stages will continue to increase as entrepreneurial energy continues to look to make an impact in this fundamentally important space, but later and growth stages will continue to be challenged as valuations shake out from earlier overblown valuations (especially in the transactional end of proptech). M&A will likely increase as Metaprop’s most recent survey showed that 54 percent of proptech companies have less than 12 months of runway, and follow-on financing will be scarce for slow growers and underperforming companies.
As generalist VCs pull back overall, I am concerned that it may be some time before they return to the sector. Being able to access these more traditional pools of capital is critical to being able to build large-scale impactful companies.
Oli Farago, CEO and co-founder of Coyote Software:
It’s been more than two and a half years since the world first plunged into lockdown, and the macroeconomic climate hasn’t been any simpler since. Real estate investors have focused more than ever on adopting solutions that help them understand tenant risk in their portfolios, ensuring that their income streams are protected.
Over the last six months, ESG risk has quickly become a priority, as investors are now realizing the influence that their ESG strategy has on valuation and returns. Working with our clients to co-create solutions that mitigate ESG risk and ultimately help reduce the built world’s impact on the environment is very exciting.
In 2023, investment volumes will inevitably drop. Focus will shift from companies that can be scaled at any cost to companies with solid paths to profitability. Money will keep flowing, but much more selectively and with fewer mega-fundraising rounds.
The drop in proptech valuations means that even companies that have doubled their revenue since their last round may have halved in value. This will lead to some challenging conversations for companies that raised at lofty valuations and will inevitably precipitate a wave of mergers and acquisitions. What worries me is that with more than 60 of the biggest CRE investors in the world using our product, we are never short of requests to build new features. The challenge is developing a focused plan of what problems to tackle and then, crucially, being honest about what you can deliver.
2023 is shaping up to be a transformative year in the history of the proptech sector. I expect three dominant themes to emerge in the year ahead that will undoubtedly have a profound impact on this young ecosystem.
First, with 10,000 startups still competing for a relatively still small market share and with venture funding largely sitting on the sidelines, we will see a wave of consolations and roll-ups, which will be welcome news from the real estate sector as fewer but more integrated solutions are what the customers of proptech have been clamoring for.
Second, we will finally see big tech converge on the ecosystem as they see the massive market potential to address the real estate sector. Companies such as Apple, Microsoft and Salesforce have already begun to focus on proptech and that will have a very disruptive impact on the sector.
Third, with the built environment being the single biggest source of greenhouse gas emissions, and government, financial and tenant sectors demanding the industry decarbonize, this will be the year that climatetech investment rivals that of proptech. Estimates are that it will require $20 trillion to decarbonize the real estate sector, which will require venture investing a thousand times more than it currently spends on proptech.
Ashkan Zandieh, managing director, CRETI:
If interest rates are going to continue moving up, then the present value of future cash flows will be moving down, impacting both valuations and funding amounts. Deal volume and dollar volume are performing at three-year lows, which has the market in conversation mode. But I would not bet against ingenuity and innovation in the real estate industry, especially not with today’s entrepreneurs.
Frank Spadafora, real estate industry principal, DealCloud by Intapp:
I’m excited to see the continued evolution of data and intelligence being created from digitally connected buildings, not only to drive operational efficiencies and smarter resource utilization for individual assets, but also as the foundation to measure, report and meet a growing range of market and investor requirements in areas such as ESG and tenant engagement.
These drivers are rapidly expanding due to a combination of growing jurisdictional requirements, such as NYC’s Local Law 97, increasing investor requirements for responsible capital allocation, and quantified ROI in the form of capex and opex reduction, as well as rent premiums for healthy, connected, sustainable buildings.
We’ll see more of this data quantified through comp and benchmark analysis to value and underwrite CRE assets, driving continued cap rate compression for smart or connected buildings, and accelerated depreciation and disposition of disconnected or “dumb” assets. Challenges and potential dislocation will make this journey bumpy. The average U.S. commercial building age in 2021 was 53, and retrofitting older buildings is challenging and cost intensive.
Despite these headwinds, the convergence of multiple market forces will drive this march to connected, healthier, sustainable infrastructure in our built environment. In 2018, a trusted colleague — both CRE broker and tech founder — stated that in five years every property would be valued based on whether the building has a digital operating system. That prediction may be on track, and a growing focus from the capital markets will further accelerate this movement toward more efficient, sustainable, maximally productive CRE assets.
Mike Sroka, CEO and co-founder of Dealpath:
The real estate industry is going through a belated and accelerated digital transformation that has been accelerated by the pandemic, the reopening from it, and a fast-changing economic environment. We’ve gone from early adopters to the early majority of the industry now leveraging proptech.
In 2023, we see mass-market adoption along with healthy consolidation. There’s a lot of work to do, which is just how we like it.
Dealpath’s business supports institutional investors across all property types. We are observing high interest and activity in assets with shorter lease durations (i.e., industrial, multifamily, hospitality) and some investors seeing value in niches of product types that are perceived as more challenged (i.e., retail and office).
We see a significant amount of dry powder and a desire to put this capital to work. However, expectations around business progress relative to valuation and terms for investment capital have changed, and the market is re-establishing pricing. We anticipate the cost of capital going up and a continued high amount of investment in proptech companies in 2023. We also see a likelihood of healthy consolidation following the wave of venture investment and development over past years as clients can only manage so many different vendors and tools and also for companies to drive efficiency. Private equity will be particularly active in the period ahead, sponsoring roll-ups and affecting non-organic growth.
Worrisome: Signal vs. noise. We have our ears up for changing priorities and needs through market volatility.
Robert Cooper, president and CEO, Embue:
In multifamily, building owners are increasing the use of proptech as they seek to understand and improve building performance in an effort to reduce carbon emissions and improve energy efficiency. We expect adoption to accelerate in 2023 as local and state mandates like New York City’s Local Law 97 and Boston’s BERDO 2.0 come into play, requiring building owners to significantly reduce carbon emissions because two-thirds of the buildings we’ll be using in 2040 already exist today.
Affordable housing operators are driving much of the innovation and technology adoption in multifamily, spurred by federal grant and green financing programs that are being used to fund the modernization of older, inefficient buildings. The Inflation Reduction Act increases those incentives as well. These operators are using proptech as part of deep energy retrofits and electrification projects and are incorporating technology into older buildings with little to no technology to gain building intelligence, along with automation, monitoring, and control of equipment to reduce costs and emissions.
Jeremy Bernard, CEO, Essensys:
Given the looming recession, we should expect to see consolidation of proptech companies, especially through acquisition of single-point solutions or the failure of those without a robust business strategy. We also see this as an opportunity for some companies.
There will be a shift in where landlords are making investments as they look to develop more compelling propositions as we experience a flight to quality. Technology companies, which are innovative businesses by nature, have been known to excel in a downturn.
With commercial real estate previously investing in surface-level amenities such as gyms, cafes or yoga decks, there will be a focus on going back to basics — looking at what is needed to make a tangible difference, and to get their house in order today.
The answer is to find tech solutions that save time, increase efficiency and, importantly, keep costs down. As a knock-on effect, those real estate companies that don’t come to this realization, those that don’t switch to investing in a digital-first strategy and partner with proptech companies, will find themselves not only facing a difficult financial climate, but also finding it difficult to navigate the changing work dynamics.
Prabhu Ramachandran, CEO and co-founder, Facilio:
In 2023, proptech, specifically property operations technology, will be a strategic anchor for enterprises to thrive in tough economies.
We can already see consolidation happening within the property ops space, and this will continue next year as well. This is evidence of a broader demand for technology products that unifies the power of building automation software and enterprise operations and maintenance (O&M) applications in a single platform, trying to gain more value out of less.
CRE owners are also seeing increasing value in making the transition from legacy computerized maintenance management system (CMMS) to modern connected CMMS, as they value the need to see systems, processes and people through a single unified lens.
Proptech will have a significant impact on CRE and office properties as well as retail, higher ed, and health care. Growing energy costs and global mandates on ESG/sustainability stressed the increasing need for large retail chains to keep costs in check and create a strong consumer appeal. Within office space, we will see more owners moving away from siloed, site-level O&M to a cloud-based portfolio-level strategy to differentiate and deliver value to occupiers, increase efficiency gains, and scale automation of tasks.
Sarah Liu, partner on the real estate technology investment team, Fifth Wall:
As the markets cool down, we’re seeing an increasing gap between companies that provide real ROI versus those that are nice to have. While the total amount of dollars being invested into proptech may decrease over the next 12 to 18 months of the market cycle, I expect the quality of companies funded to improve.
Proptech is continuing to impact every asset class. While commercial real estate tech adoption continues to lag residential adoption, I expect to see that gap shrink over time. I’m also excited about start-ups that are helping democratize access to technology for the long tail of real estate and construction stakeholders who make up the majority of the industry and don’t have the same needs or resources as market leaders.
For companies that aren’t able to sustainably grow their business and those facing significant macro headwinds (e.g., volume-based single-family transaction businesses reliant on low interest rates) I expect M&A to be a path that’s increasingly pursued. However, exits may prove challenging for many, as financial acquirers are often looking for profitable or near-profitable businesses, and strategic acquirers have seen their own valuations plummet, reducing their willingness and ability to pay.
Rather than what keeps me up at night, what keeps me updated is speaking to dozens of founders and fellow investors every week to check the pulse of the market. As we return to in-person events, conferences are another prime avenue to gauge sentiment and hear new opportunities.
Venture capitalists — “generalists” and dedicated proptech VCs — grew choosier about investing in proptech startups in 2022 amid concerns about the macro market, inflation and interest rates. Startups spent the year more carefully weighing expansion decisions to go public, while swallowing lower valuations as VCs raised investment bars.
However, proptech investment in 2023 will still be robust. Investment has continued to pour into proptech, even under challenging economic conditions. There’s an unending need to make real estate more efficient amid ever-higher fossil fuel costs, laws mandating more environmentally friendly properties and increasingly affordable, innovative property technologies. To characterize proptech as “a maturing sector” or a “trend” in 2023 would be like calling auto sales a fad reaching its peak in the 1910s. Proptech is just entering its Model T phase.
In 2023, modular construction and mass timber, which make construction faster, less labor intensive, cheaper and more environmentally friendly, will continue to attract capital. Investment also will flow toward distributed energy resources, making electricity cheaper and more reliable by facilitating technology like microgrids and energy storage, and facilitating the ongoing replacement of fossil fuel with electricity and clean energy. We will see more efficient materials, windows, facets, equipment and devices that will help to reduce energy demand. Data and predictive analytics also will attract funding, tapping vast bodies of data about buildings’ user behaviors and enabling the aforementioned proptech trends. Healthy air tech will remain attractive for making air cleaner and better oxygenated, while reducing HVAC costs.
Jindou Lee, co-founder and CEO, HappyCo:
I’m most excited about the growing pace of technology adoption across all facets of real estate. The great thing that came out of the pandemic is that it challenged the status quo for the industry, and out of necessity technology adoption became table stakes.
I’m bullish on multifamily. As interest rates increase, homeownership becomes more unaffordable, rent increases start to slow down, and there’s an undersupply of apartments across the nation, there will be a strong focus on operational efficiency gains to boost NOI. “Centralization” is going to be a key theme in the industry. Technology plays a significant role in reducing inefficiency. However, companies will need to bring on board tech-savvy leaders and individuals to be able to execute on the deployment of these new technologies and processes across their assets.
The investments into proptech will increase at the bottom end and we will see continued consolidation in the top end of the market. There is just so much opportunity to improve the industry. And ensuring that we continue to partner with customers to build tools that have a genuine impact on their business is important.
I am worried about the renter. In the ongoing pursuit to increase revenue, the income-to-rent ratio is not sustainable for the average American. Shelter is a necessity, and I worry about rent affordability.
Marcus Moufarrige, founder and CEO, Ility:
People are realizing that proptech isn’t about buying easy window-dressing solutions off the shelf. It needs to be a key part of strategic planning from the start, and listening to end users is crucial before making any purchasing decisions. Being able to respond to them with a unique offering that’s tailored to their needs will drive loyalty and positively affect your bottom line.
Out of all the different sectors that make up the real estate asset class, the one that requires the most technology-led solution is the commercial sector. It’s been inexorably changed by the pandemic, and landlords and enterprises are still ill-equipped to deal with that change to protect income and asset value. Building the ability to respond to this upheaval is essential to longevity.
Moving forward, I believe there will be a buoyant M&A market despite some of the economic instability. Savvy providers will seek to make strategic acquisitions to win their category. This market consolidation has been coming and is the natural evolution for the proptech sector.
If there’s anything that keeps me up at night about proptech, it’s the chasm that still exists between property owners and decision-makers and technology. A lack of understanding of what seem to be great opportunities when fully implemented could result in bigger problems and continual risks. Another issue is, as with any new technology, gimmickry. Sometimes technology is built for technology’s sake and not to create outcomes.
Haniel J. Lynn, CEO, Kastle:
Post-COVID, the real estate industry is undergoing a digital transformation — this is the first time that we have seen digitization take place at scale. Enterprise applications and solutions have been abundant across many sectors, but today we are seeing platforms that can consolidate data from many disparate technologies into a unified format.
Proptech will continue to affect many sectors of real estate. In commercial offices, proptech will be needed to operate and manage space more efficiently as demand for long-term space commitments slows, and the need for short-term, flexible space grows. ESG will also continue to be a priority driving owners and operators to increase the efficiencies of their buildings, which only proptech can accomplish effectively.
In multifamily, residents will want smart home technology, in addition to more sustainable living and more mixed work-at-home technology. As the way they use their offices changes, the way workers use their homes must also adapt.
Pain points in building management and experience should provide continued opportunities for funding of good ideas. However, downturns in the economy can slow technology adoption, which creates challenges, particularly for earlier-stage companies. Many of the recent wave of start-up companies were launched more as point “features” rather than full-blown integrated solutions, which suggests the likelihood of industry consolidation looms large.
I stay up at night thinking about how this entire proptech world shakes out. It’s a complex ecosystem of companies now in our market that are simultaneously partners and competitors against a backdrop that is constantly changing.
Ben Lerner, managing director, Lerner Associates:
On the M&A side, from what we’re seeing, ultimately the industry is still very much wanting to do deals, and trade buyers still very much are looking for product or geographic tuck-ins, or anything that can help them as a business. They are still pretty much at the valuations as they were the last six months, within the last year or so. They haven’t really changed on the smaller deals. What we are seeing is some of the deals are taking longer when there’s just a bit more caution in the market, or if people are genuinely busy with operational stuff, but, on the whole, deals are taking slightly longer.
On very large deals — $60 million to $200 million-plus; those that are potentially done by private equity firms, or those who are more reliant on what’s going on in the wider macro economy and the global market — they could be scaling back a little bit.
There’s still money coming into the industry, that’s for sure. VCs still very much want to spend money, but are much more cautious given where the general market is, re-evaluating their own valuations. Valuation is always an art rather than a science, but the valuations might be coming down.
From an M&A perspective, we’re definitely optimistic. We’ve got more deals now than we’ve ever had before. There’s a lot going on.
Zak Schwarzman, general partner, MetaProp:
As far as what’s exciting, one thing that continues to be on everyone’s mind is ESG and ESG-related solutions. There is investor and regulatory pressure focused all across the real estate world and broader corporate America on ESG solutions. And so there’s even greater pressure being applied to real estate as an industry compared to some others. But it’s a real challenge and there’s no panacea. However, it’s a very good space for early-stage investors to play, because a lot of the ecosystems are really cool.
We’re also very interested in the increased adoption of new construction tech. It’s been a very large subsegment of the proptech market over the last couple of years. The largest general contractors are very much interested in tech and adopting tech to a degree that they have not previously. The drivers of that are the labor shortage, material volatility, and a greater need for efficiency in the productivity of skilled labor; so helping augment that is construction robotics, which is a really interesting category right now.
As for investment, the data is kind of lagging right now, but venture, like a lot of other sectors, is going to have a dip of a year in all likelihood, but M&A will tick up. It’s been on the rise for the last couple of years, but with the market downturn, there’ll be a period of consolidation. The industry is really overdue for some consolidation anyway and this will, in all likelihood, accelerate some of that.
It’s the year that proptech will actually be used more than it’s ever been used before. People are trying to right-size buildings and estates, and the energy crisis, ESG, reporting and regulations are coming into play. All of this means people will actually have to do the things that they’ve been talking about for the last five years, but have done precious little about so far.
Proptech will be big in offices because landlords are trying to make themselves more attractive to tenants. Facilities management companies need to provide more than just people at the front desk and people cleaning the toilets. Everyone wants offices that are actually smart and benefit people and the planet.
When it comes to industrial spaces, it’ll be all about improving the efficiency of equipment with predictive maintenance and predictive failures. Residential and multifamily is a little bit trickier. The cost of sensors and technology can often be out of reach for these sectors, but proptech will continue to grow and we’ll start to see more consumer products.
I think investments will continue to increase next year, and the market will consolidate over the next two to three years. A lot of companies have over-promised and under-delivered. The market needs to make sure it starts to deliver on what it says it can do, because, as the saying goes, once bitten twice shy.
Paige Pitcher, head of strategic partnerships, Moderne Ventures:
The pandemic accelerated adoption of real estate tech, and now wage inflation and shortages are further emphasizing the need to digitize to lower operating costs and unlock new revenue opportunities.
We believe that technology is especially poignant as real estate underwrites its narrowest returns. Driving human and operational efficiency, unlocking ancillary revenue, and mitigating climate risk are all tasks that we seek to tackle as early stage technology investors.
Startup investments will likely decrease, as we saw in the third quarter. Venture investors are no longer frenzied and are taking longer to complete investments. But dry powder is still at an all-time high, and good deals will get done despite lower valuations that mirror the public market. Consolidation through M&A will likely increase via private-to-private transactions, and industry leaders will look to capitalize on the current environment.
Patrick Ghilani, CEO, MRI Software:
Most of my expectations for 2023 are positive. I see a continued focus on AI and smart data, which are making proptech even more powerful, useful and cost-effective. Even in a down economy proptech tends to fare well — perhaps even better than in a great economy — because proptech helps to reduce costs while increasing efficiencies that make the lives of stretched-thin employees easier.
Although I believe that the volume of M&A will decrease and that price points will be scrutinized more closely by potential buyers, there will still be plenty of good opportunities.
Two things keep me up at night: One is the ongoing problem that innovation in real estate exceeds adoption. Proptech tools are incredibly advanced these days, but interest in them doesn’t always translate into usage. We as an industry have to do a better job of educating and training potential users while identifying champions who can pioneer adoption within their organizations.
My second source of insomnia is the outlook for office towers. The workplace of the future is still uncertain. Companies are still experimenting with the hybrid model, and it’s unclear how things will shake out. proptech can support whatever model becomes the norm, but we have to establish what that norm is before we can match it with the relevant solutions.
Taylor Odegard, CEO and founder, NavigatorCRE:
The commercial real estate market is going through one of its biggest evolutions in 2022 and 2023. The return to office has been suppressed by a new workforce that demands flexibility and proximity. The industrial and logistics sector has reached record-high rents and occupancy, and the consumer has changed the way they travel to and use commercial real estate. Overall, the CRE industry is now in a place where proptech isn’t a nice-to-have, it’s a must-have to survive and understand the daily data and operations of any asset.
All real estate sectors have several needs that proptech can solve, including occupancy analytics, portfolio performance, and net migration of employment and staff in the remote world, as well as enhanced understanding of supply chain logistics and last-mile delivery.
There will be a decrease in new investments, while more M&A will likely occur as larger proptechs and enterprises eat up point solutions or find strategic mergers.
I’m concerned about the continual cycle of build vs. buy, and internal black box builds of software that rarely make it to end users, cost millions to build and usually are left mothballed.
Jeanne Casey, global head of proptech and innovation, Nuveen:
We are at an exciting inflection point for tech adoption, as proptech continues to mature in 2023. Although the choppy macro environment will create challenges for startups, real estate incumbents are much more open to working with new proptech companies than they were a few years ago. The startups with the strongest value propositions, focus and discipline will emerge stronger than before.
There is no doubt that proptech will impact every sector in some way — what’s interesting to me is how each sector values and prioritizes different areas of proptech. I am probably more bullish on proptech for the office sector than most investors. I see technology playing a significant role in meeting the rising expectations of occupiers and the flight to quality we are seeing in that sector.
The pace of startup investments will slow when compared to the all-time highs of last year and early 2022. We have already seen that play out over the last six months, and I expect that trend to continue well into 2023. However, deals will still get done and we will see some overdue consolidation around the best proptech companies and platforms. I expect M&A will fuel a lot of that consolidation — not only M&A among startups, but I expect we’ll also see activity from real estate incumbents and private equity now that valuations have come down.
I don’t think we’re done seeing the impacts on proptech of the overall slowdown in VC investment. I expect we’ll see further announcements around headcount reductions and startups that won’t make it through this period.
Sonu Panda, CEO, Prescriptive Data:
I’m excited about portfolio-wide adoption. Proptech has now grown out of the startup phase — being adopted and deployed on a small scale for trial periods and testing. Now that owners and operators finally see which technologies are living up to expectations, they’re rolling out solutions beyond a few test buildings to entire portfolios. We will see a rapid expansion of proptech in the real estate sector as several solutions work to cross the chasm from niche products to mainstream offerings.
The new normal is one in which there’s more flux in the usage of real estate. People have embraced hybrid work, but are also seeking to strike a balance with being in the office. Now buildings are rising to the occasion. CRE offices in particular are embattled on multiple fronts because of the call for ESG and sustainability progress. Tenants’ decisions are heavily based on ESG factors, and buildings need to meet tenant demands about Scope 3 emissions. Simply said, tenants will pay more for properties that can demonstrate ESG credibility.
I worry that the pursuit of individual companies’ progress and profit is generally being prioritized over collaboration to solve our shared climate crisis. The climate affects us all. As I look through the lens of surmounting an existential crisis sooner rather than later, we ought to consider partnering first in the hopes of finding joint amalgamated climate solutions that help us get to job-done sooner rather than later and in the most efficient, least costly, most enduring fashion.
Christopher Yip, partner, RET Ventures:
I think this is a year where the macro trumps the micro. We have interest rates going up substantially.
We are very bullish still on multifamily, single-family rental and industrial. We’re seeing continued commitment to technology and deployment innovation, but what has us excited for next year is that the solutions that will be successful are ones that drive real impact and ROI on portfolios.
Last, but definitely not least, we’re spending a lot of time and focus on operational efficiency for multifamily and single-family, thinking about on-site versus outsourced staff for maintenance operations. That ties into single-family rental, where it’s getting to institutional scale, and thinking how do we run these portfolios as efficiently as possible across these big footprints. Technology is the only answer.
This is going to be a real test for startups and their venture backers; all the investments folks have made over the last two years. There’s a much higher bar for new financing in this environment and for the commercial milestones that startups need to reach to get more funding. The exit environment is really tough, with the public exits effectively closed. The industry will probably see new startup investments slow down, and there’ll be consolidation where companies need to build, scale, consolidate and join forces.
Rasheq Zarif, co-founder and chief operating officer, ReWyre:
The paradigm shift we are witnessing of proptech proliferation will be the exciting part of digitally transforming the real estate industry in 2023. Operational efficiency solutions are improving CRE office spaces as workplace utilization is being rediscovered. Given the tight housing market, tenant experience solutions are becoming clear differentiators with multifamily. Across all real estate sectors, sustainable technology implementation is on the rise due to increased tenant expectations of having climate-friendly buildings while meeting new regulatory requirements.
Of the investors we have spoken to, there will be more focus on integration and ecosystem-oriented solutions to reduce the fragmented proptech market. ESG and climate tech investments will continue to rise with some protection from recent valuation reductions. Both will enable more M&A deals in 2023.
What keeps me up is that there hasn’t been a strong stakeholder coming forth in driving standardization — i.e. data, quality, reliability, etc. — among all the proptech players. Until that happens, we are going to see a ton of friction among (and with) the proptech providers until there is unity on the minimum standards to serve the real estate industry best.
Bart Waldeck, chief strategy and customer officer, Tango Analytics:
I’m excited about continuing to advance the technologies that help businesses manage the diverse requirements of hybrid work and omnichannel retail.
Everyone is rethinking what the built environment means in their industry. For commercial real estate and the office workplace, proptech will help them navigate the requirements of hybrid work. The pandemic fundamentally altered how and where people work, and requires a new approach that leverages technology solutions to engage employees while optimizing the efficient use of office space.
For retail, competing in the next normal requires new strategies and business models. To thrive, retail and restaurant concepts must reorient around a single view of the burgeoning cross-channel customer, recalibrate sales forecasting and market optimization models for omnichannel, and reposition store formats and location strategies to better serve customers.
The broader economic environment has and will continue to dampen start-up investments as well as M&A in the proptech sector. What concerns me is that as a broader recessionary environment looms, and hybrid work remains a fixture of U.S. offices, will we see reduced demand for office space?
Rowland Hobbs, co-founder and CEO, Stake:
Economic volatility will make delinquency and retention top of mind for multifamily and — for the first time — institutional single-family as well. As property owners become increasingly overwhelmed with the many proptech offerings, they will look for comprehensive solutions that empower renter wealth, while growing their bottom lines.
Christophe Garnier, co-founder and CEO, Upflex:
This is a very exciting time for commercial real estate, especially on the occupier side, where finally companies are starting to figure out what return-to-work looks like for them. We’ve been working with literally hundreds of occupiers across the country and Europe, trying to help them figure out what their return-to-work and what their hybrid work strategy is about. We’re entering a new phase: the testing phase comes to an end, and we’re getting into what the production may look like for hybrid work.
We’re seeing already that some companies are forced to consolidate with others to create comprehensive solutions that are creating economies of scale to survive.
In terms of investments, we have already seen investments slow down. We don’t see the venture capital and investment community as active as it was pre-crisis.
It’s not proptech, exclusively, but companies have to be efficient, reduce burn, maintain it, and not grow it. Everybody’s worried about a recession. That’s why we are gearing up at Upflex; we are careful with cash, focused on efficiencies, and we are slowing down our hiring. Given the dynamics of a recession, everyone wants to cut costs. We can help do that, so we’re going to try to surf that wave. But, at the same time, we are seeing that there is a huge adoption of flex workspace in Europe, and that Europe is going back to work much, much faster than the U.S.
Ryan Masiello, co-founder chief strategy officer, VTS:
I am excited by the consolidation of companies in the playing field. Years of record investment in the space has resulted in an incredibly crowded proptech field that many CRE decision-makers find is somewhat oversaturated. I believe we’ll see some significant consolidation of companies in the field during 2023, which will ultimately result in better products for customers and make it easier for them to vet the right solutions for their businesses.
We’re looking at offices because capital reinvestment and the race to modernize commercial buildings will be at an all-time high given demands from users in the market and the need to deliver the best spaces for tenants. We’re still in the midst of the return-to-office movement, and tenants are demanding much more of their spaces today than they were pre-pandemic. We’re seeing that heavily reflected in the spend being injected into the office sector.
Startup investment will decrease as investors are in risk-off mode. This will result in the number of M&As increasing as smaller startups will struggle to raise capital in the current economic climate.
We’re still hearing lots of noise in the industry, making it often hard for companies to credibly evaluate the right solutions for their business. Continued M&A in the space presents the opportunity for the proptech industry to have better, more unified solutions in the market that can more aptly solve problems customers have in the industry.
Arie Barendrecht, CEO and founder, WiredScore:
The proptech sector as a whole has proven resilient this past year amidst difficult market conditions. This resilience will translate into owners and developers’ efforts to physically future-proof their buildings and adapt to the challenges that come. This period has not only proved that the way we work, connect and utilize space has drastically shifted, but further confirms that we face the inevitability of rapid technological and climate change.
The importance of deploying technology that will empower resilient buildings to face these challenges has never been more apparent than now. ESG frameworks specifically will broaden to include resilience (“ESG+R”) to match the accelerating importance being placed on physical resilience in light of climate and security risks. Essentially, we will stop using the term “ESG” entirely without the R.
2023 promises to be an exciting year for proptech, as the real estate industry continues to adopt more technological solutions needed to stay resilient for the challenges to come.
Philip Russo can be reached at firstname.lastname@example.org.