After a surge in proptech investment in 2021 and 2022, the flow of funds into the sector has tailed off in 2023. But industry insiders insist it continues to have a bright future, given the increasing role technology plays in the commercial real estate industry.
The latest numbers from capital markets data provider PitchBook show that year-to-date through May 9th, U.S. venture capital deal activity in the proptech sector totaled $1.3 billion, well behind $7.9 billion recorded for all of 2022 and $11.3 billion in 2021.
Globally, proptech venture capital deals totaled $2.2 billion through May 9th, also trending well behind the $13.9 billion in 2022 and $19.8 billion in 2021, according to PitchBook.
Meanwhile, research from investment bank Houlihan Lokey shows that in the first quarter of this year, the U.S. proptech market saw just $1.2 billion in debt and equity investment, a 76% decline compared to the same period in 2022. There were more companies raising money during the quarter than during the last three months of 2022, but the funding rounds were smaller, Houlihan Lokey reported. There were 82 companies raising capital, but just 11 investment rounds crossed over the $20 million mark, the firm reported. The average proptech investment deal size in the first quarter of 2023 totaled $16 million, down 58% from the first quarter of 2022.
But another notable trend that Houlihan Lokey reported for the first quarter of this year is that the share of equity investment dedicated to proptech companies focused on commercial and multifamily sectors rose to 52% in the U.S. from 37% during all of 2022. Proptech investments in the residential sector, on the other hand, dropped from 40% to 29%, and investment in protech focused on construction went down slightly, from 23% to 19%.
Houlihan Lokey researchers noted that was likely driven by investors’ greater focus on profitability and capital efficiency vs. a “growth at all costs” mentality that was more prevalent earlier in the cycle.
The biggest proptech deal so far in 2023 involved proptech firm Lessen raising $500 million in equity and debt to buy its competitor SMS Assist, which helps connect property owners and service providers, for $950 million. Monroe Capital and Invitation Homes participated in funding that transaction, according to Bloomberg.
The Center for Real Estate Technology & Innovation (CRETI), a think tank and research center focusing on the proptech industry, wrote in its recent Weekly Proptech update that despite a decline in venture capital investment in the sector, the proptech industry “has demonstrated remarkable resilience.” CRETI insists that in 2023, the industry will continue growing, citing an ongoing digital transformation and the fact that proptech solutions remain in demand. CRETI did warn proptech providers, however, to be ready for fluctuations in investor preferences and overall market conditions.
Investor sentiment
According to Jeffrey Berman, general partner at Camber Creek, a venture capital firm founded in 2011 as the first solely dedicated to investing in real estate technology, the proptech sector is still in its early stages and has tremendous upside.
Camber Creek, which has about $1 billion in assets under management, closed out its fourth core venture fund at $325 million in 2022, as well as raising more than $100 million for its Opportunity Fund I. Berman says Camber Creek is choosy about its investments—it has invested in fewer than 50 companies since its founding. The firm’s funds are typically 10-year vehicles.
“Think about the spaces we occupy and ask how much of the day-to-day interactions and space around you is digitized,” Berman said. “I would bet right now it’s relatively small, but it will increase exponentially. There are amazing opportunities to digitize our industry, and we are still in the early innings.”
The proptech sector has had a lot of influx of cash in the last five years from high-net-worth investors and real estate operating companies, but that type of money is disappearing in favor of institutional capital, Berman noted.
“The proptech venture capitalists, as well as the generalists looking at this space, understand the opportunities to digitize and decarbonize, is only growing,” Berman says.
Camber Creek’s equity sources include institutional investors, high-net-worth individuals, pensions and endowments, along with real estate owners and operators. “They are the bread and butter and underpinning of the strategy,” Berman said of the latter. “Their real estate portfolios comprise what we refer to as our beta lab, where we can literally try before we buy.”
However, while there are a lot of proptech companies with great ideas offering solutions to the commercial real estate industry, most will be unable to deliver high multiples on invested capital and, therefore, may not be appropriate investment targets for venture capital, Berman noted. Camber Creek evaluates investments across all commercial real estate sectors, but most of Berman’s interest centers around multifamily-related ventures, as well as opportunities involving alternative building materials.
An example of the type of investment Berman is excited about is Flex, a company that provides renters with a subscription-based line of credit designed to align the timing of income inflows with rent payment dates. “Flex is frictionless for both landlords and residents and has grown faster than almost anything in our portfolio because it serves such a massive need across the country,” Berman said.
Camber Creek isn’t currently fundraising, and Berman noted the company has no timeline for when it will return to fundraising activity until it deploys capital out of its fourth fund.
“I imagine our colleagues out fundraising are having a more difficult time because there’s a lot of uncertainty in the market,” he said. “I think once the interest rate situation stabilizes, that will give some comfort to capital allocators and stabilize the market in a way they haven’t seen since the Fed started raising interest rates.”
Temporary slowdown
At Fifth Wall, another venture capital firm, Dan Wenhold, a partner with the real estate tech investment team, the company is doubling down on strategic deals by investing in companies where there’s a direct correlation between the technology needs of its limited partners and the services/software that's being provided.
“We are underwriting deals first and foremost for their standalone financial return potential,” Wenhold said. “An investment's strategic return potential—how much revenue Fifth Wall can deliver via our limited partners or how many pilots we can help the company achieve with a Fifth Wall Limited Partner—is a close second in terms of how we rank underwriting priorities.”
Wenhold added that he is seeing more willingness at an earlier stage for proptech companies to work with real estate corporations. Meanwhile, the firm’s limited partners are better able to understand the urgency to adopt new technologies and work with newer players in the field.
However, with commercial real estate facing some pain points across the board in the current environment and landlords and property managers being extra careful about how much money they spend, the focus on the ROI of any proptech investment has gained greater importance, according to Laurent Grill, a partner with JLL Spark Global Ventures who in his role focuses on strategic proptech investments.
“The fluff is being thrown to the side for a second. There was a lot of ‘nice to have’ in the technology space and companies were able to grow and sell into the various customer bases, and now we’re at a place where we really need to dig in deep and identify the solutions we need to have,” Grill said. “There’s a ton of solutions that are a must-have in a new world and, moving forward, the future of work is going to require a lot of technology solutions in order to sustain it.”
There’s still appetite for investment in proptech, Grill noted. But he forecasts that over the next 12 to 18 months, the industry will see somewhat of a dropoff in valuations because of what is likely to be slower growth. If their customer base isn’t growing at the same rate as before “naturally, these proptech companies that are selling to these customers are going to be facing short-term pain,” he said.
If the pain points are coming from the customer base that aren’t necessarily growing at the seismic rate they were before, naturally these proptech companies that are selling to these customers are going to be facing short-term pain.”
JLL Spark is both a direct investor and an LP in a handful of funds. It has invested in seven proptech funds around the world. And when attending LP meetings, “things are getting marked down right now,” Grill said.
On the other hand, once valuations are reset to more modest levels, there should be a lot of attractive opportunities in the space, he added.
According to Grill, LPs that invest in proptech funds are looking for returns that are similar to any other generalist venture capital fund. While in the long term, that remains viable, currently there are issues with the IPO market and the exit market for investments, he noted. But “We’re not investing for two years anyway,” Grill said. “We’re investing for six to eight years down the road.”
