In 2017, venture investors deployed over $5 billion in real estate technology, more than 150 times the $33 million invested in 2010. Once a sector seemingly ignored by the venture industry, real estate tech has come front and center, notably producing two of the three most valuable startups in the United States, WeWork and Airbnb.
Driving this investment explosion is the evolution of real estate tech from its initial phase of software and marketplaces complementing the incumbents to a new era where tech enabled players are going head to head against the sector’s largest incumbents (hotels, commercial landlords, brokerages) and consuming massive amounts of investor capital as they scale. As challengers mature into leading players, we believe we are entering a third phase in the evolution of real estate technology. The businesses that define the emerging third phase of real estate technology are likely to look more like the earliest technology businesses in the space – more complementary than competitive to incumbents and deriving their value proposition by utilizing new technological capabilities. This phase likely will include companies that leverage sensors and virtual reality to create smarter spaces, machine learning to standardize and draw insights from industry data and platforms to more efficiently manage transaction services as well as to design, manage and outfit physical spaces.
Given that U.S. real estate is a $35 trillion asset class, and represents a multi-faceted market generating over $1 trillion in revenue annually, according to IBISWorld Industry Reports, the strong interest in companies built to serve, arbitrage or compete with the incumbents is not surprising. Nevertheless, up until a few years ago there were only a handful of significant U.S. real estate tech success stories.
Venture investors are a thoughtful and forward-looking group, so why did it take so long for the real estate exuberance to set in? In part, despite the industry’s size, there was seemingly a general wariness of the structural issues that make it challenging:
- Traditionally, the incumbents have made for terrible customers
- Real estate agents and brokerages (the key intermediaries) have not historically made large investments in technology and, in some cases, were opposed to adoption out of a concern that tech driven transparency could lead to their diminished relevance
- Landlords and developers see their primary focus as acquisition and/or asset management and have been reticent to make significant investments
- The data is very messy
- Real-time data relied on sub-scale self-service info entry on non-standardized technical platforms
- Property listing data was often not updated with closing data
- Some agents believed that maintaining proprietary listing information was advantageous
- Creating meaningful client value and competitive barriers through tech in a space that is defined by a “real” and physical experience is difficult
- Market demand is not “stable”- most real estate markets go through cycles that heavily impact businesses serving the industry
Real Estate 1.0: The Complementary Phase
Despite the previously mentioned obstacles, real estate tech was not absent from the prior tech booms. The VC sweet spots of software & data and marketplace companies helped fuel the success of real estate tech “1.0” in the late 1990s. For example, commercial real estate data powerhouse CoStar went public in 1998 and HomeStore (now Move.com), the residential real estate industry’s marketplace, listed the following year. Moreover, in the mid-2000s, data management business, Altus Group, which makes the industry leading asset management software Argus, went public along with commercial marketplace LoopNet. With this activity, the seeds were planted for the big winners of the post 2008 residential market growth: Zillow and Trulia, traditional tech marketplaces for the home purchase sector.
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