Will Proptech Prospects Rise as Interest Rates Drop?

The Federal Reserve’s interest rate cut in September might have caused a sugar high for some proptech investors and entrepreneurs, but what the Fed does going forward will impact the sector more, according to experts.

Having chopped the prime rate to 8 percent from 8.5 percent last month, many financial experts and Fedologists are predicting another such reduction by the end of this year. Such a trend could prove to be a boon for proptech, said a number of venture capitalists and founders.

“I don’t think it’s about 50 basis points, I think it’s about directional thinking,” said KP Reddy, founder and general partner at Shadow Ventures, an Atlanta-based early-stage tech investment firm. “I have the good fortune of having some great economists that support me, like Sam Chandan over at NYU, and folks like that. So the people smarter than me believe that directionally we’ll see more cuts. But I think there’s a question of what the acceleration of that will be. We were shocked by 50, because they could have done 25 and we would have all been probably as happy. So it’s pretty aggressive.”

Whatever the prime rate reduction to come, Shadow Ventures is sticking to its general investment plan and not overreacting, said Reddy.

“I think what it does do is that when we look at our next fund, hopefully we’ll be in this cycle where people are still excited about investing in all assets,” he said.

Interest rate cuts of any kind spur mortgage rate reductions, which could help heal the long-ailing housing industry. Melissa Fagan, vice president at Park City, Utah-based RET Ventures, which focuses its venture capital strategy on the single-family and multifamily housing industry, sees housing in particular as unique when it comes to the Fed cut. That’s because such cuts invariably lead to cuts in mortgage rates for both investors and individual buyers. 

“We’re definitely seeing a more bullish attitude on what’s going on in startup funding,” said Fagan. “There are a few verticals within proptech where I think we are seeing the most benefit from the rate cut. I think anything that deals with construction tech or buying and selling housing is going to see an immediate benefit. The larger proptech landscape might be a little bit more nuanced, as far as when we see that 50 basis points — or 100 basis points, if that comes up at the end of the year — actually affect those companies.”

RET raises funds according to how much capital it has deployed and how much runway the firm has left, regardless of interest rates, Fagan added.

“We’re definitely sticking to the game plan,” Fagan said. “We’ve been actively deploying capital. We have a fund that is already raised, so we were not on the sidelines during this event. We’re still actively looking for new companies in the space. But, yes, theoretically, there could be more venture funds or other funds that will be raised in a lower interest rate environment.”

Instant gratification from the September cuts shouldn’t be expected, Ashkán Zandieh, managing director and founder at the Center for Real Estate Technology & Innovation (CRETI), a Dallas-based proptech think tank and research organization, said in an email.

“The recent rate cut will absolutely increase investment in proptech, but the effects will be felt in the medium term,” said Zandieh. “Historically, lower interest rates reduce the cost of capital, making venture investments more attractive. This was evident post-2008 when tech and real estate both saw significant capital inflows. However, the market doesn’t move instantaneously. It takes time for the rate cuts to filter through the system, so we’re likely to see a more tangible uptick in proptech investment within the next two to three quarters, not immediately.”

Zandieh also said proptech companies that offer operational improvements to property owners will see the most benefit. “Lower debt costs encourage real estate owners and operators to reinvest in their assets, and proptech companies that directly drive value — such as predictive maintenance or tenant engagement platforms — will attract this capital. We’ve seen similar trends with [internet of things] and energy efficiency startups after rate cuts in the 2010s, where tech adoption accelerated due to cost-saving incentives.”

Proptech founders are generally optimistic about the sector’s prospects after the initial Fed cut, but some do temper their enthusiasm.

“With interest rates stabilizing this year, the recent 50 basis point reduction and expectations for lower rates in the year ahead will create better access to capital with more favorable terms,” Mike Sroka, CEO and co-founder of real estate management software company Dealpath, said in an email. “We’ve already observed capital markets improving in terms of transaction volume over the past six months and anticipate continued incremental improvement in periods ahead. We’re seeing increased focus on proptech solutions that empower and support smart investment decisions as the market is ramping up and large investment managers are going on offense.

“Additional reductions in rates will be positive for the real estate business and related proptech companies. Real estate is a highly leveraged asset class, so every reduction in rates will help improve the confidence and performance of real estate operators along with service providers who are the clients of proptech.”

Proptech company performance remains a key factor for investors and clients even as interest rates fall, William Sankey, co-founder of Atlanta-based Northspyre, an asset management, capital and development projects platform, said in a written response.

“The impact of interest rate cuts on investment in proptech will be driven by two key factors,” said Sankey. “First, we’re going to see a significant boost in revenue growth across proptech companies as their customers — real estate owners and developers — confidently dive back into the market, increasing deal activity and investing in long-term growth strategies. This will make proptech a more attractive investment opportunity relative to other investible industries. Second, the increased availability of capital moving back into private sector investment as the risk-free rate falls should naturally lead to more proptech companies getting funding.”

While northspyre was conservative in its operations during the higher interest rate period, future rate cuts could change the outlook greatly for the company and the industry, Sankey predicted.

“For real estate developers, I think once you start to see rates fall by 100 basis — which the Fed predicted by the end of the year — the industry starts to experience some material change in deal dynamics for the better. For example, on a $100 million development deal, that could translate into nearly $1 million dollars of savings on interest payments. By 2025, many people are forecasting a 200 basis point decline in rates, which could result in $2 million of savings on a similar deal. In each of these cases, this makes a major difference on the profit margins and return profile of development deals. And as more deals start to pencil out, naturally there will be more procurement of proptech solutions, and that will have a follow-on effect of fueling proptech investment.”

As is often the case in economics, people’s emotions can outrun their rationality, said Brandon Wright, co-founder and CEO of Tongo, a Brooklyn-based financial solutions platform for real estate professionals.

“The interest rate drop, from an industry perspective, is probably more helpful psychologically in the short term than it is when it comes to dollars and cents,” said Wright. “And if you’re talking about how it relates to the investability of this category, well there’s this growing awareness of how substantial proptech is as a portion of the U.S. economy. And there are dedicated funds that are deep into proptech, that are good at investing independent of cycles.

“There are venture capital firms, for example, that are more bullish when interest rates are attractive because more transaction volumes are happening. If you look at the larger companies— the Zillows, the Rocket Mortgages, even the brokerages — those businesses have seen a huge uptick in valuation as not necessarily from a market timing standpoint when rates were cut, but when the market started to bake in that they anticipated rate cuts. So if you look at Rocket Mortgage and brokerages like Douglas Elliman and Zillow, they’ve all seen massive increases in stock price since the beginning of July.”

Since private companies tend to follow a lot of the dynamics of public companies, earlier-stage investors have become more bullish on proptech, Wright added. 

Those expecting to see quick results in proptech from the Fed cut should cool their jets a bit, though, said Roman Pedan, founder and CEO of San Francisco-based Kasa, an online hospitality company that offers flexible accommodations for business and leisure travelers.

“Lower interest rates are a tailwind for the proptech environment,” said Pedan. “But one rate cut on its own is not going to make a significant impact. The companies that are going to be most impacted are ones that rely most heavily on development, on new financing issuances, on transaction activity, whether it’s commercial or residential. The lower-rate environment increases the likelihood that more new developments get financed, that there’s additional financing activity and transaction activity, so those businesses stand to benefit.

“That being said, the Fed’s policy typically works on lengthy and uncertain lags,” he added. “A change today won’t have an impact on the system for some time, probably nine to 18 months. It takes time for capital flows to adjust and reset. It takes time for new debt to be issued or refinanced on commercial real estate. So, while it is positive, it isn’t immediately a silver bullet. It helps the equation, but doesn’t fundamentally alter it.”

Another vote for patience came from Blake Owens, founder and CEO at Agrippa, a broker-free commercial real estate capital matchmaking platform founded in 2022 with backing from Alquant Fund, as well as family offices and ultra-high-net-worth individuals.

“Proptech companies will become more aggressive in expanding in anticipation of greater funding, but with caution,” said Owens. “Many companies, including ours, have learned from past over-hiring.”

However, Owens is already seeing early signs of increased investment.

“At Agrippa, some of our existing investors have recently increased their stakes, driven by rate cut optimism and our recent surge in traction,” he said. “Agrippa’s Q2 to Q3 signups have skyrocketed by nearly 1,000 percent, with our admitted user base growing by nearly 300 percent, as we aim to be selective in who we accept. CRE optimism is evident and growing. In the last three weeks, more than $1.25 billion in new deals have been added to Agrippa. These deals span the country, and range from $2.5 million to $180 million.”

John Ensign, president and executive managing director for North America at real estate tech giant MRI Software, offered an overall balanced view of the Fed cut’s effect in a written response.

“I expect the cut to increase investment in proptech, but the impetus for the increase is as much emotional as data-driven: People have been waiting for a first cut as a sign that the Fed believes a soft landing is possible and see it as the beginning of multiple cuts. This adds to the motivation to deploy capital.

“But anticipation of cuts was already driving an increase in investment. The number of companies for sale over the past six months has risen dramatically, but it was only the highest-quality companies that were ultimately transacting; many good companies were simply not transacting. As rates continue to drop, I would expect these good companies will find willing buyers.”

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