Good afternoon! As a part of todays proptech manual, we asked the Braintrust to let us know how changing market conditions can affect the development of products in the space. Questions or comments? Send us a note at email@example.com.
Partner at Zigg Capital
When interest rates rise, new mortgage origination and refinance volumes go down. For proptech companies that benefitted from the huge home sales numbers last year (a 15-year high in 2021), it can cover up a lot of warts in a business. As we possibly move from a macroeconomic tailwind to a headwind, product development often turns to automating manually processes in order to drive efficiency (margin gains), which become a necessary offset to lower revenue growth. At Zigg, we're most bullish on companies that have genuinely figured out how to automate manual workflows, either via applied narrow AI or through approaches such as smart templates. Examples from our portfolio would include companies like Snapdocs or Vesta in mortgage, Nabr or OpenSpace in construction, Spruce in title, Juniper Square in investor reporting, et al. With the recent reset of tech valuations in the public market, we expect the product focus of many proptech companies to turn to automating COGS and away from speculative initiatives designed to drive top-line growth.
The macroeconomic environment of the past two years has had a meaningful effect on the real estate world overall. Therefore, by extension, it has also influenced proptech.
There have been obvious impacts, like the negative short-term effects that working from home has had on flexible work solutions like WeWork or Industrious, but there are also more subtle impacts.
The pandemic-era desire to live in a house (instead of an apartment) has accelerated the growth in the single-family rental sector and rapidly increased the scale of alternative financing products. Examples are Divvy’s rent-to-own solution or alternative financing tools (Homeward, Ribbon and Knock), which allow consumers to buy before they sell.
The need to find socially-distant tools to manage construction sites has accelerated the adoption of AI-driven site monitoring solutions like OpenSpace. And we have seen rapid growth in funding and company creation across the proptech sector as more dollars flowed into venture in general, plus proptech stood out as the most rapidly growing area of sector-specific venture.
Across the country, inventory supply continues to be at an all-time low, and the market remains incredibly competitive for buyers. Homes are not staying on the market for very long, and the pressure doesn't seem to be easing in the near term. And with two-thirds of home sellers also buying, this can be a daunting time for many.
Consumers are craving ease, certainty and seamlessness to navigate the entire moving process. Instead of thinking about selling a home and buying a home as distinct transactions, we need to think about these personas jointly, providing an end-to-end experience to buy, sell and finance a home all in one place. You can hail a ride, order food and get groceries with the tap of a button; why can’t consumers have that same convenience in real estate too?
Product development in proptech should continue to address core customer pain points, like the challenges of both buying and selling, rather than focusing on nice-to-haves that are not critical to the success of buyers and sellers.
Over the past two decades, new tech has been introduced into just about every aspect of the real estate journey. And while this is great progress, the recent challenging housing market and other complicated macroeconomic factors — inflationary and supply chain concerns — have shined a light on one of the main drawbacks of all these new developments. In an already difficult buying market, how can consumers navigate dozens of different end-point solutions and tech offerings?
To meet the economic moment, product leaders should work to create solutions that support consumers at every step of the process — from initial search to financing through home renovation — and give them a solution for every different challenge they might face, while also surfacing data and insights to better equip their decision-making.
The relationship between macroeconomic trends and proptech invariably starts with the relationship between the macro-economy and the real estate sector.
Sticking to the residential side of real estate, a major secular trend in the real estate capital markets has been the surge in institutional capital flows into multifamily and single-family rental real estate. This trend is driven by a number of macro factors, in particular an extended period of depressed real interest rates, which has driven institutional capital in search of assets with consistent, inflation-hedged yield, like an apartment building.
This trend of increasing institutionalization has led to the emergence of larger, nationwide portfolios that require an enterprise-grade technology infrastructure to build, acquire, finance, operate and dispose of assets at scale.
Not only has the institutionalization of real estate made technology essential for property operations, it has also highlighted the financial benefits of proptech. As capital flows into real estate have driven down residential cap rates, the incremental operating leverage provided by a strong technology infrastructure is more important in ensuring optimized asset performance — and ultimately increased NOIs — as a ballast to lower cap rates on new acquisitions. Access to differentiated data sets and the utilization of more rigorous quantitative frameworks in real estate will become requirements for investors seeking to deliver differentiated returns and win deals in this highly competitive environment.
Finally, an increasingly challenging labor market has left many operators struggling to staff leasing offices, front desks and maintenance teams, making tech-enabled solutions for core property management an absolute requirement.
The proptech industry has received a lot of attention from the venture capital and public markets recently, with more and more money poured into companies each year. In addition to those with deep expertise in the space, several well-known, large-scale companies that have traditionally leveraged technology meant for everyday consumer use are focused on breaking into the industry and are investing in proptech.
Key factors driving this interest include:
The growing awareness around climate change, carbon emissions and waste reduction require intuitive solutions for everyday needs such as parking management, managed Wi-Fi, smart devices, AI, waste monitoring and package management. Today’s consumers expect innovative solutions, and proptech can deliver them.
Owner and operator willingness to accept change and adopt new technologies. The pandemic has challenged owners to do more with less while still delivering a great end-user experience. Centralizing operations and creating and investing in amenities that focus on infrastructure, accessibility and ease of use is critical.
Enhanced interest in self-service. All major industries (auto, health, banking and retail, for example) are adopting self-service customer experiences, and the real estate industry is finally moving in that direction with things like self-guided and virtual tours, iBuying, parking management and sophisticated CRMs that infuse AI.
A shift in buyer personas. We’re seeing more purchasing of proptech solutions being handled by operational and tech-focused leaders rather than the traditional marketing and sales-focused personas of the past.
Kevin McAllister ( @k__mcallister) is a Research Editor at Protocol, leading the development of Braintrust. Prior to joining the team, he was a rankings data reporter at The Wall Street Journal, where he oversaw structured data projects for the Journal's strategy team.