How To Modernize The Real Estate Industry Using Property Technology
Real estate is the largest asset class in the world — worth more than all stocks and bonds combined — yet it is one of the last to adopt a technology. This industry contributes $3.5 trillion to the US GDP, of which $836 billion is construction spend. On the residential side, about $1.3 trillion worth of existing homes transact every year, and these deals generate about $66 billion in commissions for real estate brokers.
The opportunity for tech-enabled companies to compete in this space is driven not only by the sheer size of the market but also by the limited amount of innovation to-date. Global construction labor productivity has lagged overall labor productivity. Buildings are still constructed with the same processes employed a century ago. From the small mom-and-pop property owners to sophisticated real estate investment firms, Excel is the most commonly used tool for data management 30 years after its introduction. Collaboration across the many stakeholders in the value chain reside in fragmented, offline channels. Having these situations being said, we know and we can see for a fact that even simple, light-weight innovation can have a huge impact in this industry.
Three waves of PropTech
The opportunity to modernize real estate is not new. In fact, there have been three waves of PropTech since the 1980s, and each wave mirrored a contemporaneous trend in the broader tech ecosystem.
Early PropTech: Real Estate in the Microsoft Era (1980–2000)
After the introduction of personal computing and later the popularization of tools like Lotus and Excel, real estate institutions began to adopt technology to drive more quantitative approaches to investment and portfolio management. Software companies emerged to address the industry’s demand for better tools for critical functions such as underwriting, accounting, and analytics. Unlike the enterprise software solutions we see today, the products introduced during this period were closed-form enterprise services that did not communicate or integrate with one another, and in many cases, they required expensive customization by the end-user. Despite these limitations, the leading companies founded during this era — Autodesk, CoStar, and Argus to name a few — still maintain leading market share today.
PropTech 1.0: Online Aggregators Emerge (2001–2007)
Following the dot-com boom, the Internet Era ushered in a new period of consumer confidence in online transactions. At the beginning of PropTech 1.0, it was difficult to find real estate information online, and nearly impossible to purchase or rent a home online. Over time, however, the emergence of large online aggregators in social media and e-commerce acclimated consumers to online transactions in such a way that similar models began to take shape in real estate. Online portals such as Zillow and Trulia targeted the residential real estate opportunity, given its relative size and availability of data. These teams began to disintermediate incumbent information providers by leveraging cross-sided network effects to scale across large users bases and become industry standard platforms.
PropTech 2.0: Bigger is better? (2008-present)
Buoyed by remarkable advancements in data processing, storage, and ingestion, the last ten years of PropTech ushered in companies with large ambitions and even larger treasure chests. Consumer preference for access over ownership propelled companies like WeWork and Airbnb into the mainstream. These companies leveraged the shared economy to make physical spaces more fungible — including homes, offices, retail shops, to storage space. Just as the defining characteristic of Web 2.0 was richer user experience and participation, companies in the PropTech 2.0 era sought to improve the user experience of renting, buying, selling, and building physical spaces. In many cases, companies believe that vertical integration is critical to achieving massive efficiency gains. For example, Katerra is vertically integrating the entire construction supply chain end-to-end, while Opendoor is acting as the buyer, renovator, seller, and agent for their residential transactions.
Venture Funding in PropTech
While these large ambitions will no doubt require significant (and patient) investment to scale, they have benefited tremendously from the last decade’s massive influx of tech capital. However, venture capitalists haven’t always been interested in this real estate. Looking back at 2008, only $20m was invested in PropTech. Fast forward to 2018, that figure increased to ~$4B. While this represents only 5% of total VC funding and 20% of fintech funding, interest in PropTech has grown considerably over the last decade.
Looking Ahead Towards PropTech 3.0
As we’ve seen in the past, every wave of innovation in technology has seen a corresponding innovation in real estate. The Microsoft era started to address the industry’s growing demand for better underwriting and back-office tools. PropTech 1.0 applied the online aggregator model to real estate. PropTech 2.0 leveraged themes like the shared economy and vertical integration to achieve even larger ambitions in the building and management of physical space.
In the coming future, we can see that tech-enabled real estate companies will capture the majority market share over the next 10 years. The next crop of companies will introduce solutions to digitize workflows and elevate transparency for every stakeholder in the ecosystem so that better decisions can be made at a fraction of the cost. There is every indication that technological progress will continue to shape the future of this industry.
