Proptech’s Reset: Making Money Is the Hot New Thing

The commercial real estate downturn is less a major obstacle than an opportunity for proptech companies to add value when transactions can’t or don’t, according to leading proptech investors and principals. That can come through helping make acquisitions easier to complete, reducing costs, and capitalizing on lengthy sales cycles. 

The downturn also means that proptech firms need to prove their financial value to clients and potential clients, rather than pursue growth for growth’s sake — which is what defined much of the sector until shortly after the pandemic struck. 

Luckily, proptech for now is insulated a bit from the commercial real estate industry’s struggles because of a facet of that industry itself. 

“As a function of having such high gross margins, tech and IT is not typically a place you look to cut costs,” said Brendan Wallace, co-founder and managing partner at venture capital firm Fifth Wall. “I would say, behaviorally, what that leads to is less cyclicality around the demand cycles for tech in what is the otherwise very cyclical industry of real estate, simply because it’s a very low percentage of their total revenue.”

It’s true that many commercial real estate firms are closed to new tech vendors, but they are looking for ways to do more with the ones they already work with, said Zach Aarons, co-founder and general partner at MetaProp, another VC firm and one that specializes in early-stage companies.

“Because you’re going to see net retention increase with the existing software vendors, you’re actually going to see software spend as a percent of overall general and administrative budget at these commercial real estate firms go up in this real estate recession,” said Aarons. Though, he added, that won’t be obvious for another few years.

Signs of restructuring at property companies shouldn’t scare proptech firms away from reaching out for a sale, either, especially if the prospect company isn’t engaged in solely transactional business, according to Aarons. 

“If you’re selling B2B software and you see a company that’s a known brand name, that you don’t think is going to go bankrupt anytime soon but is clearly undergoing some significant restructuring, I think that absolutely should be a green flag for you to approach them to try to sell your software,” he said.

Instead of just spending less on tech tools, real estate companies are turning to tech to help reduce expenses. 

“More of the [property company] calls I get are: ‘How do I save on water? How do I save on power?’ ” said Matt Knight, founder of investor clearinghouse PropTech Angel Group. The primary focus at the seed-stage companies he works with is around product-market fit, rather than navigating commercial real estate interest rates, Knight said. (Companies Knight has invested in include Moved and Amenify.)  

“There’s no transactions, so that focus on growth by assets under management and getting your fees up is dead, you can’t do that,” Knight said. “So the next thing you do is look at the bottom line and say, ‘The portfolio is what it is, how do I maximize what I got?’ ”

Vik Venkatraman, general manager of Blueprint Events, which puts on the Blueprint conferences, echoed the role of necessity as the mother of invention. “We’re believers, and I think we’ve seen that when a space is under challenge from traditional forces, new models, new methods and new technologies have the opportunity for adoption that would have been harder under historical or previous mainstream conditions,” he said.

If some of the biggest challenges property companies face today lie in finding and financing acquisitions, that’s where innovation may concentrate. 

“We’re seeing ways in which you can use automation to affect how people find, source and secure properties,” Venkatraman said. “We’re seeing new ways in which capital from different parts of the stack can be used instead of traditional mortgage financing. We’re seeing different ways in which people are thinking about ownership, acquisition or usage of properties.”

Some fields under the proptech umbrella do show particular resilience. Aarons said that, because of the backlog of construction and infrastructure projects, “people aren’t anticipating a slowdown until really 2026. … In the construction sector, people are even willing to sign contracts with new vendors.”

According to Fifth Wall’s Wallace, another standout is climate tech. First, he said, “40 percent of the Fortune 500 has a net-zero commitment. Proptech companies that are focused on decarbonizing assets are seen as a very attractive solution for landlords to attract these tenants that have these net-zero commitments.” 

In addition to supporting leasing, Wallace said climate tech helps owners avoid penalties and carbon taxes, such as those from New York’s Local Law 97 that starts to take full effect in 2024. “The increased demand for climate tech from the real estate industry is both driven by incremental revenue as well as cost savings,” he said. 

The commercial real estate slowdown may not be a massive threat to proptech success, but what about the slowdown in venture funding? It was down 77 percent annually in the third quarter. That’s already had an apparent impact on the growth of companies. 

“There hasn’t been as much hiring from the growth stage companies — Series B and C,” said Xan Winterton, North American managing director for proptech recruiting firm LMRE. “Actually it’s been much more of the early-stage companies, seed to Series A, who’ve been doing more hiring.”

A lean period for VC investment could help the current generation of early-stage startups build discipline into their operations without the distraction of big funding rounds and lofty growth goals. 

“We’ve heard it a thousand times, but the conversations people are having as a result of capital markets and macroeconomic factors is like, ‘OK, you need to be watching your burn rate. You need to be going along that route to profitability,’ ” Winterton said.