Midyear 2024 Proptech Outlook: AI, ROI and the Triumph of the Practical

Midyear 2024 finds a middling proptech market with many companies merely treading water and some experiencing growing demand.

Like the rest of the world, proptech is still feeling the economic and social backwash of COVID-19, while at the same time dealing with the effect of high interest rates. The result is a mixed bag for entrepreneurs now — and probably through the end of 2024, experts said.

“Winners and losers have become more distinct,” said Nick Romito, CEO of Manhattan-based commercial real estate management software company VTS in an email. “ ‘Winning’ companies are focusing their energy on providing real-time data that fuels smarter large-cap decision-making at a time when capital is tight, and improving the customer’s experience in the spaces they inhabit. We expect a strong second half due to increased momentum around our latest release, VTS 4, and a surge in demand for VTS Activate across office and multifamily.”

Over the first half of 2024, proptech adoption “has likely remained flat,” Romito said. “Owners and operators are actively evaluating their existing technologies to see if those tools are adding value and finding opportunities to consolidate vendors. By year’s end, we expect a mix of net-new proptech adoption and replacement.”

As in seemingly everything, artificial intelligence continues to be an inescapable topic in proptech.

“AI dominates the discourse, but the conversation is evolving,” Ryan Masiello, chief strategy officer for VTS, said in an email. “Earlier on, it was simply: ‘Is AI friend or foe, and how do we even begin to unlock value from things like generative AI?’ With more market education, the conversation has shifted to the practical. Owners and operators are working through developing data strategies to unlock AI’s value. Companies like VTS can assist in this process, and we’re excited about engaging with forward-thinking groups in commercial real estate.”

Proptech startups focused on the once red hot multifamily market are now experiencing something of a pause in their business, said James Moore, COO at RCKRBX, a Washington, D.C.-based software data mining company.

“Recoveries coming out of things like COVID take a long time,” said Moore. “Obviously, office takes longer than multifamily, industrial and all the other hot spots. But, yeah, we’re feeling the slowdown.

“Our company is singularly focused at this point on multifamily. The biggest thing we hear, whether it’s here in the mid-Atlantic, down in the Sun Belt or out on the West Coast, is that it’s really difficult to get deals to pencil out. As a result, that reduces the amount of transaction activity, whether it’s new development or buying something for a reposition. It’s slow out there, and that has a cascading effect on real estate writ large, which trickles down into the proptech space.”

That slowdown has led RCKRBX to pause a fundraising round it had begun and to change its funding strategy, said Moore. “If the industry has a cold, proptech gets the flu, so we’re experiencing that the same sort of way. Whether it’s angel investors or private investors, folks are a little nervous about the stock market. We have been trying to preserve cash and kind of wait out the storm a little bit. I think there’s a lot of companies where that seems to be widespread. We’re not the only ones who are having to hold cash and gut it out.”

Venture capital investment into proptech fell 14.3 percent to $4.47 billion at the end of the first half of 2024, a drop from $5.1 billion compared to the same six months in 2023 and a staggering fall from $13.13 billion in the first half of 2022, according to the Center for Real Estate Technology & Innovation (CRETI).

On the entrepreneurial side, 91 percent of the 1,088 proptech startups CRETI surveyed plan to raise capital, with 45 percent targeting the next 10 to 12 months. Early-stage startups dominated the funding chase, with 63.7 percent of such companies surveyed this spring seeking investment. Growth and late-stage firms seeking funding rounds accounted for 28 percent and 8.3 percent of the surveyed startups, respectively.

Although venture capital investment is down, it’s not out, said Aaron Ru, principal at RET Ventures, in an email.

“RET is largely focused on ‘rent-tech’ — the segment of the proptech market that comprises technologies and tech-enabled solutions that service landlords,” said Ru. “We continue to actively invest in startups that deliver clear ROI [return on investment] upon deployment. For early-stage startups, we continue to see strong interest for companies with good fundamentals — 100 percent year-over-year revenue growth, a path to profitability, and a strong product market fit.

“We have seen a pullback of generalist early-stage venture capital firms that are likely more focused on AI at the moment, but growth and private equity investors have stepped into this gap and continue to have strong appetite for real estate technology.”

A key factor in real estate owner-operators’ thinking at the moment is improving operational efficiency or decreasing operating costs, Ru said. Many are now moving to a centralized model and are looking for technologies they can deploy to help smooth that transition, he added.

Additionally, with labor costs continuing to rise, maintenance is an area of focus, as is AI.

“Within our portfolio companies, almost every single startup is leveraging AI in some fashion, from co-pilots that help improve operation team efficiency to client-facing chatbots to leveraging machine learning for 3D map cleanup,” Ru said. “AI has moved the needle significantly in helping startups improve their product offerings and operating efficiency.”

Even as midyear 2024 proptech features new and ongoing challenges, there is still considerable opportunity, according to some in the industry.

“Despite the headwinds, we think the sector remains ripe for a continual digital transformation overall,” said Frank Spadafora, real estate principal at DealCloud, a Jersey City, N.J.-based deal management and business development investment software firm.

“If we look at some of the areas that have been trailing in their disruption — everything from construction tech to obviously a lot of focus on residential, given the affordable housing challenges and the opportunity to create more holistic tenant engagements in that space — we’re still seeing a ton of activity there,” Spadafora said.

In a recurring theme among proptech experts, AI has become a huge issue.

“Obviously in the Gen AI space, I’ve seen estimates of 70 percent funding having been focused on that space across proptech, and that trend has continued,” said Spadafora. “While there is overall compressed allocation and a bit of a pullback in the VC and in private equity space in proptech, those high-value areas are remaining active.”

In a series of quick-hit statements for this article, proptech entrepreneurs described a range of what their companies are experiencing as we enter the second half of 2024:

“One of the major shifts we’re seeing with many owners, investors and developers is a hyperfocus on investing in proptech that generates an immediate ROI,” Russell Smith, managing director for North America at MRI Software, said in an email. “For example, they’re using the data from software that tracks energy use and footfall to make decisions about site selection, scheduling and operations of building systems. Energy tracking is especially popular in markets with emission regulations, such as NYC’s Local Law 97, and where 40 U.S. city or state governments have committed to meeting building performance standards for energy efficiency and emissions.

“Trends we’ve observed year-to-date will likely persist in the second half of 2024, despite uncertainty around interest rates and the upcoming election. These trends include increased proptech adoption among health care companies, sports and recreational facilities, and storage providers. We’ll also continue to see growing demand from proptech users for combinations of solutions that work together dynamically on all devices in real-time.”

Real estate investment deal management platform Dealpath is doing well at midyear in part because it has further identified its market.

“New priorities have come into focus for clients and vendors with an emphasis on operational efficiency, data-driven analysis, and risk management,” Mike Sroka, CEO at San Francisco-based Dealpath, said in an email. “Practical applications of AI and business process automation are of high interest for client-facing products, customer support and software development.”

A more mature proptech startup founded in 2014, Dealpath is growing and investing in technology “to supercharge deal sourcing, screening and comp analysis, helping firms to evaluate more deals and capture more data,” said Sroka. “We’ve also expanded our support of debt across the investment lifecycle. Our product roadmap for the second half of the year is equally stacked. We see the broader real estate market improving incrementally each period and expect for our business to continue to outperform.”

Lee Hoffman, president and co-founder of Runwise, which makes smart building controls aimed at energy efficiency and cutting carbon emissions, was also bullish on his company’s prospects.

“We had two of our best quarters ever with 2.5x growth year-over-year on sales for the last quarter of last year and the first quarter of this year,” said Hoffman.

While a variety of factors contributed to Manhattan-based Runwise’s growth, Hoffman says successful proptech companies at the moment share a certain trait: a service that provides a net ROI. 

“If you require huge capital investments and/or the ROI is kind of nebulous, it’s a very tough environment,” he said. “I think that could change as carbon legislation continues to add economic costs if you are not addressing your carbon reduction as interest rates come down, potentially, over the next few years. Improving either tenant comfort or efficiency will become more advantageous as that happens. But right now, it’s an eat or be eaten environment financially for a lot of real estate operators.”

Philip Russo can be reached at prusso@commercialobserver.com.