Are VCs Changing the Housing Industry? Experts Weigh In
Few things are as backward as housing in the United States. Virtually everything about how housing is designed, financed, constructed, managed, and sold is beset with inefficiencies and outdated, analogue answers to modern problems. But this may be changing. A number of startups are bringing novel thinking and tech to fossilized sectors of the housing industry.
These approaches have caught the interest of VCs, whose waning interest in solving for things our moms used to do for us has sent them looking for more enduring opportunities. This interest has translated into investment, and last summer Techcrunch declared that “VC doors are wide open for real estate startups,” and noted a $100 million increase in investment in real estate focused startups from the previous year.
While this is encouraging to anyone concerned with remedying the U.S.’s myriad housing crises, it’s news that must be treated soberly. Time will tell whether the majority of VCs can tolerate the long runways, huge amounts of capital, and innumerable regulatory hurdles that come with most housing ventures.
Rather than speculating whether the current VC interest is here to stay, I emailed a number of housing startup founders and experts — most of whom have dealt with VCs firsthand — to hear what they have to say on the matter.
Stonly Baptiste, Co-Founder and Partner at Urban Us Ventures
Urban Us is the first fund for startups that make city life better. (Crunchbase)
Do you think VC money is really interested in housing long-term or is housing simply having its moment right now?
Housing is having a moment, but it could be a very long moment. The challenges and opportunities are massive, and so long as that’s true, entrepreneurs will show up. Where there are entrepreneurs, there will be at least some VC money. How much will depend on the results of the current investments as well as the quality of the entrepreneurs the space attracts.
We’re [Urban.us] committed to moving the needle on housing affordability, quality of living, and sustainable construction. There are numerous very large markets under the umbrella of housing and we’re just starting to scratch the surface.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
Long term implications are hard to tell this early. We don’t know who the new incumbents are yet. Short term implications are an increase of opportunities for this very old and inefficient industry to modernize.
Harley Courts, CEO Nooklyn
Nooklyn is a tech-enabled brokerage committed to making the process of finding an apartment or roommate as easy and enjoyable as possible.(Crunchbase)
Do you think VC money is really interested in housing long-term or is housing simply having its moment right now?
An increase in venture funding for the real estate tech space is validation that VC money is in it for the long haul, as their funds look for 8–10 year returns. Real estate has been slow to adopt technology and treats it as an accessory rather than integral part of how business is done. In the near future, there won’t be a distinction between tech and non-tech companies. Every other market has already been disrupted by tech, and highly regulated markets like real estate are next. Most other big market sectors are yielding lower returns or are consolidating and becoming monopolistic. VCs are looking where to put money next and real estate tech is definitely a promising space.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
For the consumer, venture funding into real estate tech is great. This means more transparency, better on and offline experiences, and long-term cost reductions to housing. There is so much unused space, and technology really is the solution to making it easier to move or identify emerging development opportunities.
Jon Dishotsky, CEO Starcity
Starcity is building a new category of real estate between hotel and housing. Our mission is to make great cities accessible to everyone. (Crunchbase)
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
Absolutely the former. We’re going to see some awesome innovation in housing over the next decade, and the kingmakers [VCs] of the best startups will be rewarded for their early bets today. Many of the “traditional” venture investors who sit on our cap table, or are taking a deep look into the market, have or are starting to realize the enormity of the problem and therefore the opportunity. It took movements like YIMBY, the uptick in salaries within their portfolio companies, and technology to get to the point where they took notice. Now the question has become, “do these new companies fit into the venture-return models?” We (and many of them now) believe they can. We also believe that these startups, as fully realized companies, could dwarf the largest technology companies that exist today, due to the sheer market size. That is what’s getting some of the top firms to really lean in heavily now for the long-term.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
I think the majority of the changes and benefits will all accrete to the customer of housing, i.e. the renter/owner/buyer. If you look to the parts of any market that has the biggest pain points, that’s what startups like to attack. In housing, it’s flexibility, affordability, quality, etc. If we all succeed, housing for the next generation of consumers could be an order of magnitude better. There will be many startups that fail over the course of a decade or two of innovation, and that will suck for a small subset of consumers. But in the end, we’ll be looking at an entirely new housing market with brand new market leaders that use technology as a major component of their businesses. Today the word research and development doesn’t even show up on the 10-K of the top homebuilders. I would argue that all the best startups now in housing are entirely R&D. Venture has to, and should, play a part in that innovation, and it’s an imperfect but necessary harmonious relationship.
Brad Hargreaves, CEO Common
Common designs, creates, and operates all-inclusive shared homes, bringing community, convenience and flexibility to housing. Since 2015, Common has opened more than a dozen homes across NY, SF, Oakland, DC, and Chicago. (Crunchbase)
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
Rental housing is one of the largest industries in the United States. It’s also one of the most backward, with basic software technology — electronic signing of leases, automatic rent payments, online ticket management, to name a few — that has not yet been implemented by most residential property management companies. Furthermore, only the most advanced developers are using data to make decisions. It’s one of the last industries where “this is the way we’ve always done it” is still a widely acceptable answer. This creates opportunity for innovation, which is why venture investors have taken an interest in it.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
It’s important to note that venture dollars are rarely “going into the housing market”. That is, venture investments are typically used to pay software engineers and designers, not purchase real estate. It’s important to make this point, as framing this discussion as “venture money moving into housing” is an oversimplification that’s going to scare a lot of people who are worried about rents going up. Historically, in other consumer product categories, venture investment in a sector has brought consumer prices down — not up — through innovations in production, efficiency, and the disruption of longstanding oligopolies. I believe this will happen in housing as well.
Martyn Hoffman, CEO Kasita
Kasita is designing and manufacturing connected, resilient, and modern micro homes designed to fit in the heart of the city or right in your backyard. (Crunchbase).
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
I think VC’s are beginning to realize the opportunity within the housing segment and are intrigued by the market size and the issues that are plaguing the traditional construction industry. In the tech world, disruption is part of everyday vocabulary, but not so much in the construction industry. With Kasita’s focus on modular construction as a housing industry disruptor, VC’s are seeing the correlation and are attracted to it. By adding a tech component to the housing/modular industry, it allows them to bridge the gap between what they are used to investing in and a new area of opportunity.
That being said, they take a much more conservative approach to the industry given that it is a new area for them and out of their core expertise. I do believe that VC money is interested in housing long-term because the value that is ripe for the taking is long term, unlike many software/app cycles that they are used to.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
I think it means more disruption and more attention from unconventional minds in a space dominated historically by conventional ways of thinking. I think it will bring a new age of innovation and questioning around everything from how we design homes, to the manufacturing process, to what people expect and want in a home of the future.
Aaron Holm, CEO Blokable
Blokable is a high-performance modular building system for developers to deliver residential, retail, and mixed-use projects in a fraction of the time. (Crunchbase)
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
VC money is interested in any large market where technology can change market dynamics and create new value. I don’t think housing is having its moment yet with VCs yet. I think we’ll look back on this time the way we look back at the PC industry in the early 80s; before Microsoft and Apple brought personal computing to the mainstream and before computer networks connected people to collaborate using technology.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
Venture Capital in housing is a recognition that we’re moving beyond the ‘custom project’ housing development model that has held the industry back for so many decades. If architects and builders have to start from scratch with every project — both from a tools and a finance perspective — there’s very little room to take risks and to innovate. Custom projects require the seller to take as little risk and make as much profit per project as possible, while products require the seller to invest in a repeatable idea that can be sold as broadly as possible.
Venture capital provides the upfront financing required to prototype an idea before implementing it as a product for a customer. In my company’s case, when our customers buy a Microblok, [Blokable’s housing module] they’re getting the value of millions of dollars of research, development, prototyping, and testing, but only pay $85,000 because it’s a product, and we’re selling the same product to multiple customers. We are also deploying software with every unit we ship and will continuously update the capabilities and experience, meaning our product will improve over time. The long term implications are huge: increased product standardization, pressure to reform housing regulations and policy as traditional building bottlenecks are removed, new financing and homeownership structures, and increasing connectivity between housing and other systems as VCs connect companies in their investment portfolios. I believe the entire housing ecosystem is in the early stages of a radical transformation.
Roger Krulak, CEO FullStack Modular
FullStack Modular provides turnkey modular solutions for developers of new multifamily buildings, hotels, and dormitories.* (Crunchbase)
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
VC follows money-making opportunities. We know that there are massive housing deficits and that our relationship to the house as an asset class is changing. Therefore, there are market opportunities. The opportunities can be in from an opportunistic, high-yield perspective — e.g. buying houses at a massive discount and renting them for massive profits. Or it can come from new asset classes such as micro housing and coliving, which offer new operational models and better revenue through new managed living models. As they say follow the money.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
I am not sure. For the most part, VC capital seems to go for short term gains focused or big wins. However, that approach sometimes drives efficiency and innovation as a byproduct of chasing the capital. Those gains could well serve the industry and its players long-term as a result.
Shruti Merchant, CEO HubHaus
HubHaus is a housing community that provides working professionals with a long-term, shared housing with AirBnB-like ease. HubHaus on Crunchbase.
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
I absolutely think this is a long-term play, and will continue to grow as time progresses. We know that 50% of people are currently living in urban areas (which will go up to 70% by 2050), and that folks are getting married later. We’re also seeing trends in the sharing economy: our generation is not only okay, but wants to split amenities which previous generations were not okay sharing (as shown by companies like Uber & Airbnb). There’s a major gap in the housing sector for professionals who are not interested in settling down yet. In addition, as housing prices increase, we need more creative solutions to make living in cities a feasible option.
Where the market goes, the money will go as well. VC’s are picking up on these market trends and are just starting to invest in housing startups. This will continue to increase with time.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
The industry will change quite a bit as venture starts to put money in. Venture inevitably means high growth and usually a heavy dose of tech. We’ll probably see companies grow faster (with some of them failing) and likely clumping together a very fragmented property management and apartment market. On the user side, it’ll mean that we’ll see a refresh of an age old industry: a more seamless experience to find a house, rent/buy a house, and move in experience.
Dror Poleg, ReThinking Real Estate
Dror consults with private equity funds, institutional investors, and real estate companies to capitalize on long-term economic and technological trends. More at www.rethinking.re.
Do you think VC money is really interested in housing long-term, or is housing simply having its moment right now?
Most mainstream funds are just starting to ramp up their interest and there’s plenty of room for them to increase their involvement. The problems in housing (and real estate at large) are significant and present opportunities for value creation that can keep plenty of investors and entrepreneurs engaged over the next 5 years and beyond. This includes new problems that will emerge with intensifying demographic and employment trends.
What, if any, are the long-term implications of the inflow of venture capital into the housing market and its related industries?
It will turn real estate development and operation into an increasingly specialized business, where success depends on deep understanding of customer’s needs and a sophisticated integration of hardware, software, and value-added services. This, in turn, would shift the advantage towards new types of real estate companies — as well as towards more sophisticated investors who are not simply “allocators” of capital.
- Disclosure: FullStack Modular is a client.
David Friedlander (me) runs Hothouse, a Brooklyn-based marketing communications consultancy with a narrow focus on innovation in real estate. If you’re up to something cool, let’s chat.
