PropTech through the ages
Real estate is the largest asset class in the world, worth more than all stocks and bonds combined. The industry contributes $3.5 trillion to the US GDP, $836 billion of which is on construction spending. On the residential side, about $1.3 trillion worth of existing homes transacts every year. And yet, the industry hasn’t fully taken advantage of the innovative technologies available to them.
The opportunity for tech-enabled companies to compete in this space is galvanized not only by the sheer size of the market but also by the limited amount of innovations to date. The lack of tech in the industry is well documented. Thirty years after its introductions, Excel is still the most commonly used tool, from small property owners to sophisticated real estate investment firms. Collaboration across stakeholders in the value chain still remains an offline, difficult to access, channel. That being said, we know and we can see for a fact that even light-weight innovation can have a huge impact in this industry.
The opportunity to modernize real estate is not new. In fact, there have been three distinct stages of PropTech since the 1980s.
Early PropTech (1980–2000)
The introduction of personal computing and later, the popularization of tools like Excel, real estate institutions began to adopt technology to drive more quantitative and analytical approach. Software companies began to emerge to address the industry’s demand for better tools for functions such as underwriting and analytics. Unlike software solutions we see today, the products introduced during this period were closed-form services, which did not communicate with one another. Despite these limitations, the leading companies founded during this period (Autodesk, CoStar, etc.) have still preserved the leading market share today.
Post dot-com bubble (2001–2007)
Following the dot-com boom, the internet ushered in a new period of consumption in online transactions. At the beginning of this period, 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 adjusted consumers to online transacting in a way that similar models began to take shape in real estate. Now online giants, Zillow and Trulia, targeted the residential real estate opportunity, given the amount of available data. These companies began removing the need for incumbent middlemen.
Remarkable advancements in data processing, storage, and ingestion, the last twelve years of PropTech ushered in companies with large ambitions. Preference changes lead to a demand for access over ownership, which propelled companies like WeWork and Airbnb into the mainstream. These companies leveraged the shared economy to make physical spaces more homogeneous. If the defining features of the last PropTech waves were richer user experience and participation, the era of PropTech sought to better the user experience of renting, buying, selling, and building physical spaces. Many companies believe that vertical integration is critical to achieving and continuing massive efficiency gains.
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: PropTech
As we’ve seen in the past, every wave of innovation in technology has seen a corresponding innovation for real estate products. The Early PropTech era started to address the industry’s growing demand for better underwriting and back-office tools. The Post dot-com bubble era applied the online aggregator model to real estate. The Gig-Economy era 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, create proper valuation methods, 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 real estate.