Where top VCs are investing in real estate and proptech (Part 1 of 2)

The multi-trillion dollar global real estate market is getting flipped on its head.

Business model innovation, data accessibility and the proliferation of mobile, SaaS and other cloud-native software have already given rise to a cohort of tech unicorns that sit amongst the world’s most influential real estate companies. Emerging technologies and growing capabilities across machine learning, 5G, IoT and more — coupled with fast-moving regulations and dramatic cost structure changes — have opened up opportunities for the next wave of innovation across a wide set of multi-billion dollar real estate verticals and sub-verticals.

And despite WeWork’s implosion garnering countless headlines in the real estate and technology worlds, venture dollars are continuing to spill into real estate tech (or proptech) companies at a rapidly increasing rate. Just upwards of $16 billion in venture capital has flowed into real estate-related startups in 2019 alone, according to data from Crunchbase and Pitchbook, with major fundraises happening across industrial, commercial, residential, and financial categories.

If we follow the money, it’s clear that more and more leading VCs are turning to real estate tech or proptech for ripe opportunities for juicy returns and disruption on a global scale. Given the countless subsectors where exciting new startups are popping up, we asked more than 20 leading real estate VCs who work at firms that span early to growth stages to share where they see opportunity within the colossal real estate category. For purposes of length and clarity, responses have been edited and split up into part one and part two of this survey (in no particular order). In part one of our survey, we hear from:

• Zach Aarons, MetaProp
• Pete Flint, NFX
• Ryan Freedman, Corigin Ventures
• Constance Freedman, Moderne Ventures
• Tyler Sosin, Menlo Ventures
• Jeff Crowe, Norwest Venture Partners
• Micah Kotch, URBAN-X
• Merritt Hummer, Bain Capital Ventures
• Kia Nejatian, Plug and Play Tech Center
• MJ Cootsona, Plug and Play Tech Center
• Robin Godenrath, Picus Capital

Answers have been edited for length and clarity.

Zach Aarons, MetaProp

What trends are you most excited in real estate tech from an investing perspective?

We like to track trends that play out in the broader real estate markets. Due to low interest rates and cap rate compression, real estate investors are now looking for yield through investments in non-traditional asset types. Industrial real estate has performed very well over the last few years, and we see a push toward workforce housing, medical real estate, and senior housing. We are looking at investing in technologies that benefit processes within these non-traditional asset classes.

How much time are you spending on real estate tech right now? Is the market under-heated, over-heated, or just right?

We spend 100% of our time on real estate tech (proptech). The market is definitely hot, but the addressable markets are enormous and adoption is still relatively low and accelerating. We believe that now is a good time to invest in early-stage proptech, provided it’s done prudently.

Are there startups that you wish you would see in the industry but don’t?

We would love to see more startups in the material sciences sector. Innovations like steel, bricks, timber, glass and reinforced concrete are hardly new, and they are still the predominant building materials of today. There have been minor advances like cross-laminated timber; however, we are looking for fundamentally new materials to bring into the building trades.

Plus any other thoughts you want to share with TechCrunch readers.

Proptech is the most fun sector in the world. No other sector shares the complexities and idiosyncrasies of technology that has to be applied to the built world. We are very lucky we get to do what we do.

Pete Flint, NFX

Real estate is the biggest asset class in the world by far, but the products available and service proposition surrounding it are still in the early stages of tech adoption. I see at least three major areas of opportunity for startups in real estate tech.

First is the real estate transaction process. Starting around 2005, companies like Trulia and Zillow, transformed the consumer research experience and home buyers increasingly began their search online. But the transaction itself spanning brokerage, financing and closing remains largely analog, complicated and inefficient. There’s an opportunity for startups to provide innovative solutions to help simplify and digitize the transaction process. Example companies in this area are Ribbon and Modus.

Second is the rise of alternative (or professionalized) living arrangements. I see a big opportunity for startups with a strong technology component to provide solutions for the mismatch between the way consumers want to live today and the aging housing supply that was built for a previous era with different needs and demographics. Companies like Lyric and Zeus are building alternative living solutions with a vertically-integrated short term rental strategy, while co-living startups are providing long-term rentals with value-added services.

Third is spend around the home. The large costs in time, effort, and money of designing, building, and maintaining a home provide an opportunity for tech-enabled solutions in construction, home management, and home maintenance. For example, Setter is providing a better consumer experience for requesting home maintenance services while Constru is bringing AI and machine vision to lower prices and reduce schedule overrun on construction sites. I see many more opportunities for startups like these in this space.

While these are big opportunities, the challenge with investing in real estate tech is to find startups with teams that not only have world-class product and software capabilities, but also world-class knowledge of finance, real estate, and operations. And with the recent WeWork debacle, we have seen a renewed emphasis on the failings of low-margin businesses. So for PropTech startups that are looking for funding today, there’s an increased need to demonstrate good unit economics and long-term margin potential.

Ryan Freedman, Corigin Ventures

At a high level, I believe we are still in the early innings of proptech – maybe 3rd or 4th inning. I always like to make the comparison to fintech. Technically speaking, real estate is a larger asset class than financial services. Between 2013-2017, fintech had cumulative funding of $62.4B vs. proptech’s $10.1B. Even though proptech has ramped up the last few years, we still have a long way to go prior to catching up. In addition, you may recall that PropTech used to be a “sub-sector” of fintech prior to being its own behemoth category. There are several subsectors within PropTech today, that I think a few years from now will be their own categories – construction tech is one of those.

From an investment perspective, we’re spending a lot of time in construction tech right now. From a macro standpoint, we feel there is a supply-demand mismatch with respect to the size of the market and the amount of funding in the space. Construction accounts for ~$10T annual spend globally and employs ~7% of the global workforce. In addition, it’s one of the most antiquated industries in the world. This summer we spent a ton of time digging into the space and have now made a handful of investments. We’re big believers of founder-market-fit, and this category in particular requires category expertise to navigate a very old-school industry.

Another area we’re spending time in is broker-tech. We’ve seen the “tech-enabled brokerage” model be effective in a ton of different industries including PropTech. A lot of investors believe this space is “crowded” – which is true in some sub-sectors (i.e. residential) – but when you look closely within the commercial real estate industry, we believe there is a massive opportunity to disrupt traditional real estate capital markets firms.