Real estate technology (PropTech) investment soared in 2017. Based on data from CB Insights, global funding for PropTech companies may have reached $3 billion for the year. If you add the current 36% year-over-year increase to that statistic, it would indicate increased adoption and significant potential. However, real estate in general and commercial real estate in particular has been less open to technology and innovation compared to other industries. While there may be widespread recognition of the impact of technology in commercial real estate, adoption has been painfully slow and mostly restricted to pilot projects instead of a broader strategic play.
Already there are observations by some experts that PropTech companies may not be differentiating their offerings and many emerging firms may be trying to solve the same problems. Without an end-to-end digital offering by any single company, property firms are forced to look at potential solutions on a piecemeal basis while they attempt to progress from adoption to implementation to value creation.
I believe that a lot of these challenges can be overcome if PropTech market leaders decide to collaborate across geography. If technology can come together with local knowledge, it’ll introduce a new paradigm in commercial real estate. Let’s take a step back and look at how commercial real estate models worked internationally within a collaborative environment. Broadly we have three categories of collaboration:
1. Large international brokerage and consulting firms setting up wholly owned subsidiaries with predominantly local talent.
On the surface, this model enables brokerage companies to provide seamless services to their clients. But when you look at this model holistically local laws, data standards, transparency issues, lack of common guidelines prevent seamless integration. Technology and digitization can play a huge role in bridging this gap quickly, one country at a time.
2. Two large firms across continents joining forces to create a ‘single global entity’.
More often than not, this model is implemented between dominant regional firms in Europe and APAC with a strong player in North America. Again, while the intent is to portray seamless service offerings, it is far from a perfect solution. Different systems, processes and culture between the two firms can add an extra layer of complication to what is already a risky process.
3. Prominent firms in multiple countries joining forces in a franchise model.
This is comparatively the least effective model globally and has never truly succeeded. Every participating firm within each country has different systems and processes. Barring deal referrals for small & medium size companies, the model is more isolated and less collaborative.
When you look at the current dominant players in the global PropTech industry, they are either technology services or data platforms. To understand how powerful this combination could be, we just need to combine a big data player with a powerful tech platform. Most of us would know about a recent legal battle between two prominent technology service companies, CoStar and Xceligent. It is important to remember, this battle was about data. In addition, more robust commercial real estate data is increasingly being utilized in other areas like risk management, Moody’s partnering with CompStak is a good example of this.
The multi-billion-dollar question is, “is it possible to get all the global data companies under one roof?” It is hard to even speculate how much that data set would be worth. How easy is it to get this done? Very difficult, if not impossible, as data in most countries is controlled by governments. Every country has a unique data company that becomes a dominant player within that country when combined with a tech platform. Whether existing technology platforms and data providers consolidate even further is yet to be seen. I will certainly depend on whether their products and services are more useful or independently on combinedine will certainly play a role. But, just having a good business case might not be enough. Other political and economic factors will also sure shape the future of the global PropTech landscape.
I predict that either one of the four scenarios will pan out within the next 2-3 years:
- A large global institutional investor will partner with a large global brokerage company to form a giant data company
- A large co-working player may partner (or takeover) one of the top 5 global brokerage challengers to CBRE
- Two of the largest global brokerage companies will combine to challenge the largest brokerage firm
- A dominant software company will aggregate data companies across the world
Scaling beyond your home country is extremely tough in PropTech without collaborating with a local partner. PropTech, to a very large extent, will mirror the traditional commercial real estate industry where local expertise and relationships are an ongoing key to success. While data aggregation could be the most important factor for companies to analyze current trends and predict future scenarios in the short to medium term, predictive data analytics will be the key differentiator if we experience any of the above scenarios in the long term.
Examples that validate this line of thought include the largest property data company in the world not being a dominant player in markets outside North America and that certain PropTech companies are choosing to discontinue international expansion and instead focus within their home country. Many companies that have a presence outside of their home country struggle to generate adequate revenues, especially considered the amount of time, money and effort it took to oversee the expansion. The companies that have succeeded internationally have mostly been technology platforms, which compared to large scale data companies, have limited impact on the global commercial real estate industry.
The stakes are high for PropTech companies in 2018 as we observe a decrease in investors’ appetite to fund seed stage or Series A. With increased collaboration between PropTech companies, there are higher chances of adoption within the industry. The rise in adoption will create sustained interest and larger funding sources and enable deeper innovation within the industry. However, in the absence of collaboration, traditional real estate companies may lead the consolidation and could possibly limit the ability to truly innovate by overlooking certain technologies.
Let’s hope that the PropTech industry will continue to collaborate in 2018 and help further refine the global commercial real estate industry.