If you are in the commercial real estate sector, you’ve heard the buzzword: PropTech. Often used to refer to anything tech- and real estate-related, the word’s ubiquitous use has many of us wondering what is PropTech.
While there are many ways to define PropTech, the most common and straightforward definition is “a collective term used to define startups offering technologically innovative products or new business models for real estate markets.”
It’s used to describe innovation in the commercial, residential and industrial real estate sectors and can range from construction and building materials, architectural design, smart building automation, property management, and smart contracts. Virtually everything from designing energy efficient landscaping to using virtual reality to provide commercial and residential tenants and buyers with property tours is considered Proptech.
No doubt the convergence of technology is driving the real estate marketplace to create new solutions for the sector. However, many people in the industry will tell you that PropTech is more significant than just that. PropTech is rapidly becoming a part of a broader digital transformation which is driving both technological and cultural change of the real estate industry.
Nearly 86% of respondents comprised real estate sector professionals viewed digital transformation as an opportunity rather than a threat, according to a recent survey by KPMG.
The survey found technological innovations in big data and data analytics, IoT, improved building performance, and customer engagement are expected to have the most significant impact.
As more real estate startups develop innovative real estate related technologies, they are transforming attitudes of both of consumers and investors. What was once legacy-oriented industry, highly reliant on one-on-one relationships and solid portfolio management focused on long-term return on investments is fast being displaced by rapidly growing technological innovation, R&D, data analytics and venture capital investment.
Factors driving PropTech investment
As more companies grapple with the increasing technological changes abound in IoT, artificial intelligence and big data more REITs and commercial real estate investment firms are setting up their own divisions to invest in PropTech.
One of the primary factors responsible for increasing investment in the sector has ironically been its absence. For the most part, legacy real estate firms have remained dormant to technology investment and stayed away from high-risk start-ups. However, it is this very fact is that is attracting unprecedented investment in PropTech today.
Unlike other industries which have already been tapped for tech investment, the real sector has remained insulated from tech-heavy investments which make it a fertile ground for innovation compared to other industries. With the total value of investable global commercial real estate expected to reach $65 trillion by 2020, according to data collected by JLL and total PropTech investment at a meager $8 billion at this time, there is plenty of room for the sector to grow.
Earlier this year, Brookfield, a Toronto-based global landlord with assets of $285 billion, announced plans to invest between $200 million to $300 million in the next three years in startups in its four business lines including real estate. For deep pocket investors with portfolios running into the tens of billions who are both owners and operators, developing technology that can maximize their portfolios and manage them efficiently is a win-win. While it can be an expensive and labor-intensive process, there are significant advantages to being at the forefront or first to market in an industry which has traditionally lagged behind in innovation.
The proof is in the unicorns
Evidence that investment in real estate tech is a good bet can found in the many PropTech startups that have successfully achieved billion dollar or more valuations in a relatively short time frame. Last year alone saw an unprecedented emergence of PropTech unicorns. Real estate sector startups Compass, Homelink, SMS Assist, and OpenDoor Labs, all reached the coveted $1 billion mark.
Moreover, the success of startups like WeWork and other coworking operators which accounted for nearly 35% of leased office space in the US this past year is now driving unprecedented interest from venture capital firms expanding the rapid rate of growth of the sector.
At this increasing rate of growth, there’s no telling how PropTech startups will rewrite the book on tomorrow’s real estate industry.