There was a five day stretch last month where venture capital funding rounds for real estate technology companies (aka “PropTech”) totaled over $1.7 billion. That is an astounding number, particularly when you consider that in 2013, PropTech startups raised less than $500 million in total VC funding for the entire year.
So where did all this money go? Well, more than half went into the coffers of iBuyer, Opendoor and the tech powered brokerage Compass.
Both companies have become media darlings as they aim to disrupt how houses get bought and sold in this country.
But a scan further down the list of funding recipients this year reveals that construction technology has become an area of intense interest for VCs and other investors. This includes technologies related to smart buildings, green development and beyond.
In fact, according to MetaProp, nearly 60% of PropTech investors say they are most interested in technology related to smart buildings and architecture/construction. Developers are also interested in these areas, as these innovations promise to increase safety and efficiency (and therefore profitability) of their buildings.
CONSTRUCTION TECH STARTUPS
One PropTech innovator whose product holds such promise is Travtus, an artificial intelligence powered digital commercial property manager. With training models that have been seeded by more than 700,000 work orders, the software handles tenant requests using natural language processors. This means that the system can diagnose, scope and calculate the appropriate labor needed to resolve a query described as “clogged toilet” or “backed up pipe” or whatever term the user might submit.
More importantly, the company now has such a rich data set that they can advise builders on the most commonly occurring issues, and areas that may warrant additional investment during development work. For example, after seeing the number of clogs in a cluster of buildings, it might make sense to build additional access panels for the risers and confirm slopes during development in order to prevent this from becoming a maintenance headache.
By engaging a system like this early in the design phase, developers can ingest this data and as the specs are finalized and the building is being constructed, they can map all the knowledge of the build space into the A.I.’s brain. This means that while you are building the physical space, you are building a virtual memory for the building too.
Another PropTech innovation changing the development process for the better is a class of technologies related to increasing construction site visibility. Virtual Reality and Augmented Reality help construction companies to plan every facet of a proposed building in greater detail, thereby improving efficiency. Meanwhile applications like OnsiteIQ document site conditions in real time and record workers’ movements in order to better enforce OSHA compliance. With an application that operates much like a child’s flip book, OnsiteIQ users can skim and scrub through time periods throughout the life of a development project. Their interactive walkthrough is credited with a range of benefits from decreased worker injuries to lower insurance premiums.
HARD TECH vs. SOFT TECH IN REAL ESTATE
The PropTech universe seems to be segmenting itself between technologies that empower buildings and those that empower people looking to buy and sell buildings.
So-called “hard-tech” like self-diagnosing smart buildings and VR literally make for a better development process by informing builders’ design decisions and expanding the scope of what is even possible to be designed.
Meanwhile tech enabled brokers and iBuyers reduce friction in real estate transactions by simplifying the process and providing liquidity to sellers.
It may be somewhat counter-intuitive that the softer side of PropTech (Opendoor et al), whose innovations center more on optimizing the sales process than on physical structures, has commanded such a large proportion of capital from PropTech investors. But the trend is less surprising if you consider that the ability to mine customer data for buy and sell signals, and the ability to increase liquidity in housing markets has a tremendous impact on physical development, albeit indirectly.
This effect is sometimes referred to as a ‘second order’ change. As an example, some researchers believe driverless cars will have a massive impact on real estate through a second order change. Autonomous vehicle technology obviously has no direct connection to the built world. However, to the extent that AV’s reduce or remove the stress of commuting, they will widen the halo around cities and make more locations viable, thus pushing up prices in those suburbs and exurbs.
A similar effect is anticipated from the deep data dives that are powering innovations in real estate sales. In a market where houses are bought and sold with Shopify-like speed and simplicity, developers will make different decisions around capital investment. The Phoenix market for example which has been ground zero for the iBuyer movement, now attributes a full 2% of all home sales to iBuyers. Surely, this level of liquidity in the market has a second order impact on business owners’ willingness to invest in the city, as well as the design decisions of local developers who will bid for their business.
A more pronounced second order effect of “soft” tech on real estate development is in the realm of distressed properties. There is a large body of research on the impact distressed housing has on a neighborhood. In urban areas, for example, vacant homes not only contribute to increased crime, but can drag down surrounding property values by 5% or more. Therefore, clearing neighborhoods of blight has a calculable economic impact.
TECH FOR REVITALIZATION
Since distressed residential real estate is typically the domain of local house flippers and landlords, any technology that empowers them to ferret out the owners of these properties in order to buy and rehab them has a second order impact on the economic revitalization of those communities.