Fifth Wall’s Brendan Wallace On a New Fund, the CBRE-Industrious Deal and More

Coming a day after the news that CBRE had acquired complete control of proptech venture capital firm Fifth Wall’s portfolio company Industrious for $400 million, the Manhattan-based VC made a series of follow-up announcements Thursday about its 2024 activity.

Given that, it seemed an opportune time to check in with Brendan Wallace, CEO and co-founder of Fifth Wall, to get his thoughts on his company’s past and future as well as on the proptech and real estate industries as a whole.

Wallace talked about Fifth Wall’s flagship fund, which closed out 2024 with the launch of new limited partner commitments from Lowe’s, Public Storage, Ryman Hospitality Properties, Federal Realty Investment Trust, Kite Realty Group, Titan Group, Independence Realty Trust and Riyadh Valley Company, in addition to a number of major institutional investors. He also touched on Fifth Wall’s largest investment to date, ServiceTitan (TTAN), which went public in December with a $9 billion market capitalization in the firm’s seventh IPO from its portfolio.

Wallace spoke to PropTech Insider on Wednesday about 2024 and why he believes 2025 will be a year of “rebirth and renewal for proptech.”

This interview has been edited for length and clarity.

PropTech Insider: Fifth Wall released quite a bit of news all at once today. Was it because you had that much more news than usual coming into this year?

Brendan Wallace: I would say probably it was a mix of we didn’t get around to announcing it and we knew about this imminent merger that was just announced yesterday, which is probably the biggest strategic merger to happen in the proptech space. It’s one of Fifth Wall’s first and largest investments being acquired by one of our first and largest strategic leverage partners. 

So, my thought is there’s a really interesting story around renewed momentum in proptech. ln my view, three points make a trend. Those three points are, No. 1, the IPO of ServiceTitan, which is basically the first IPO that we’ve had in the proptech space since 2022. The company has traded up nearly 40 percent post-IPO. The second meaningful data point is the acquisition of Industrious by CBRE (CBRE). The third would be Fifth Wall bringing in all of these new strategic LPs to its new flagship fund and the timing of its launch. All those represent what is a clear sign of a momentum shift in proptech, and that was one of the reasons why we wanted to wait to put the news out.

Tell me about this flagship fund.

Our first flagship fund was raised in 2019. That was a fund with a target of $400 million. We closed on $500 million. This would be the second flagship fund. [Wallace did not quote a target for the second flagship fund.]

You’ve gotten LP commitments from some large and varied companies. How did that come about?

It’s probably a function of three things. One is Fifth Wall’s performance as an investor. Our performance has, across all of our funds, attracted many of the largest owners, operators, and developers of real estate. The second thing is a maturation of the real estate industry, where some of the largest owners of real estate now realize it’s increasingly critical for them to have a strategy to invest in proptech. I believe for all of these groups that Fifth Wall is the only proptech fund that they have ever invested in.

I think it’s a sign that the real estate industry increasingly recognizes two things: one, the imperative to invest in proptech, and, two, the futility of corporate venture. The last thing that I think it is indicative of is that I think spring has sprung in proptech. We just endured a very challenging, very bitter winter for the product ecosystem, which consisted of very challenging real estate capital markets, challenging tech capital markets, a dearth of IPOs, and a dearth of M&A events. 

You’re seeing that change in real time. Just over the last 30 days, we’re seeing the ServiceTitan IPO, the Industrious acquisition, and these new LPs, all of which are indications of green shoots in a proptech ecosystem that has been stagnant for the last two years.

Is it just that the corporates realize they can’t do proptech development, or are there other demand factors such as speed to market or general efficiency that are pushing them to integrate proptech into their companies?

I’d say it’s also a timing driver as well. Timing plays a very significant role in venture capital, whether venture capitalists want to admit it or not. If you look at Fifth Wall’s last flagship fund, it was probably the most successful in all proptech. It invested in four of the most successful companies in our space: Aurora Solar, Procore, ServiceTitan and Lessen. I think it was a function of Fifth Wall’s brand and our investment talent, but I think it was also a function of amazing timing. I think we hit a moment in capital markets that preceded the explosion in liquidity that we saw during 2020 and 2021, which was very opportune. 

And my intuition, having run the largest proptech fund for the last eight years, is that we’re just now entering a similar moment in time, where there are very few venture funds that are active in the proptech ecosystem. The companies that have survived this winter are stronger, more durable, with better business models, less cash drag dynamics. We feel like it’s going to represent a very attractive vintage for venture capital in general and proptech specifically.

We think that the 2025 minute is probably going to be one of the most attractive of the last 10 years. And the reason for that is the supply-demand dynamics, meaning there is a very limited supply of venture funds like Fifth Wall that have dry powder and a lot of demand from companies to raise that capital. And the quality of those companies has increased because they endured a very challenging winter. That is very promising.

Let’s get into the CBRE acquisition of industrious. Why did that come about at this point?

I would say there’s three things that I think this acquisition indicates, in no particular order. One is that CBRE under the leadership of Bob Sulentic, Vikram Kohli and Croft Young has transformed the organization into probably the most innovative and aggressive around new technology and innovation that we’ve seen in the real estate ecosystem. The second thing it shows is that proptech is a hard category, and that Fifth Wall was literally the only proptech venture investor that invested in Industrious, which is now clearly the heir apparent in the flex office space. 

If you look historically, when we made the investment in Industrious [in 2018] it was very contrarian. At the time, everyone was betting on WeWork or Knotel. I think of Fifth Wall’s, proptech VC peers — nearly all of them invested in WeWork. So WeWork was the company to bet on. Fifth Wall was successful in this because we really understood Industrious’s business model better than anyone else, due to our real estate strategic LPs. Everyone else was betting on WeWork’s master lease model, which led to rapid growth, but ultimately led to the company’s demise. It was its Achilles’ heel because it had a mismatch in the duration of its assets and liabilities. Industrious never had that. From the outset it was focused on management agreements, which it believed — and we believed — better aligned its incentives with landlords and allowed for the white labeling of space. It also allowed for better, more controlled and sustainable growth. Now that’s obvious, but at the time it wasn’t.

The second thing it indicates is that proptech is hard. What happened to WeWork or Knotel versus Industrious is a very clear way to tell that story. 

And the last thing is that I think it’s a function of timing. There was a moment where proptech was not an attractive category for M&A and nothing was happening. Right now, companies like Industrious are seeing a lot of interest and the company has a lot of options. It was a very opportune time for CBRE to make this really bold, decisive move.

On what happens from here, we have always believed that the trend toward flex office representing a greater and greater share of the office industry is inevitable. Where we diverged from the consensus view is that we believed a management structure was more attractive than a master lease structure. Said differently, we believe that in business it’s not enough to get the trend right, you have to get the business model right. What Jamie Hodari nailed at Industrious was the business model, and I think CBRE very astutely understood that. I think that’s one of the reasons why they gave their coworking platform to Jamie, and I think it’s one of the reasons why they’re now reintegrating it — they believe that flex office is going to be a big part of their business.

Unlike some proptech investors, Fifth Wall seems to have successfully put a lot of money into office sector proptech. With people returning to the office, do you see that as a growing part of your investment strategy?

I’m not sure I would totally agree with the premise of the question. Yes, we have had a lot of success in investing in office as a category, but some of our most successful investments have actually been outside of office. If you look at Fifth Wall’s exit on Opendoor,  where we distributed $350 million to investors, or Aurora Solar, which is a $4 billion company, or Procore in the construction tech space, none of those are office businesses. 

What’s been unique about Fifth Wall is that we have uncharacteristically had success investing in office, which is distinct from many of our venture capital peers. I think one of the reasons — and this is core to our model — is that we never cease to believe in office as a desirable category of commercial real estate. What we did believe is that the dynamics around it changed, whether that’s a function of existential questions like changing demand for space and work, work-from-home dynamics, or business model dynamics around flex office. But our belief was that to be great investors in technology for the commercial office industry you have to collaborate with the largest office owners. The way we do that is by bringing them in as LPs, and that’s why we brought in Related, Hudson Pacific, Hines, British Land and many of the largest office owners that we engage with to understand how they’re thinking about the industry. 

Looking forward, what do you see as far as M&A in the coming year? Is there going to be a consolidation in proptech or will it be longer term?

To answer the question very directly, I absolutely think we’re going to see more M&A in proptech. And the reason we’re going to see more is that I think you’re going to see an opening of capital markets for proptech and for real estate over the course of the next year, and both those trends provide positive tailwinds for M&A. 

The second thing is that I think venture funds, Fifth Wall included, are going to have to become more nimble, creative and athletic in how they help their portfolio companies. I think, traditionally, venture is a space where it was enough just to provide capital to your portfolio companies. That no longer is a differentiator. Firms have to do more. In Fifth Wall’s case, what more meant was opening all these distribution lanes through our strategic LPs to our portfolio companies. But I think it also means helping them navigate transitions in their business, whether that be capital formation, selling their business or acquiring another business — really rolling up our sleeves and being very active, thoughtful, collaborative partners. 

Simply put, venture firms are going to have to do more than invest, and, because of that, I think you’re going to see a lot more activity in proptech M&A.

If you had to pick one sector of real estate that is most going to break away through the adoption of proptech this year, what would it be?

My answer might surprise you, but I think you can actually see it in our announcement. Retail has been a challenging category for the real estate industry for quite some time. The predictions of the, quote, death of retail have circulated since Fifth Wall began. We already have many strategic retail LPs, and the fact that two of the largest — and, I would say, most prestigious retail REITs in Federal Realty Investment Trust and Kite Realty Group — are investing in this new fund is a testament to the fact that the commercial real estate retail industry has shifted from its back foot to its front foot. 

I think for the first time in Fifth Wall’s history we are seeing retail real estate businesses act offensively around technology and innovation, and I think that’s very exciting and very new.

Early last year, Fifth Wall promoted Jeremy Fox and Magnus Vik to be co-presidents. Today, your announcement ended with a sentence that Brad Greiwe has transitioned to chairman of Fifth Wall. What does that mean about your professional relationship with your longtime partner? What will he be doing and how will you work together going forward?

All firms kind of have to grow and develop and up-level their talent, and Fifth Wall is no different. I’d say the people that were very important and very influential to our business early on, nothing can be taken away from that. But as CEO, obviously, I’m trying to set up the business for where we’re going. The promotion of Jeremy Fox and Magnus Vik is part and parcel to that. I believe they’re the right people to lead the business. 

Brad is going to stay at Fifth Wall as chairman, and I think that is a role which better suits him and will allow him to continue to add value to the business. But Brad is not departing. He is continuing to be engaged at Fifth Wall. Brad as chairman is going to be fantastic for the business. That’s why we wanted him to stay.

Last thought?

I’d say the last thing I would mention is my optimism around 2025 and 2026. I think that we are entering a period where proptech is emerging from a very challenging two years. And I think that there are lots of positive signs. It’s never been a better time to be in proptech. I think this is a moment of rebirth and renewal for the whole proptech category.

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