As we approach the second half of the year, a race is taking place behind closed doors at commercial real estate firms. The winners of this race will shape the future of real estate.
Our industry is experiencing a dramatic transformation. Real estate was able to rest on its laurels for a long time, sticking to traditional ways of doing things. But as we emerge from the pandemic, things have shifted. Simply acquiring and providing a space to tenants no longer cuts it, we need to make sure that space is sustainable, healthy, engaging, and inviting. To do this, we need to leverage data to make better decisions around which properties to invest in, lease or sell—basically how best to use portfolios.
This is PropTech’s moment to shine. Suddenly, just about every company is adopting a solution that monitors their indoor air quality. Many employers are deploying desk-booking apps to help employees navigate hybrid work. Corporations are under additional pressure to maximize the ROI of physical space by incentivizing employees and clients to come to the office. And investors are seeking innovative ways to leverage real estate portfolios to minimize risk as traditional markets face uncertainty.
In 2021, we saw multiple high-profile PropTech companies go public, including smart lock startup Latch and construction tech provider Procore. VC funding also accelerated, with a reported $4 billion of funding in the first quarter of 2022 alone. Smart-glass maker View went public via a $1.6 billion special purpose acquisition company (SPAC). The number of real estate startups grew 300 percent over the past decade, from just 2,000 to nearly 8,000 today.
Currently, the recent tech selloff in the stock market is rippling across venture capital, with startup valuations being slashed and investors becoming more cautious. Reports predict that VC funding is set to slow sharply, and IPOs may completely dry up. Now, many of these startups are priming themselves for acquisition as VC funding slows, and luckily for them, many traditional real estate players, especially the innovative ones with healthy cash balances, are looking to make strategic investments and acquisitions.
Major consolidation deals are already taking place, including JLL’s $300 million acquisition of Building Engines, VTS’s $200 million acquisition of office tenant experience platform Lane Technologies, Fortive’s acquisition of facilities maintenance SaaS company ServiceChannel for $1.2 billion, and private equity firm Thomas Bravo’s merger of two integrated workplace management systems (IWMS) investments, iOFFICE and SpaceIQ.
Consolidation is going to accelerate as customers look for complete solutions, many early-stage companies provide features or products which need to be aggregated into a larger platform. It is also increasingly difficult and expensive for early-stage companies to reach and sell to larger customers. As venture funding dries up, startups will increasingly look to sell to strategic partners who can help accelerate their product roadmap and efficiently scale their go-to-market engine. Consolidation will happen in CRE as it has happened in every other vertical where the initial explosion of innovation is followed by multiple waves of acquisitions as the industries mature.
Over the next five years, we’ll likely see the M&A race focus on three specific areas in real estate: smart buildings, intelligent workplaces, and data-driven investing.
Property companies should expect to see a flurry of mandates around reducing emissions and the carbon footprint of buildings. Consumer and employee demand for corporations to accelerate sustainability efforts will also fuel the adoption of technology focused on solving this problem. This will lead to more intelligent buildings that can optimize energy consumption and automate equipment maintenance requests to maximize efficiency.
Now that hybrid work is the norm, companies must also equip offices for seamless access and digital collaboration between onsite and remote employees. The office is evolving from a place where individual work gets done into a place where collaboration and networking get done, and employees gather to be energized and inspired. This is driving an even greater demand for smart building technologies, which provide companies with insight into patterns of space utilization so they can design offices to fit the evolving needs of their workforce.
Looking beyond the innovation of actual physical spaces, commercial real estate investing is an area ripe for technology transformation. Investors are always striving to maximize ROI, and increasingly, real estate investors are using data to inform decision-making. For example, in the past, in-person appraisers needed to visit commercial properties to determine their value before an investor would purchase. Today, investors can access vast repositories of data on various assets to quickly narrow down which are worth an in-person visit.
Despite the recent tech downturn, it’s an exciting time to be in PropTech. Today’s founders still have plenty of runway to innovate and create breakthrough technologies that could revolutionize the use of space. As M&A ramps up it’s time for PropTech companies to consider a few things. Are you a consolidator, or a consolidatee? Is the fastest path to achieving your vision on your own, or with a strategic partner? Forward-looking firms are all in on the digitization of the property lifecycle—from construction to buying, selling, and leasing, all the way to the tenant experience. Getting adoption from these firms will take a large effort, the kind that will likely be led by a few powerful tech companies and not hundreds of startups. All of this boils down to a race to consolidate where the winners will be rewarded with massive growth and the losers will fade into obscurity.