You know the drill. Disruption engenders change and, as a result of the current and ongoing market shock driven by the COVID-19 pandemic, change that was already underway has accelerated. Real estate companies have been embracing proptech like never before. However, this change has by no means been uniform across the board. I had a chat with Connell McGill (CEO) and Comly Wilson (director of marketing) at real estate SaaS platform Enertiv, that serves large owner-operators as diverse as AvalonBay, Starwood Capital and Prologis, to discuss what they have been seeing on the market.
According to Wilson, while it’s true that COVID-19 has been a catalyst for proptech, the trend has been unevenly distributed, and there are some indications that publicly traded real estate companies (REITs) have been more aggressive in their deployment of tech than their private counterparts. Historically, Wilson shared, Enertiv’s revenue split was 45% private companies and 55% publicly traded companies. Since COVID-19, that gap has widened to 36% private and 64% public companies. A recent Deloitte survey showed that REIT respondents seem to be more open to collaborating with proptechs. On an average, 58% of REIT respondents have increased their intent to partner, compared to 45% of respondents who are developers.
In McGill’s words, “there’s nothing about being a REIT that inherently makes a real estate company more sophisticated, but it’s possible that the public nature of the company creates a higher sense of urgency to adopt tech that can increase cash flows when occupancy and rent increases can’t be counted on.” Further, and perhaps unsurprisingly given current market conditions, nearly all of the $24B raised in 2020 is focused on distressed assets and value-add opportunities. It could be argued that these types of investments can particularly benefit from integrating technology.
Why might some industry players be hesitant to innovate during trying times?
First off, it’s legitimately difficult to make investments when your business is taking a hit, and, as Wilson puts it, “evaluating technology feels like drinking from a fire hose, as there are just so many solutions on the market with new ones popping up weekly.” Many commercial real estate (CRE) companies resort to slow selection processes that often result in dozens of 100 page documents that end up remaining unread. Others have tried piloting multiple technologies simultaneously, which can be overwhelming as tech solutions have different strengths and weaknesses and pricing models, which makes apple-to-apple comparisons difficult. Finally, and perhaps most importantly, the return on investment can often be unclear, as it is difficult to unpack what percent of a tenant’s decision to sign or renew a lease can be attributed to a tenant experience app for example, or how exactly does increasing productivity lead to bottom line value.
It’s hard to get people to talk about when things aren’t going to plan, but a property management executive of an office owner-operator in Atlanta shared the following on condition of anonymity. Though they have been reasonably active in pursuing new ideas over the years, such as monitoring water use, installing solar arrays and upgrading their automation systems, they have consciously decided to watch the market this year to see what winners emerge amongst the various proptech market players. The goal is to learn more about how data turns into savings (money and/or energy) and how it ties in with their team’s specific skills. Migrating to a new platform would take time, and while they might make the investment one day to implement a “one-stop” shop solution they don’t see value in continuing a piecemeal approach to technology, as the implementation then begins to overtake the real objective, which is to keep the buildings running efficiently.
Ron Becker, VP of Operations and Sustainability at Brandywine Realty trust had the following to say on the topic during a fireside chat with Enertiv. “I think in the near and immediate future, we’re going to see a lot of trepidation. A lot of companies are not sure what’s going to happen next. New technologies are coming constantly, and there is so much that goes into having to evaluate it, to finding the time to go through it all.”
In McGill’s words, “Something that often gets lost when we talk about technology adoption is that the decision maker trying to evaluate different solutions has never bought this thing before. It takes a lot of work to even understand the landscape and learn what pitfalls to avoid.”
So, what can you do to get it right? There is no golden rule, but the following six basic principles should be useful for any real estate firm looking to implement proptech.
Look for single platform approaches. No platform will be able to do everything the organization will need, but you shouldn’t have more than one for each broad aspect of the business, such as marketing and market analytics, property management and tenant experience, operations and asset management.
Think about “time to value.” The likelihood of your teams adopting more advanced features is largely based on how quickly and efficiently they can start using the basic ones. Ask yourself, how quickly can the technology be deployed, and how fast can teams be onboarded to it?
The value proposition should be quantifiable. Ideally, it should map to your pro forma line items (rent, maintenance, utilities, capital expenditures, etc.) so no extra steps or assumptions are required.
The technology should be property and system agnostic. The last thing you want is to end up spending months or years integrating different infrastructures. Start with something that can be deployed in any asset you own today or that you may own tomorrow.
Be honest about your current stage of digital transformation and where you want to end up. The right technology can both digitize manual processes today and provide advanced capabilities (such as predictive analytics) tomorrow.
Finally, you should understand that the key determinant of AI, machine learning and predictive analytics is the quantity and quality of data. Beware of technology that claims to be driven by AI if its providers cannot demonstrate how they have acquired a reliable data set to work with.
In his fireside talk, Becker had the following advice to share to any real estate player looking to embrace tech. “There are so many different technologies out there, what I think you really need to do first is sit down and take one property, I don’t care how big your portfolio is, take one property and say ‘what is the best of the best that I could use in this building?’ Because automatically you’re building that return on investment. From there, you can expand that out.”
Wilson shares this view and reckons a winning strategy is that of trying to do one thing very well, to begin with. “Most portfolios start with one specific need – whether that’s modernizing tenant submetering, digitizing maintenance practices, or improving energy efficiency and ESG reporting. Once they have scaled that, the next step is to see how they can centralize more aspects of their operations onto one platform.”
It is a fact that market shocks are a great driver of change, and we can expect to see more maturity and consolidation in the global proptech ecosystem over the coming months and years. Whether real estate companies are able to embrace this change and turn it into a growth factor will shape who the winners and losers are.