Real Estate Tech Industry Landscape

Naomi Grossman

October 2018

Objective        2

Industry Overview        2

Property Management        3

Broker Tools and Search        3

CRM/Marketing        4

Data and Analytics        4

Investment/Liquidity        4

Market Size        4

Industry Trends        4

Real Estate 1.0        5

Real Estate 2.0        5

Real Estate 3.0        6

Smart Applications - IoT        6

Visualization        6

ConTech        7

RE FinTech        7

Data management - Robotics and Cognitive Automation        8

Market Map and Segmentation        10

Industry Drivers        11

Shift from owning to renting        11

Technology adoption of firms        11

Consumer Expectations        11

Urbanization        11

Mobile Technology        11

Case Study: Hudson Yards        12

Conclusion        13

Next Steps        14

Sources Used        14

Objective

The purpose of this document is to provide a market landscape and segmentation for the real estate tech industry and to serve as a resource for Laconia due diligence on companies in this space. The document includes an industry overview, market size, trends, and segmentation. This document and corresponding database are works in progress and are by no means fully comprehensive. Please note that the inclusion of companies in this document does not indicate an endorsement by Laconia.

Industry Overview

Following the period of diminished property value, strict lending requirements, and halted real estate development that characterized the 2008 housing bubble, the real estate industry has experienced strong recovery.[1] The residential and commercial housing markets make up the most valuable asset class in the United States, worth approximately $23 trillion and $15 trillion, respectively.[2] The activities within the asset lifecycle of the real estate market consist of funding, development/construction, broker & listing, leasing, management, and selling/buying. Each of these activities creates opportunities for technological innovation:[3]

Property Management:

About 70% of real estate properties are self-managed, meaning individuals/owners are responsible for daily operations. Not only do technological applications remove the hassle of managing properties and tenants, but they also generate ROI by streamlining tenant on/offboarding and payment processes. In the future, we can expect property managers to seek out end-to-end solutions across their workflow.

Broker Tools and Search:

With the Computational Age, online listings have addressed a major pain point in the real estate listing process. Previously published in newspapers and magazines, listings are now available online and searching makes it easier than ever to qualify listings, bringing greater transparency to a once old-fashioned industry. As a result of higher match rates and enhanced broker communication, sale cycles have decreased and customer service has improved.

CRM/Marketing:

Customer Relationship Management allows brokerages to leverage their network and clients to power their sales processes through outbound contacting and referrals. In addition to a database of contacts, marketing is being enhanced by technology through automated outreach, campaigns, search engine optimization, and transaction management. In an industry characterized by longer sales cycles, tools to drive a deal are critical.

Data and Analytics:

Data and the tools to analyze it are extremely valuable. In real estate, data such as inventory, transactions, market rates, and occupancies are being collected. With the correct interpretation of this data, individuals, commercial real estate owners, brokerages, and construction companies can inform their various decisions.

Investment/Liquidity:

In terms of asset management and investing, there is an opportunity to streamline the portfolio management process so that anyone can participate in this type of investing. Just like companies have simplified stock management, online solutions provide transparency and visibility into portfolio performance, creating a meaningful value proposition for beginners in the real estate investing space.

Market Size

Within the $35 trillion real estate market,[4] Catalyst Investors, a growth equity venture capital firm, estimates that real estate tech totals about $6.5 billion, with $3.7 billion in software spend commercially and approximately $2.8 billion residentially (top-down approach).[5] Globally, the sheer number of real estate tech startups has increased from just 176 in 2008 to 1,274 in 2017, representing an increase in capital investments from $2.4 billion to $33.7 billion.[6]


Industry Trends

The real estate tech industry can be divided into three distinct phases that mark a shift in the use of technology in this space (see chart below). The timeline runs parallel to Computer Automation and the Fourth Industrial Age.

Real Estate 1.0

Real Estate 1.0, also termed the Complementary Phase, was driven by software, data, and marketplace companies from approximately 1980-2000[7] (during the Computation Age). Technological applications during this time consist mostly of online search and listing capabilities, making it easier for buyers and sellers to access data and speed up the sales process.

Companies include: CoStar, Altus Group, LoopNet, Yardi, and Argus

Real Estate 2.0

From 2000-2017, the real estate industry entered the Challenger Phase during which startups leveraged technology to build on and outperform the incumbents’ existing offerings. This phase was driven by the rise of e-commerce, social media, open-source software, and multi-platform capabilities. Additionally, the concept of space arbitrage gained popularity with the shared economy, as real estate could now satisfy a different use or be used for a shorter duration than was typical.[8]

Companies include: Airbnb, WeWork, RedFin, Compass, OpenDoor, Zillow, Trulia, LiquidSpace, PivotDesk, Flexioffices, Spacious, Breather, and Workbar

Real Estate 3.0

We are currently in the Synthesis Phase where startups are becoming complements to incumbents rather than challengers. This phase is categorized by a wide variety of technological applications and unique business models:[9]

Smart Applications - IoT:

Definition: A network of physical devices embedded with software and sensors to offer connectivity and data analytics.

Purpose: To measure and drive sustainability through tracking factors such as energy, water, electricity, and usage of locations. The real time data is then used to make cost-cutting and energy-decreasing decisions.

Example: AWS data storage centers are using this technology to coordinate sustainability efforts across locations.

Companies include: Nest Labs, Aggreko, Honeywell, WiredScore

Visualization:

Definition: An interactive, computer-generated experience to simulate an environment or physical space.

Purpose: To support visualization in the real estate industry by enabling virtual tours of listings and development plans.

Example: Architects can manipulate floor plans from mobile devices, reducing the risks of making mistakes in the construction process and a customer not enjoying the final product.

Companies include: Matterport, Floored, HouseLens

ConTech:

Definition: Technology that tackles pain points in construction, more specifically related to design, engineering, and architect workflows. ConTech presents a major opportunity as this segment of real estate hasn’t been fully addressed by modern technology: “while the rest of the economy has been supercharged by machines, computers and robots, construction companies are about as efficient as they were in World War II.”[10]

Purpose: To cut costs by using cheaper materials, enabling longer working hours, and eliminating human capital costs (also addresses the affordable housing problem brought on by an increase in housing demand and decrease in worker supply).

Example: The WASP project in Italy is using 3D printing to help with affordable housing issues in developing economies.

Companies include: Katerra, Autodesk, ConstructConnect, IronPlanet, Micello, ProCore

RE FinTech:

Definition: Financial technology applications in the space of real estate include crowdfunding, debt and mortgage platforms, leasing, portfolio management, and investing. Of the global real estate tech space as a whole, fintech companies make up 3.2% on a funding basis. Additionally, the global lending industry has been estimated to grow from $40 billion to over $1 trillion from 2016-2021.[11]

Purpose: To address the inefficiencies of property selling and trading, including the illiquidity of investments, costly due diligence, and complex portfolio management.

Example: VTS has 7 billion square feet under management and provides real-time data to top landlords and brokers, allowing them to manage their deal flow and examine trends/performance instantly.

Companies include: VTS, RealtyShares, LendingHome, Better Mortgage, RealtyMogul.com, Zillow, Zoopla, Credit Sesame

Data management - Robotics and Cognitive Automation:

Definition: Utilizing technology and machine learning for automatic data entry, analysis, and management. Robotic process automation (RPA), projected to be a $16.9 billion market in 2024[12], allows repetitive and manual processes to be automated. On the other hand, cognitive automation and machine learning speeds up decision-making processes.

Purpose: To aggregate listing data in order to deliver fast and accurate information to the customer without having to consult experts in the industry for property valuations and mortgage calculations. This technology will primarily be used in the finance and accounting areas to cut costs, reduce process time, and collect data for decision making (see infographic below).

Example:  Instead of filling out countless forms, processing applications, inspecting the property, hiring an appraiser, and going through the negotiations, RE tech companies use AI (e.g., Zestimate by Zillow) to price homes with incredible accuracy, cutting the initial process by half the time.

Companies include: HouseCanary, Reonomy, Zig Bang, RedFin, Estately, 42Floors

Market Map and Segmentation

Venture funding of real estate tech companies is steadily increasing year after year, with the proportion of seed/angel funding representing about half of total investments across all stages of financing.[13]

Below is a market map of Seed and Series A startups in the real estate tech space. A more comprehensive and sortable database of companies in this space can be found here.

Industry Drivers[14]

Shift from owning to renting:

The real estate market is seeing an increase from 34% renter-occupied (as opposed to owner-occupied) properties in 2012 to 37% in 2017. In New York, Los Angeles, Houston, and Chicago, over 30% of housing is in the form of apartments.[15] As a result, software that addresses property management, tenant management, and renting processes will be increasingly valuable.

Technology adoption of firms:

In an industry where technological applications have the opportunity to complement or challenge the current players, incumbents are embracing this technology rather than being taken out by it. Legacy players have been following an acquisition strategy (rather than building in-house) and increasing their technology spend to stay relevant in a changing industry. The real estate industry is one where technology has been slow to enter, so there are many opportunities to remove intermediaries, increase consumers’ access to information, and automate traditional processes.

Consumer Expectations:

As touched on above, the real estate industry has lagged behind in terms of innovative solutions. Therefore, because other industries have seen this change already, consumers have come to expect tech solutions to exist.

Urbanization:

54% of the world’s population lives in urban locations, and this is expected to reach 70% by 2050. This huge shift of people into cities creates demand for real estate that creates logistical and supply problems. One way to address these coming issues is by using sensors and data to analyze environmental impact, the quality of infrastructure, and the basic needs of occupants.

Mobile Technology:

Given the magnitude of people who now own mobile devices, about 2.6 billion people, real estate tech companies must address this trend and offer transactional processes on mobile devices. Additionally, millennials represent the greatest number of smartphone users, and they are projected to make up 75% of the workforce by 2025. Therefore, even B2B real tech companies will need to make mobile technology a priority.

Case Study: Hudson Yards

Bounded by 30th St., 12th Ave., 34th St., and 10th Ave., Hudson Yards is the largest private real estate development in U.S. history and the largest real estate project in NYC since Rockefeller Center. The $25 billion project will be the poster child for real estate tech and connectivity, combining 14 acres of gardens/plazas/playgrounds/public space, 3 parks, 18 million square feet of commercial and residential space, and 1 million square feet of retail space.[16] 

The motivators behind what this space will provide come from the previously-mentioned trend of millennials comprising the majority of the workforce. Jay Cross, the President of Related Hudson Yards, acknowledges that the Hudson Yards project must cater toward the future of the workforce, not the present. Thus, this real estate development project has kept connectivity, collaboration, social features, and mixed-use environments as top priorities.[17]

Behind “one of the most complex construction projects in the history of New York City” are a number of features that demonstrate the overlap between technology and real estate:[18]

The eastern side is expected to be done this year and the western side is expected to be completed in 2025, but Hudson Yards has been 100% leased, a testament to the ambitious nature of the project.[19] Hudson Yards is a huge step toward accelerating real estate technology development, and the city of New York is very excited for the finished product.

Conclusion

Full of legacy workflow processes and making up the largest asset class in the U.S., real estate has proven to be a ripe opportunity for technological applications. The venture capital world has picked up on this opportunity, too, as VC funding totaled $5 billion just in 2017.[20] 

Key takeaways from this industry landscape include:

  1. Real estate constitutes the most valuable asset class in the United States at $35 trillion, with real estate technology contributing $6.5 billion.
  2. Every activity within the real estate asset lifecycle has opportunity for technological applications, and because this industry has been historically slow to innovate, it is an ideal time to for it to catch up.
  3. Three distinct phases characterize the real estate industry, each defining the way incumbents interact with new entrants/technology in the space: complementary → challenger → synthesis.
  4. Consumer behavior is the main driver of the industry’s direction (owning to renting, urbanization, tech expectations). The Hudson Yards project is a case study for how real estate projects are catering to these consumer needs, priorities, and behaviors.

Next Steps

Please comment or reach out to info@laconiacapitalgroup.com with any insights, feedback, or missing companies.

Sources Used


[1] IBISWorld

[2] Codetiburon

[3] Catalyst

[4] Forbes

[5] Catalyst

[6] Deloitte

[7] Forbes

[8] Forbes

[9] Codetiburon

[10] NYTimes

[11] Deloitte

[12] Deloitte

[13] Catalyst

[14] KPMG

[15] Catalyst

[16] Deloitte

[17] Inc

[18] Hudson Yards

[19] Inc

[20] Forbes