While technology has modernized many aspects of our lives, the commercial real estate industry has not experienced the same transformation. A nascent industry called “proptech,” short for property technology, is determined to change that.
Proptech is an umbrella term used to describe a wide range of technological innovations applied to how people analyze, construct, buy, sell, occupy, rent, or manage both commercial real estate and residential properties. Users of proptech include real estate investment managers and other industry players like attorneys, contractors, tenants, and property managers.
This blog post (which is a summary of my recent white paper on the subject) will focus on how and why institutional real estate investment managers are using proptech, what this means for institutional investors with real estate allocations or those considering one, and what steps investors should take to assess how effectively their managers are using proptech to improve returns and increase efficiency.
What Managers Hope to Get From Proptech
Real estate investment managers use proptech to improve the physical performance of assets, or the processes for managing assets. For instance, software solutions can help create efficiencies by digitizing manual, cumbersome workflows and reducing the number of systems that store data, typically resulting in a savings of time and capital while making it easier to scale a business.
Other proptech products can modernize physical assets, which can preserve asset values, reduce energy consumption, or improve the tenant experience. For instance, window panes that use artificial intelligence to adjust the amount of natural light they let in, oftentimes referred to as smart windows, can result in lower energy costs and improved health and wellness for tenants. One study found that smart windows can reduce energy consumption by up to 35% in high-rise buildings.
Proptech has also helped managers improve their environmental, social, and governance (ESG) ratings, with many of those improvements in the “E” category. Since the start of the pandemic, emphasis on the “S” has accelerated as landlords seek to improve indoor air quality, surface sanitization, social distancing measures, and the overall well-being of commercial office space dwellers.
Real estate managers both generate and gather vast amounts of data around activities like deal sourcing, underwriting, asset management, and dispositions. Technology that can make analyzing data more efficient helps managers improve decision-making. As an example, a manager might use machine learning to create algorithms that quickly analyze data from many sources around a potential deal and then present the findings in an easy-to-digest format, like a deal ranking, which is used in the underwriting process. Managers with proprietary artificial intelligence systems that use machine learning could create significant advantages for themselves relative to their competitors, making this segment of proptech a potentially strong disruptor in deal sourcing and underwriting.
Assessing and Accessing Proptech; GPs Become LPs
Given that there are thousands of proptech companies, many of which are early-stage startups, adopting proptech successfully can be challenging. However, the proptech industry and its users have moved toward identifying the most effective solutions. Venture capital firms focused on proptech have not only been active in identifying proptech investment opportunities, but some have also created proptech ecosystems within an advisory business that consults with investment managers seeking guidance on implementing new solutions and introduces these managers to proptech firms. Oftentimes, these real estate investment managers may also be investors, or the limited partners, committing capital to these VC proptech funds, further driving the growth of the proptech industry. This ecosystem aims to uncover more startups with strong solutions, get capital behind them, and connect them with real estate investment managers and other industry players willing to test and implement their technology solutions.
Some of the largest real estate investment managers, with relatively larger corporate coffers, are making in-house investments in proptech, rather than using external advisory services, by hiring tech talent and using their own assets and employee groups as testing labs for either home-grown proptech solutions or outside proptech startups. Taking it a step further, some of these larger real estate managers have either launched their own proptech investment funds or their own SPACs to further capitalize on their specialized tech knowledge.
Key Steps for Institutional Investors
What should investors do to better understand how their real estate managers use proptech and the resulting impact on their portfolios? One approach is to initiate a conversation with the manager on its proptech efforts across its business and portfolios. Some questions to consider are:
- What are the proptech-related goals for the firm? Over what time horizon?
- Tell me about a tech solution your firm is either considering or has implemented that has qualitative benefits that are not easily quantifiable.
- How are decisions to implement new technology made?
- Is there a key person responsible for overseeing the process of selecting and implementing a new technology solution?
- What technology initiative are you considering or have you implemented that directly impacts tenants?
- If your firm has launched a SPAC, directly invested in a proptech company, or launched a proptech investment fund, have you implemented the proptech product or service in your business? If so, what are the potential conflicts of interest? How have you addressed them?
This approach opens up a conversation many managers typically do not have with their investors and helps to uncover what steps the manager is taking to create efficiencies at the firm and portfolio levels.
For more information on proptech, here are some helpful resources