Most real estate managers today are not using proptech tools, leaving a big opportunity for growth ahead, especially around identifying efficiencies that save on operating costs or that can avoid the hit from punitive carbon taxes in the future, Alan Greenberg said. “We’re not in the mainstream yet,” he said. “These are huge opportunities.”

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Fundfire
By Tom Stabile
October 20, 2021

Real estate fund managers are encountering an onslaught of new technology offerings aimed at digitizing, automating and optimizing the business of buying properties and operating those buildings and facilities – as well as questions from investors on how they are approaching this so-called “proptech” revolution.

The roster of products, software and services under the loosely defined proptech banner is growing fast, spanning tools as mundane as document workflow and rent collection systems or as advanced as robotics, process automation and virtual reality “digital twins” of a building that can model peak performance.

And managers and investors are gauging the potential of these tools to improve operations, bring efficiencies, track sustainability and ultimately boost investment returns. Many fund managers and institutional investors are still engaged in the first step of taking stock of available and emerging proptech options, said Bernie Bazile, VP in the real assets consulting group at Callan.

“That’s where you start, by asking ‘What is going on in real estate technology?’” she said.“We’ve seen an uptick in clients asking that same question.” It’s too soon to ask managers for a checklist of what proptech tools they’re using or not using, and instead better to simply ask what they’re doing so far, Bazile said. “It’s such a nascent industry,” she added. “Even the proptech companies at the intersection of real estate and technology are learning.”

Understanding the scope of possibilities is a daunting hurdle for real estate managers flooded with all kinds of new technology, said Andrea Chegut, director at the Massachusetts Institute of Technology’s Real Estate Innovation Lab, which recently developed a Tech Tracker tool under a research partnership with Jones Lang LaSalle.

“How the real estate sector uses technology to overcome challenges is still evolving,” she said. “We’re trying to stretch the culture toward this long-run perspective of [embracing] technological processes for the built environment – how to find technology that is relevant and how to plug into the proptech universe.”

The Tech Tracker, unveiled last month, aims to provide both baseline knowledge as well as outline the broad future possibilities for real estate professionals, with features such as a top 10 list of new technologies for the market and a running list of proptech tools that are gaining momentum or losing steam. The initial version lists 5G communications, virtual reality, the internet of things, graphene, augmented reality, photogrammetry, connected home, aramid fibers, exoskeleton and carbon nanotube as current technologies to track. And that list leaves off other ambitious items such as flying cars and plastics made from algae.

“You should be aware of all of these technologies,” Chegut said. “But for fund managers… anything that has to do with automation is [critical]… And 5G and internet of things are like utilities – if they don’t understand that, they’re kind of missing out on the basics of what is going to happen in the next decade to support the digital acumen of our space.”

But technology innovations can also have more routine targets, Bazile said, such as systems that help managers collect and analyze data; source and underwrite deals; or build, acquire, sell, lease and manage real estate properties. Tools to measure environmental, social and governance indicators – or improve the physical performance of assets around ESG goals – are another major area of proptech development, she said.

And the flow of new technologies remains steady in part because of strong interest in the sector from venture capital firms. The Center for Real Estate Technology & Innovation estimates that proptech companies attracted $116.5 billion in venture capital funding between 2017 and 2020, and despite dipping during the pandemic last year, is on pace for a rebound in 2021.

Even five years ago, real estate was one of the least digitized industries in the economy, said Alan Greenberg, chairman and co-founder of Greensoil Investments, which has two $100 million-range proptech-oriented venture capital funds. It raised the first in 2015, and the second earlier this year had a roughly $50 million first close. Greensoil focuses on startups that merge proptech and climate change mitigation technologies for real estate, and counts Canada’s Public Sector Pension Investment Board among its investors.

The real estate market “was ripe for change,” Greenberg said. “In the last two years, we’ve seen a plethora of venture capital firms focused on real estate, and [we’ve] also seen a lot of generalists start to develop expertise in proptech… [E]very month there’s a new proptech [vehicle].”

But adoption of these technologies among fund managers varies widely, depending in part on how old the firms are and how far along they are in their own technology journeys, Callan’s Bazile said. “It ranges from managers now deciding to put more intention behind proptech decisions to others that have gone through that process and built out a set of goals,” she said. “And some are focused more on the physical asset level, some more on operations.”

Most real estate managers today are not using proptech tools, leaving a big opportunity for growth ahead, especially around identifying efficiencies that save on operating costs or that can avoid the hit from punitive carbon taxes in the future, Greenberg said. “We’re not in the mainstream yet,” he said. “These are huge opportunities.”

Even if managers haven’t jumped into the market, they should at least be forming a view around proptech and where it might fit in their investment approach, Bazile said. “It wouldn’t be encouraging if a manager [said it was] not considering proptech,” she said. One reason to step up is an expectation that use of proptech tools eventually can translate into better investment returns, Bazile said. “The assets that are performing less efficiently – that could impact their bottom line,” she said.

Another reason for managers to get a head start is that the future landscape for proptech is vast and could take unexpected directions, Chegut said. The concept of a fully developed digital twin, for instance, may become a standard tool not only for modeling building operations under different conditions but also for tracking depreciation and mapping out the financial performance of a property, she said.

And emerging technologies such as window walls that double as solar panels or water booster pumps that use less horsepower augurs changes in real estate that could impact a wide array of standard building functions, Greenberg said.

“The broad industry is looking at every component in a building,” he said.