Billions of tech dollars are circling commercial property. An estimated 40% to 50% of that is destined for multifamily housing due to the attractiveness of the aggregation of consumers in our communities. Owners and managers are devising new ways to participate financially in this innovation.
Investing as individuals or a company in a PropTech fund, and benefiting from the due diligence information, MFN pricing and rapid growth of a company; investing as a seed investor on your own, or as part of an investment club; and, earning warrants or options as an advisor or early adopter.
Crisis-induced liquidity has created unprecedented savings, and hence investment dollars seeking assets. And with PropTech and RentTech being a relatively immature sector among venture capitalists, commercial property has benefited from being an attractive growth sector, at the right time and place to capture new high levels of interest and investment.
This Multifamily Innovation Conference – Atlanta (MICA) session featured Matt Knight, Founder PropTech Angel Group; Cristopher Yip, Partner at RET Ventures; and Kurt Ramirez, General Partner at Nine Four Ventures; and moderated by Steve Lefkovits or Joshua Tree Media Group. The group discussed the current state of affairs.
Lefkovits said he is encouraged by the interest of a younger generation of innovators in the apartment industry – especially given that so many are truly focused on the renter and improving that experience.
“Five years ago, there’d be just one panelist for a session like this,” he said. “It’s great to see the growth in this part of the industry.”
Yip said it’s an exciting time to be an investor in PropTech and RentTech, following the capital being put to work for profits and innovation.
“I see it as having too much and too little flowing into this space,” he said. “Looking at all of the headlines and valuations lately, we scratch our heads. Then again, overall, the venture capital market in the past three years, it’s only about $5 billion -- or about $1 billion a year when you carve out some of the biggest new ventures.
“So, that $5 billion is less than you’d think, and most of this goes to later-stage companies as many are doubling down on those established players. For early-stage seeding, when you have an idea and find investors, it’s just as hard as ever to find investors.”
Knight said, “On the surface it seems like more than it is. There are investors looking to play into companies with low revenue, early revenue or even no revenue.”
Can the industry actually use all the technology that is being brought to market out there?
Ramirez said some larger operators are structured to adapt and test and leverage new technologies. “But for the lion’s share, these companies aren’t structured for it,” he said. “They don’t have the people or the processes to be aligned to filter the tech into their operations.”
What’s All that Noise?
Yip said you can hear a lot of noise. “We’re told from our 40 owner/operator groups that they are being bombarded with pitches, and they haven’t yet figured out how to integrate some of those point solutions into their tech stack, and that it’s hard to stay on top of that.”
Word of mouth is a good and reliable way for operators to get around having to take every call and hear every pitch, Yip said.
Knight said he thought of hiring an integration specialist at his PropTech Angel Group to help with concerns about whether products can integrate with current tech stacks and be implement into their overall eco-systems because a product’s ability to integrate into every property management software platform is crucial.
“For example, automated window blinds is a cool thing, but my operators are saying they’d rather have a full energy management system,” Knight said. “[If you are a start-up], you need to solve one or two problems, but then grow into more services. And playing well with others [in terms of integration] is now table stakes. If you don’t, or can’t, adoption is going to be really tough.”
Innovators Should Look Through Owners’ Lens
Ramirez’s firm Nine Four Ventures includes Partner Jeff Elowe, who was founder and owner at Laramar Group property management, a company known to be an early adopter of technology based on its assets’ needs.
For companies looking to develop the next great thing, Ramirez said they have to look at things through the lens of an owner.
“An owner is thinking, I have to make large investments across a wide swath of industries in technology products that have to be used across my portfolio, how can I do that?”
With smaller, scattered sites, Laramar Group needed software and technology to help it operate more efficiently. Elowe dipped his toe into Angel investing.
Elowe had the resources and he understood the market to know what technology can be adopted now and at what price, and what a start-up’s go-to-market strategy should be, Ramirez said.
“This created less friction for us to connect with a startup and get that early access into multifamily,” Ramirez said.
“There are real estate companies who own 10s of billions of dollars of real estate,” Ramirez said, “and then [they are asked] to put in $1 million or $2 million in seed money it should be a no-brainer for them.”
Yip has 45 owners/operators and investors in his group RET Ventures who he says are all enthusiastic about what his firm is doing.
“They want to drive innovation and value creation in their portfolio, plus earn the financial return in these young companies to make them successful,” Yip said. Some invest individually and others do it from their corporate balance sheets. Principals and companies invest, as well, as executives at these [real estate management] companies, he said.
Knight said some property owners become investors, and some investors sometimes become property owners.
“Most join [Angel Group] so they can get in a room with others and to become educated [about multifamily technology investing],” he said. He recently lowered his minimums for entry so more investors can get in.
“These investors are thinking: We are spending millions of dollars on these pilots, so, we should get a piece of the value that we’re helping to create from these start-ups. You can now choose to plug into this, you can choose your own adventures based on the level to which you want to participate, depending on your appetite and personal net worth and liquidity. If you want to be on the cutting edge, now you can be.”
Knight’s group works with rolling funds, other Angel-style groups. “Here, you’re investing in people, and not necessarily a company and a product,” he said. “We’re more about education and networking than about making money, though it’s exciting when you can make money, too.”
Start-Ups are Not Panaceas
Knight said that start-up companies should not be looked at as being panaceas.
“They are a tool,” he said. If used properly, they can improve NOI and help reduce costs, and improve things like hiring, efficiency, and other operational things, he said.
For startups, there’s so much more upside for products related to software and hardware margins in a non-traditional model. “There’s incredible alpha you can drive when you hit the right technology at the right time,” Knight said. Look at companies like OpenDoor, Latch and Airbnb and their impressive multiples.”
Lefkovits is encouraged that, today, smaller investors can get involved.
Ramirez said, “People invest in people, and firms invest in firms. The earlier you invest and the smaller size you are as an owner, the easier it is to realize that – without the technical debt of having a backbone that prohibits you from working with just one firm or another, or one start-up or another – you can do a lot with a little.”
Ramirez added that larger owners should be concerned that “these smaller, more nimble owners are going to be able to crank out more margin, and as these start-ups scale, they can scale along with them,” he said. “The company can become more of an enterprise system.”
Should Tech ‘Stick to Its Knitting?’
Lefkovits asked if it makes sense for investors buy their own property management firms to use as a test lab for products they are developing.
Yip said no. “Technology is a wonderful because it brings innovation to become scalable, and be applied across portfolios,” he said. “But I say, ‘stick to your knitting.’ These are technology people who are execution-driven, so I don’t know if that would work.”
Meanwhile, tech startups are well capitalized; “they have a war chest,” Yip said, “and where you have cash, you will spend it. There will be consolidation on the technology side. Some of these single-point solutions need to come together to become platforms to become viable vendors to the industry, and not just solutions. It’ll be worth watching and waiting to see if any venture into property management.”
Ramirez said, with all this cash sitting on the sidelines, when Covid-19 hit, it became an accelerant for technology and innovation.
But he added, “Property management is challenging enough. It’s a physical asset. If it breaks, you need to be able to fix it. [The industry found] how software and hardware can work together to move the needle and help owners and operators stay ahead of the game.”
Ramirez said tech might be that thing that could reduce costs or headcount: Like using it to check the roof, and not having to send a person up there every day.
During Covid-19, you had to find tech to give comfort to your residents, Ramirez said. Companies did adopt to technology to create that comfort, “because if you didn’t, you were going to lose.”
Owners who did will win in the end, he said. Technology created a very bright line between those who did and those who didn’t on how they approached their tech stack. “[Coming out of the pandemic], it will continue to be a bit clogged [with those who did and those who didn’t], but we’ll soon see that those who did will have differentiated themselves from the competition and will come out on top.”
Here is the replay:
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