How to Decide Which Proptech Products Are Worth the Investment?

According to a 2020 Commercial Real Estate Outlook report from consulting firm Deloitte,92 percent of its survey respondents plan to maintain or increase their tenant experience-related technology investments going forward.

However, with hundreds of proptech companies entering the space, real estate professionals are tasked with picking out which technology solution can ultimately help their bottom line.

NREI recently talked with Dharmesh Ajmera, partner and proptech expert at Deloitte, Jake Fingert, partner at Camber Creek, a venture capital firm focused on investing in real estate tech companies, and Felicite Moorman, CEO and Co-founder of Stratis IoT, smart apartment IoT platform, on their views on the evolution of the proptech space, and how commercial real estate players can decide which proptech products are ultimately worth investing their time and money in.

This Q&A has been edited for length, style and clarity.

NREI: Which products and services are most essential for commercial real estate players right now?

Dharmesh Ajmera: The biggest and most impactful proptech element would be the data analytics, the power of data that clients can use and then incorporate within their own data. [Proptech] is very wide, so let me narrow it down by giving you a few examples when it comes to building operations. For example, the companies or the clients are able to look at data analytics to make sure they are looking at insurance, building operations, the use of power and electricity and things like that so they can really pinpoint and focus and narrow it down to where the inefficiencies lie and really make use of data to make buildings more efficient, for example, or operations more efficient that would result in tangible significant savings. Then, on the flip side, when you look at tenant experience and the revenue side of the tenant side, clients are using proptech whether it’s third-party proptech or their own incubator type proptech company or element of their business. They look at where can they generate more revenue by enhancing tenant experience or looking at the market data and bringing in the right type of quality tenants, as well as making sure their current tenant base is well-informed of the market studies and different data sets so that they can renegotiate the lease rental revenue. So, many of these examples would result in tangible savings for the client. So, I would say the data analytics that incorporate both the front office, as well as the back office, would be the most prominent. 

Jake Fingert: There’s an enormous opportunity to leverage technology. Some of the really exciting companies that we’re seeing that are creating real value in the space are companies that are kicking those specific workflows, whether its leasing a property, managing a property, moderating tenant satisfaction, leveraging technology to help do those pieces of work more efficiently. Then, capture the data in a systematic way, so that at management level or at a portfolio level, owners can really start to gather greater insight into what’s working and what’s not, and figure out ways to drive performance and ultimately drive returns for their portfolio.

Felicite Moorman: For me it’s “sidewalk to sofa” access management control, hands down, number one driver across all categories. Everybody that I’m working with is focused, first and foremost, on access management control. I call it “sidewalk to sofa” so that people have an understanding that it’s literally every single access point of a building on the same platform.

NREI: How can people in the industry decide which proptech products/companies are worth investing time and money in and which are not?

Dharmesh Ajmera: It’s a tough question to answer because when I look at the proptech space, there are [many] companies that brand themselves right now as proptech. For them to brand themselves as proptech there are a variety of reasons, including sometimes it’s very appealing, the term proptech itself. It’s easy for them to market themselves. So, sometimes you will have companies, they call themselves proptech until you do more investigation and research only to find out they’re not really a proptech. So, to answer your question, how do you narrow it down to who could be the top five that are worth investing time and money in? One could triangulate these proptech [offerings]. So, what I mean by that is, there are three elements to the decision-making framework when it comes to which company to invest time and money in. First, and it’s my personal opinion not necessarily of Deloitte, [is] the proptech management quality. What I mean by that is you’re assessing… an XYZ company, one would look at the management history of success and their operating style. For example, if they have successfully executed a few other proptechs or tech [offerings], you get an inherent level of comfort. The second one being the quality of venture capital and investors. So, if the proptech is backed by prominent venture capitalists or large enterprises who are very successful in that industry, that would give you that inherent level of comfort that this is the right proptech to invest time and money in… The third part of what I described as you triangulate would be to look at the quality of product or/and services that proptech is offering. So, one way to go about that is to look at what is the quality of product and scalability of that product, and what’s the size of the market and opportunity and [can] you really replicate this to make it a very large product. For example, retail, housing, single-family homes, there are a lot of companies trying to come up with ways to disrupt that whole model of home buying and selling experience and also investing in the homes so that they can really differentiate their product and service so that it is scalable and also profitable. Sorry for the very long answer, but I would triangulate by looking at the quality of management of the proptech, quality of investors and quality of the product and services.

Jake Fingert: I think that’s one of the biggest challenges that a lot of owners and operators have today. There are so many companies coming onto the market, some of them are really great solutions. But a lot of them, in a lot of ways, are really new and untested. So, I think that one of the challenges they face is figuring out “what are the areas we want to invest in, both our time and our money, to roll out new technology. And what is the effort that we need to expend to help drive returns for our portfolio.” When looking at specific companies or opportunities, we always recommend doing a few things. One, is making sure you and your team are not just going to the dance with the first one who asks you, but really doing a landscape analysis, understanding the different solutions that are in the market. We often advise talking to multiple solutions [providers] to really get a sense of the market, get a sense of the strengths and weaknesses of different competitors. Second, I would say is talking to existing customers of different solutions to make sure you’re doing the reference checks. Then, third, is working with experts like us. There are a few groups out there that are really spending an enormous amount of time in this space, getting smart in the space and leaning on those subject matter experts to make sure [they] understand the product attributes of different solutions… At the end of the day, picking the right company is not just about driving greater value for your portfolio and your team, it’s also critically important to make sure you’re partnering with solutions that are going to be in business for a long time. I know a lot of property managers have felt firsthand the pain of using a new technology or getting excited about a new technology only to find that that company goes out of business after six months or a year. That can be one of the most painful things for an organization, particularly an organization that’s trying to be more cutting-edge with technology. You have the pain of having to turn around and rip out the technology, which can often take a lot of time and money. But second and sometimes more importantly, you get organizational scars, where the people on your team that have been trying this new technology that have been quick to adopt it, that have been excited about the new technology, oftentimes they can feel burned by the experience and are potentially that much less likely to use a new technology in the future. That level of damage can be enormous for an organization if you’re trying to really rollout a true tech program.

Felicite Moorman: Age-old dilemma. So, there are 3,000 proptech startups right now, that’s just unparalleled. The first questions is “the platform, are their partners secure?” Cyber-secure and physically secure. That’s a really hard standard to meet. Just that one. A lot of startups don’t have the capacity, or the time, or the know-how, to create cyber-secure products and physically secure products. We don’t see it far more frequently then we see it, and we’ve been in the IoT space from a professional perspective for a decade. So, it’s very disheartening and it has to be the first top of the mind question that an investor or a real estate individual who’s investing for the purpose of their property asks. Are they creating more security or less security in adopting technology?

NREI: Which property type do you think will benefit the most from proptech?

Dharmesh Ajmera: I think single-family will benefit from [proptech] because that’s the industry where you can really make a meaningful impact… I’m just trying to envision what a successful enterprise would look like, if you could have an arm that is your manufacturing, and I will expand on that in a bit, and then you have the research and development and technology, and then you have the third arm say, if you’re able to build as a general contractor, and the fourth arm would be how do you optimize the value of sort of keeping it as an investment. So, let’s do a case study on multifamily or residential house. If you have a proptech that can come up with a product and technology whereby you can have prefab or modular homes whereby you have manufacturing facilities that are using really green or easy to obtain product and make it very cheap product whereby you can build that prefabricated material. Then, you have technology that is going to empower that prefabricated material to put a very smart home or smart multifamily apartment building that is able to operate on its own, and then the third arm is your general contractor… You can have everything in-house and start building communities, multifamily apartment buildings. Then, lastly, take this all the way to the end game being able to keep that multifamily building as an investment of your own instead of selling. You can put debt on it and keep 25 percent equity in and refinance through a loan, you can have significant streams of cash flows generated from this whole model whereby you can use the byproduct or materials produced by large corporations as a starting point to build a prefabricated home. Now, if I try to look at this and try to replicate something similar for large commercial class-A or class-B office building, proptech can [add] significant savings in that industry, but the level of disruption that could be there for multifamily or single-family homes is much larger in terms of magnitude compared to the commercial office buildings. So, personally I would say that the biggest [impact of proptech] would be in multifamily.

Jake Fingert: All of them, definitely. We see it in multifamily, single-family, office, industrial, warehouses, hotels. I think everyone in the space is starting to get a lot smarter and more attuned to what’s happening in the proptech space. If you look at the big companies in particular, a lot of them now have, for example, CIOs and CTOs that are reporting directly to the CEO of the company. That is, in a lot of cases, new. Many of those companies three, four, five years ago, didn’t have that role or if they did have that role, it was reporting to the COO or someone who was a step removed from the CEO. So, now we’re seeing a lot more senior level attention at the big companies across asset classes.

Felicite Moorman: The bigger the building, the more opportunities to optimize efficiencies, and it doesn’t matter which category it’s in. That goes for multifamily, industrial, etc. If you think about percentage savings, the bigger the building, the bigger the percentage of spend on things like energy and other efficiencies. The bigger the property, the bigger the spend, the bigger the opportunity to optimize. So, every single property in commercial real estate today can benefit from some IoT application, or optimized marketing application or some technology, there’s something for everyone to improve their own company. But, the bigger the portfolio, the bigger the property, the more rapid is the return on investment inevitably.

NREI: Do you think investments in proptech will increase even in the case of an economic slowdown?

Dharmesh Ajmera: Yes, it’s a strategy. Because many of the companies when you look at their financial statements, are sitting on large chunks of cash, and the slowdown actually when I look back to 2009 and 2010, only taught us a lesson that some of the companies during that period of time became really highly valuable opportunities to invest in and that’s what we are observing right now. There is potential for the companies to deploy that excess cash they have available in hand so they can take the slowdown as an opportunity to start investing in these companies that have great potential for when the right time comes.

Jake Fingert: We’ve seen an enormous uptick in the amount of investments in proptech, the amount of capital coming into the space, the amount of entrepreneurs that are creating new companies in this space. I don’t think that’s going to change anytime soon. There are a couple reasons behind that. One is, historically, if you look at the amount of technology spend that large real estate organizations have committed to technology, it’s oftentimes one to two percent of their annual budget that is going to technology, maybe in some cases three or four percent. When you compare that to other industries, a lot of other industries are spending four, five, six, seven percent of their budget on technology. What you have in real estate, it’s a sector-wide problem, it’s an industry problem, it’s just decades of underinvestment relative to other industries. Real estate is notoriously a slow adopter for technology. So, there is a huge backlog of opportunity… I, myself, spent a lot of time as an operator in real estate, we had all these processes of using pdfs, using fax machines, using excel files and there’s just tremendous opportunity in the real estate space for technology to play a meaningful role and drive value for real estate customers. So, I think given that dynamic, we’re not going to see a change anytime soon. Second, if the real estate market were to slow down, I think you would have a lot of investors, who have been focusing in recent years on new development and new construction, who are going to start to look more internally at their operations and say, “okay let’s slow down a little bit on building new buildings, now that we have a little more time on our hands and a little bit more senior-level focus, let’s start to think about how we can maximize the value of the portfolio that we have today.”… And when you start to ask those really tough questions, and a lot of our partners are asking those questions today already, one of the obvious answers is technology. Proptech is a great solution to help do that.

Felicite Moorman: On one condition, and that condition is that the platform or product in which they would invest creates operating efficiencies. It has to produce an actual return on investment, an actual net operating income increase. [If it doesn’t pay for itself], those proptech companies will go away in a downturn, inevitably. If, it creates efficiencies that are real and tangible, and can be calculated with actual PTIs, those companies will stay in the game, even through a recession, because what do real estate people do during downturns? Focus on efficiencies, they don’t build as much, but they look at their portfolio, and they build out that technology in the portfolio they have, as long as it creates efficiencies.

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