The Potential of Proptech: Revolutionizing Real Estate Through Technology

Venture capitalists often seek to invest in technologies that will reshape industries that are fundamental to our daily lives. One such industry is real estate. No matter what, people must have a place to live, work, or play. Increasingly, information technology is radically altering the landscape of this industry and in the process, profound investment opportunities are being generated. This opportunity is known as proptech (property + technology) and its implications are profound as they represent the advent of the integration of the digital and physical worlds.

Defining PropTech

PropTech refers to the application of technology to the real estate industry. As such it encompasses all of the technology tools that real estate professionals, their clients, and other industry stakeholders use to facilitate the research, analysis, buying, selling, marketing and management of property. 

Examples include real estate platforms such as Airbnb and Zillow as well as property management platforms such as Appfolio. Just as real estate is a subset of the financial sector, proptech can be considered a more specialized branch of the broader arena known as fintech. The proptech market began to take off in 2015 when over $1.7 billion was invested in 190 deals, which represented a 50% year-over-year increase and an incredible 821% increase in funding compared to 2011. Deal activity also increased 378% during this period. The market is primed to explode over the next 10 years, quadrupling from $35 billion in market size to $133 billion by 2032:

Furthermore, the proptech market will be global in scope with significant opportunities in Western Europe:

The size, growth rate, and global scope of the proptech market are a great part of the appeal to venture capitalists. But the diversity and depth of opportunity within the market are also key drivers. People must always have a place to live and work.

The fundamental divide between residential proptech and commercial proptech makes the market rich in opportunity. Residential proptech focuses on the owning, managing and renting of apartments and houses and consists of:

• Single-family property search platforms – Multiple listing services and real estate marketplaces, both for rentals and buying/selling (Roofstock, Doorvest, Zumper, RightMove)
• Short-term rental platforms (Airbnb, Lyric)
• Single-family property management tools designed for landlords (TurboTenant)
• VR and AR Tools – 3D virtual property tours (View Labs)
• Crowdfunding platforms allowing individuals to invest in residential real estate (Sharestates)
• Real estate tokenization platforms offering individual investors an opportunity to invest in real estate through blockchain technology (SoluLab, Fireblocks)
• Smart home solutions – energy management software (Facilio), IoT-powered tools (Frigate, Homebase AI), AI-powered voice control systems (Josh AI)
• Mortgage lender software – money lending platforms designed for lenders providing mortgages for the residential property (LendingTree, Kiavi)
• Loan management systems – tools for loan application and management, underwriting and appraisal (Enodo and GeoPhy)
• Marketing and advertising brokerage software (Mailchimp, ADvendio, Composer)
• Title and insurance management tools (Doma, Axxis Systems)

The residential proptech value chain works as follows:

In contrast, commercial proptech focuses on the application of information technology to facilitate the operation, sale, and rental of office buildings as well as industrial and retail properties; and it consists of:

• Property search platforms – multiple listing services and marketplaces (Bright MLS, Zillow), brokerage CRM (Ascendix RE)
• Commercial real estate CRM (Buildout CRM)
• Evaluation and financing tools – underwriting software (RealINSIGHT), appraisal tools (Reggora, Valcre), and automated valuation models (Quantarium)
• Facility, space and asset management tools (RentRedi, UpKeep, SpaceIQ, Foyr)
• Online booking platforms (Sirvoy, Roomsy)
• Solutions for investment and venture capital funding management – proptech analytics software (Advan Research, Audience Town), portfolio management tools (Juniper Square)

The commercial proptech value chain operates as follows:

Benefits of Proptech

The opportunity to integrate a technology into an industry is not sufficient to generate venture capitalist interest. There must be a significant problem to be solved to induce customers to but the new products and services built and designed by proptech startups. For real estate customers the benefits include the ability to more easily identify, comparison shop, and accurately visualize properties by deploying augmented reality and other enhanced 3D visualization technologies. 

Just as ecommerce sites like Amazon and Ebay have made shopping for everyday items more efficient, so too proptech can do the same for the highest cost item a person will purchase: a domicile. Indeed, during the COVID-19 pandemic, properties that were able to offer virtual tours at a time when face-to-face contact was problematic had a distinct advantage in the real estate market over those that did not have that capability. 

Likewise, proptech makes it easier to match customer preferences regarding square footage, home and apartment features, neighborhood characteristics, urban amenities with the appropriate individual or family. Since moving across the country is not unusual in a large territory with a dynamic job market like the United States, this is particularly valuable. For real estate brokers, proptech facilitates accurate data collection about both properties and customers which makes AI-enabled marketing both easier and more cost-efficient. 

The more accurate and voluminous the data collected about the properties and the customers the easier it is to deploy artificial intelligence systems that depend on good data to be effective. In addition, real estate brokers often depend on commission-driven compensation so the ability to identify which customers to reach out to and how to sell to them is critical to their financial well-being. 

With regards to the administration of the property, proptech makes it possible to gather data on how the real estate is actually being used which can enable improved utilization. For example, if one can understand why a property is vacant and not just the number of vacant units, that can help to reduce the vacancy ratio and improve property revenues. 

In addition, technologies like sensors and other communication devices can reduce fires and other opportunities for damage which can prolong the life of the property. But perhaps the greatest immediate advantage of proptech is that it facilitates an improved customer experience in an industry that has long been renowned for poor service. The ability to pay rent online or keep property owners and administrator on their toes by reviewing them online for potential renters/buyers induces a better balance of power in the real estate market.

Risks in PropTech

While the proptech market offers benefits to all of the myriad stakeholders in the real estate market, it also offers profound risks. Firstly, due to the fact that it is tightly integrated with real estate markets, it is highly susceptible to interest rate changes. For example, Blend, a digital lending platform that seeks to support and simplify applications for mortgages and other financial products has experienced great difficulty as interest rates have been sharply raised in recent months which has reduced the demand for new homes. 

In addition, the grand slam investments that venture capitalists seek usually come from companies that have network effects. But not every company that bills itself as a proptech firm has network effects. Network effects are generated when the more users join a platform, the greater the benefit to everyone: the buyers, the sellers, and the owners on the platform. Notoriously, WeWork, a company that received $12 billion in venture capital from SoftBank and was once valued at $47 billion is now bankrupt. Why? Because whether someone rents a WeWork property in Atlanta has no impact on its customers in New York—no additional value to other customers is generated from that transaction. 

In addition, the COVID-19 pandemic is leading to an ongoing restructuring of office markets. The rise of remote work, which is itself a proptech opportunity as consumers retrofit their homes to adapt, means that we will not be working as intensively in the urban core which will dramatically reshape our cities. This black swan event helped to kill WeWork but it will also generate new commercial proptech opportunities.

Technology Trends in PropTech

Part of the immense appeal of proptech as an investment opportunity is that it has become a salient application arena for a wide variety of cutting-edge technologies. These include:

1. Artificial Intelligence and Machine Learning:

• AI-enabled brokerage technology – brokerage intelligence platforms (LocateAI), listing generation tools (Listing Copy AI)
• AI for appraisal and loan origination – robotic software and cobots (Silverwork Solutions), automation evaluation models (GeoPhy, Quantarium), underwriting and appraisal intelligence platforms (Enodo, FoxyAI)
• AI for property management – space and property management tools (TRIGIGA, AUtility), ethical tenant screening tools for hospitality (Autohost)
• AI home automation – smart security (Frigate), smart building systems (Homebase AI)
• AI for energy resource management – energy intelligence platforms (Gridium), renewable energy software (Clir Renewables), climate management platforms (Climate AI)
• AI for real estate development and construction – data management software (Versatile), interior design generation software (Interior AI), construction development management (Deepblocks)
• AI real estate investment solutions – real estate investment platforms (SkylineAI), investment management tools (Canoe)
• Conversational tools – chatbots and textbots (Localize), virtual assistants (RoofAI)

AI-enabled chatbots are particularly powerful tools for real estate wherein the management of high levels of customer service is a key competitive advantage. The latest chatbots reduce customer waiting time, make it possible to gather high quality information for better leads and improved sales generation, and free employees to concentrate on more complex tasks that require a higher level of cognitive and analytical power.

2. Big Data: The digitization of property data assets makes it possible to deploy that data in a whole host of productive ways that are value to the administration, maintenance and investment in the property. Data like human capital is the most valuable asset of an entity.
3. Augmented and Virtual Reality: According to a Goldman Sachs report, an estimated 1.4 million realtors will rely on AR/VR by 2025. As noted, its power lies in its ability to give customers a more accurate assessment of the look of a domicile and to imagine its appearance if certain features were to be digitally added or removed.

4. Internet of Things: The ubiquitous deployment of sensors and 5G known as the IOT will enable a network that will gather information from virtually everywhere on a property that can be analyzed to track what needs to be maintained. This will also have security and privacy implications for residents.

5. Energy Efficiency: PropTech will take energy-efficiency to a new level as it will be possible to use every aspect of our residences only as needed. Energy companies will be able to track who is in a residence and remotely deactivate services based upon physical activity sensed or behavioral patterns.

6. Blockchain: Although it has been in the press for the wrong reasons lately, the blockchain remains a powerful and verifiable alternative payments system whose impact on real estate is only just beginning. It has the potential to speed mortgage closings with smart contracts an increase transparency in real estate dealings.

PropTech Startups

There are a number of firms that have embraced these financial and technological opportunities. Pacaso, which was founded in 2020, has already raised $1.5 billion in funding but generated only $18.4 million in revenue during the second quarter of 2023. The company was founded by former Zillow executives with the mission of making second home ownership more affordable for everyone. 

The process works as follows: someone who already owns a home and is seeking to move to a neighboring state for a few months or a year—instead of renting an apartment during that period—can share a second home at a rate of 12% of that home’s purchase price. Users can also resell their share or swap it for a different Pacaso house. Currently one of the most valuable new proptech companies, Pacaso’s initial strategy has been to focus on luxury second home sales due to the fact that this type of second home purchase increased by 25% during the second quarter of 2022. The proptech market can be quite cyclical due to the aforementioned risks so it remains to be seen if this strategy can continue to be successful.

Orchard is a real estate marketplace that was established in 2017 and has raised $472 million in funding. In contrast to traditional homebuying companies/agents that don’t allow a customer to buy a new property before selling their old one, Orchard does both. The marketplace offers access to licensed real estate agents that conduct free home valuations, organize expert home prep for not additional cost, and then strive to sell the old home at a premium price. Orchard’s strategy is to compete by offering modest improvements to processes that have long been frustrating to consumers. By opting for evolution instead of revolution, the company may prosper long term.

Founded in 2014, Side is a brokerage platform that has raised $313 million. After almost ten years, although it only generated $13 million in revenue during the second quarter of 2023, it is valued at $1 billion. Side’s value proposition is to try to disrupt the traditional brokerage industry by supporting real estate agents in legal matters, auditing, advertising and related matters. This frees agents to focus on their clients, which is how they should be making their money. By working with Side, the real estate agent has full ownership of their business, which means they can sell or change it later—something that is not possible if the brokerage owns the business.

PropTech Investors

Real estate is so basic to our lives that there are many proptech investors. Among them are New York-based MetaProp which was founded in 2015 and is focused on artificial-intelligence-enabled proptech. MetaProp has made 152 investments with 17 exits. These investments include: LocateAI – a brokerage intelligence software; Common – a rental co-living marketplace; CompStak – a data analytics platform for commercial real estate; and Mapped – an AI-driven data layer for CRE that integrates with the building systems and gathers/analyzes data in real time. 

JLL Spark is the corporate venture capital unit of JLL that was established in 2017 and has made $380 million in 45 early stage proptech startups. It focuses in smart buildings and ESG-related investments as well as future-of-work technologies. Investments include: EliseAI – conversational AI for multifamily operations; Foyr – a provider of tools for 3D floor plan generation and interior design; Roofstock – a single-family rental property platform for home management, buying and selling; and Inforgrid – AI-powered building intelligence platform. Camber Crick was established in 2011 and has made 64 proptech investments with 14 exits. Among these are: Arcadia – a digital solar energy management platform; Measurabl – an ESG data analytics platform; VTS – a digital platform for leasing and property management; and Flyhomes – a real estate brokerage and tech company that simplifies home buying and selling. Finally, Click Ventures is global in scope as it operates from both San Francisco and Hong Kong with additional offices in Singapore and New York. 

It has made 48 investments and 11 exits since its establishment in 2015 including: Star City – a company with operations in hotel and housing real estate; and Ziffy Homes – a rental Indian marketplace.

Great venture capital investment opportunities often stem from the reimagination or reorganization of activities and industries that are intrinsic to our daily lives. Real estate is one such activity. There are so many rapidly evolving technologies that are poised to dramatically alter this market. Proptech and the venture capitalists that invest in it as well as the startups that innovate within it will literally be altering how we interact with the physical world in as yet unimagined ways.