Real Estate

Real Estate Technology Market Overview



By Jackson Evans

INTRODUCTION

Real Estate Technology (“RETech”) is broadly defined as software and tech-enabled services serving the residential and commercial real estate markets.  While still early, an uptick in RETech funding ($733MM raised across 61 deals in 2017, as of Q1) is quickly fueling growth and bringing companies to scaleSpecifically, Seed / Angel and Series A funding concentration (64% of all Q1’17 financings), coupled with increasing average deal size ($12.0MM in Q1’17 vs $9.7MM in 2016), may indicate a maturing market on the cusp of growth.

Global Real Estate Technology Private Financings

 

Shifting market conditions and the continued consumerization of technology will bring new entrants that challenge the status quo.  The fundamental value proposition of RETech is to leverage technology to unburden property owners, operators, tenants and facilitators through streamlined, consumer-centric solutions that make business more efficient.

 

MARKET OVERVIEW

The Asset Lifecycle

We define the real estate asset lifecycle as the perpetual construction, investment / purchase, lease, maintenance and sale of residential and commercial real estate.  Although the owners and tenants of a property may change over time, the asset itself is a constant source of revenue that will always require financing, maintenance and upkeep.  Stakeholders include: renters, owners, operators, investors, lenders, brokers and builders.  In general, RETech solutions lend themselves to one of following asset classes:

  1. Residential (single / multi-family properties; 1-4 units)
  2. Commercial (income-generating office, retail and industrial space; 5+ unit residential)

Historically, residential has been the quickest to adopt RETech solutions.  However, the Dallas Business Journal reports that CBRE (the world’s largest commercial real estate services and investment firm) is doubling its annual spend on technology, indicating an increased focus on technology adoption by large commercial players.  Per the 2016 Profile of Real Estate Firms (published by the National Association of Realtors), commercial real estate managers have lagged their residential peers in technology adoption:

New market entrants seeking to fill these voids combined with increased acquisition activity by legacy players to remain competitive are driving the formation and growth of the RETech landscape.

Within RETech there exist multiple sub-sectors:

  • Property Management (tenant communication, payments, facilities management)
  • Broker Tools
  • Search and Multiple Listing Services (“MLS”)
  • CRM / Marketing
  • Data & Analytics
  • Investment / Liquidity

RETech vendors can make an impact throughout the real estate asset lifecycle, as illustrated below (dark grey and red highlight denote sub-sectors / tools included in this report):

 

 

Market Opportunity

Residential

  • Given the breadth of residential real estate, it is difficult to peg the RETech addressable market to an exact value. Using a top-down approach, we examine total residential real estate spend as a % of U.S. GDP to quantify the overall capital available for monetization:
    • Investment considers construction, remodeling, production and broker fees
    • Consumption considers gross rents and utilities (both actual and imputed) paid by renters

  • IBISWorld estimates a $34BN market opportunity in residential property management in 2017
  • Key Trends:
    • U.S. Census data reflects the consumer shift from owning to renting: as of October 2016, 63% of 118MM households in the U.S. were owner-occupied and 37% were renter-occupied, compared to 66% and 34% of 114MM in 2012
    • Apartments now account for 30%+ of all housing in the four largest metro areas by population (New York City, Los Angeles, Chicago and Houston)
    • Outsourced property management will become more prevalent as owners look to reduce staff and expenses; property management providers will consolidate to save through economies of scale

Commercial

  • Using a bottom-up approach, we estimate a $3.7BN commercial real estate software market in the U.S., across office, retail and industrial real estate

  • Key Trends:
    • We expect office and industrial software spend to increase as companies invest in facilities software for tenant management and maintenance operations
    • Emergence of connected buildings (IoT) and smart facilities
    • Data collection will give rise to more sophisticated building management systems

 

 INVESTMENT THEMES

  1. Property Management
    1. Value Proposition: Property management tools reduce the stress of day-to-day operations for owners by organizing tasks and workflows. Industry estimates indicate that ~70% of properties are currently self-managed.  Adoption of property management solutions will create long-term ROI for owners and reduce vacancy rates, lessen missed / overdue payments and speed-up tenant onboarding.
    2. Relevant Vendors:
      1. Buildium offers property management SaaS for small businesses; covers accounting, online payments, resident and owner portals, rental listing, application processing and tenant screening. Property owners pay a monthly subscription fee per unit, as well as associated one time fees related to document processing, tenant screening and payments processing.
      2. Facilities Management Express offers facilities SaaS for schools, industrial sites and government / religious organizations. Solutions include maintenance and event scheduling, inventory and asset management and HVAC monitoring.  Customers pay a monthly subscription fee, based on occupancy.
    3. Outlook: TechCrunch reports that 78% of renters would prefer to pay rent online but only 30% of the industry accepts online payments. Furthermore, Real Trends reports that the 20 largest residential property management firms currently have <5% of industry revenues.  Demand for property management tools will continue to increase as owners i) become more efficient by using software tools and ii) fully outsource management to tech-enabled providers.  Currently, companies offer point solutions for work orders, payment and tenant onboarding; however, competition within the point solutions remains high, creating an opportunity to offer a full end-to-end solution.
  1. Broker Tools & Search / MLS
    1. Value Proposition: Historically, disparate home listings appeared in periodicals, by-owner and other mediums. Online listings have brought transparency to pricing, property details and property history, allowing buyers and sellers to find higher quality matches more efficiently.  Additional solutions for brokers include commission processing, client interaction and inventory management; these solutions help heighten client service and shorten sales cycles.
    2. Relevant Vendors:
      1. Opendoor operates an online home-selling service capable of shortening the sales process to a few days. Sellers submit their homes to the platform, receive an offer and free inspection and are paid shortly thereafter.  Opendoor handles the maintenance and resale of the property, post-sale.  Users can buy homes on the platform and receive a warranty and 30-day satisfaction guarantee.  TechCrunch reports OpenDoor charges a ~6% brokerage commission plus a risk-adjusted service fee (~2-3% extra, on average, up to 6%).
      2. 42Floors operates an online marketplace for office space. The platform aggregates available space from brokerages, landlords and other internet listing sites.  The company monetizes the platform through premium listings, lead generation, advertising and proprietary data.
    3. Outlook: Industry forerunners (Zillow, Opendoor and Redfin) have been acquisitive and will continue to be as more markets come online. The continued shift towards renting will increase the need for tenant matching and marketplace tools.  Additional features such as title transfer, inspections and other transaction-related documentation will further bolster online listing service suites.
  1. CRM / Marketing
    1. Value Proposition: CRM software enables agents and brokerages to nurture leads and drive referrals. Key features include lead segmentation, automated outreach, follow-ups and custom campaigning.  Marketing suites will enhance campaigning by offering SEO, lead generation, reporting, team accountability and transaction management solutions.
    2. Relevant Vendors:
      1. Placester builds compliant listing websites (IDX) and offers SaaS-based lead / campaign management and CRM for agents, brokers, publishers and associations. Users can also find properties and manage relationships with potential buyers.  The platform monetizes through both freemium and per user per month models.
      2. BoomTown offers mobile CRM and lead-gen tools, capable of servicing single agent operations to larger broker agencies. From predictive CRM to multi-MLS management, real estate agents can drive quicker close times and more effectively manage clients.
    3. Outlook: CRM and marketing solutions help yield quality leads, shorter sales cycles and higher close rates. Although a more mature sub-sector, large opportunity still exists if providers can differentiate themselves with clear KPIs (e.g., reduced time on market and higher close rates).  The most successful solutions will enhance broker efficiency by applying AI and machine learning to industry datasets.
  1. Data & Analytics
    1. Value Proposition: Real estate data, particularly commercial, has traditionally been opaque and proprietary. CoStar pioneered the migration of commercial real estate data to an online platform.  New entrants are bringing inventory, tenant information, sales comparables, lease rates and building occupancy statistics online, enabling buyers and sellers to make more informed investment and project / cost planning decisions.
    2. Relevant Vendors:
      1. HouseCanary can predict a home sale price within a 2.5% margin of error. Leveraging proprietary housing intelligence, HouseCanary delivers home value reports, appraisals, market insights and additional valuation information.  Users pay per month for appraisal software and per report for valuation and other market data.
      2. Reonomy manages a robust database of commercial real estate market statistics. With an interactive map, users can search for properties nationally by type, size, sale date and other data points.  The platform offers owner information and organization tools for workflows and custom filtering.  Users pay monthly subscriptions per seat.
    3. Outlook: The U.S. Census provides only intermittent high-level statistics. Property owners will be able to make data-driven decisions, leading to efficient building operations, accurate property appreciation predictions and tenant satisfaction.  Opportunity exists for those able to collect and bring to market reliable and dynamic datasets as this information is invaluable to brokers and investors.
  1. Investment / Liquidity
    1. Value Proposition: Real estate specific asset management and liquidity platforms have vastly improved the simplicity and productivity of portfolios. New market entrants facilitate deal activity, identify trends and quantify portfolio performance.  Marketplaces for real estate investing create platforms for anyone to invest across multiple asset types.
    2. Relevant Vendors:
      1. VTS offers lease management, budgeting, modeling and workflow tools and portfolio data and analytics for landlords and agencies. The comprehensive portfolio / asset management platform enables real estate professionals to gain insight into investments and build long-term tenant relationships.
      2. RealtyShares offers an online marketplace for real estate investing that pools together debt and equity investments from multiple investors. Casual investors, asset managers and high net worth individuals can all invest across various assets.  RealtyShares monetizes investments by collecting placement and asset management fees, both at the time of investment and longer-term.
    3. Outlook: Online portfolio management and real estate specific asset management will give investors more exposure to live opportunities and tighter controls over portfolios. Vendors can charge a premium for access to user-friendly portals that simplify the investing process and relieve the burden of complex accounting and transaction calculations.  Easy to use and consumer friendly interfaces for online investing will become more prevalent as novice investors enter the real estate arena.


 

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