Real estate tech is bouncing back from its pandemic slump
The pandemic has had a stormy impact on the real estate industry.
On the one hand, offices were empty, hotel occupancy collapsed and construction was halted for months. At the same time, the demand for living space increased as people looked for more space to work and study.
As a result, global VC deal flow decreased by almost 80% in 2020 compared to 2019. Meanwhile, venture investments in residential real estate technology fell less than 10% over that time, according to PitchBook data.
As pandemic-related standstills are coming to an end, both segments see renewed interest from venture capitalists. About six months out of the year, VC deal activity in residential real estate technology has already hit an annual record of $ 6.2 billion as of June 18, according to PitchBook data. And with $ 2.6 billion in funding, the commercial segment is well on its way to becoming the second most important year for venture activity in 2021.
Unlike previous years when the busiest companies in the industry served commercial customers, much of the venture dollars goes to startups focused on disrupting the scorching housing market.
“There are so many interesting trends in the living area that you can hardly pay attention to them,” says Frank Rotman, co-founder and partner of QED Investors.
A severe housing shortage in the US and a large millennial population reaching the maximum age for home buying combined with antiquated buying and selling methods are creating momentum for real estate-oriented startups.
“You only need to hit a single-digit percentage of these markets to build a really big business,” said Lisa Wu, partner at Norwest Venture Partners. Her company just ran a $ 136 million Series B for Homeward and a $ 150 million Series C for Flyhomes, both of which offer platforms to help buyers buy homes with cash offers.
Venture capitalists are also targeting companies digitizing home sales outside of the United States.
Real estate technology in emerging markets is seeing some of the biggest valuation gains, Rotman said. QED invested in Loft and Quinto Andar, two Brazil-based marketplace and property search platform providers, each of which recently raised multi-billion dollar mega-rounds.
The segment now also produces a number of public exits.
Real estate agent Compass went public earlier this year with a valuation of $ 7 billion. Offerpad agreed to merge into a SPAC that valued the digital brokerage at approximately $ 3 billion. In another reverse merger with Blankoscheck, Better, a mortgage lender, will go public for $ 7.7 billion.
Many investors believe they can predict the future of the residential real estate markets and that the demand for home ownership will continue to outpace supply in the years to come. But the post-pandemic commercial real estate landscape is full of unknowns. Rotman said the opportunity for investors is to identify “the right future” for these subsegments. “You have to understand these markets extremely well,” he said. “Office buildings in Manhattan are very different from shopping malls in the suburbs.”
But some trends are emerging in the commercial market.
The explosion in online shopping is a boon to logistics and warehousing technology.
“We hypothesize that retail and logistics are essentially merging as an asset class,” said Zach Aarons, co-founder and general partner of MetaProp, a venture firm focused on early-stage real estate tech startups that are currently a third with a $ 100 million fund.
Flexe, which provides a marketplace for large retailers to purchase on-demand warehouse space, raised a Series C worth $ 80 million last winter. Some investors are betting that the post-pandemic world will need flexible office space. WeWork, whose attempted IPO in 2019 is known to have failed, agreed earlier this year to go public through a SPAC merger valued at $ 9 billion including debt.
While the residential segment is overtaking the commercial segment at this point, Aarons is certain that it will have more opportunities for technical disruption in the future. “Commercial transactions are much more complex, but they too will be digitized at some point,” he said.
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