Digital Disruption: How PropTech is Reshaping Real Estate Investment

INTRODUCTION

In the evolving real estate investment landscape, Property Technology (“PropTech”) emerges as a transformative force, reshaping how we approach property acquisition, asset management and due diligence. PropTech has progressed beyond artificial intelligence and virtual reality, presenting multiple innovative and cost-effective solutions to managers who decide to enter the space. Allied Market Research predicts that the PropTech market will have a value of $119.9 billion in 2032, up from $26.8 billion in 2022. PropTech has brought several advancements across all property sectors, but the residential sector has seen the most growth, with the highest market share in revenue in 2021.

According to a PropTech Market Update published by Houlihan Lokey in July 2023, Investors continue shifting capital away from purely residential in favor of commercial and multifamily. On the other hand, the commercial and industrial segment is anticipated to register the fastest CAGR over the forecast period of 2020-2030.

Source: Houlihan Lokey

The investment process in real estate is multifaceted, encompassing everything from acquisition and due diligence to leasing, property management and disposition. Therefore, there is no one-size-fits-all solution. Specialized systems are catering to various aspects throughout the process. Managers can create a PropTech system that addresses every facet of their operations by acknowledging the diversity of needs. The integration of PropTech should begin with a strategic assessment of goals and priorities. Managers need to analyze their specific needs, pain points and objectives to identify what PropTech solutions align with their needs and strategy. It is also crucial to consider integration capabilities, scalability and data security when selecting these tools.

Alliance Global Advisors (Alliance) emphasizes the importance of managers staying well-informed about the influence of PropTech within their organizations and asset portfolios. Our latest blog delves into several key aspects, including the adoption of digital property management platforms, the pivotal role of AI and machine learning, the assessment of Environmental, Social and Governance (ESG) impact, collaboration with PropTech startups and prudent consideration of associated risks. This comprehensive Q&A session provides invaluable insights into harnessing technology to enhance operational efficiency, gain data-driven perspectives and implement sustainable investment strategies in the ever-evolving real estate landscape.

In this blog, Alliance interviewed professionals in the PropTech sector to understand the opportunities technology creates for the industry and how to leverage technology to improve a firm’s capabilities. Zander Geronimos provided comments for this blog prior to his departure from MetaProp.  At MetaProp, Zander served as the Head of Strategic Partnerships and Business Development.  While Zander is no longer with MetaProp, his comments reflect sentiments on PropTech and remain relevant today. We thank Zander Geronimos and Sarah Liu, a Partner on the Real Estate Technology Investment team at Fifth Wall, for contributing to this article.

Q: How can real estate investment managers leverage PropTech to streamline property acquisition and due diligence processes, improving overall investment decision-making?

Zander Geronimos, MetaProp: Now more than ever, investment managers must be thorough in evaluating and selecting an active PropTech technology stack. Numerous providers in the market have concentrated on discovering valuable pieces of investment-related information across the value chain, resulting in an overwhelming volume of data to be processed. In turn, investment teams need to ensure they possess a system capable of receiving, standardizing and utilizing this information across their assets, service providers and tenants/residents.

Real estate continues to be a highly subjective asset. Nonetheless, market forces and revenue drivers are adopting a more objective stance due to the incorporation of transparent data, ranging from building-level HVAC and access controls to broader market-level credit scoring. The crucial aspect lies in effectively integrating this information and establishing a protocol to prevent its deterioration, ensuring that investment teams are equipped with the most reliable data possible to facilitate informed decision-making.

Sarah Liu, Fifth Wall: There are thousands of PropTech platforms on the market that help investment managers streamline operations and improve overall investment decision-making significantly. Choosing a core stack of tools can be difficult among so many options, but here are some tried-and-tested solutions.  

Managers can evaluate the current condition of a property and forecast the potential impact of renovations or improvements on rental yields using tools like Tailorbird and HelloData. These tools provide access to comprehensive property data, including market trends, property condition and potential improvements, which enables more accurate underwriting of the rent impact that specific enhancements or modifications might have.

Testfit and similar conceptual planning tools can help evaluate the optimal land use for a property. By visualizing and testing various architectural and design scenarios, investment managers can make more informed decisions about the potential use and development of the property, considering factors such as zoning regulations, market demand and potential return on investment.

Document processing tools like DocSumo are a great way to expedite the data ingestion process by automating the input of essential data from various property-related documents like contracts, agreements and property records. Reducing manual data entry improves efficiency and minimizes the risk of errors.

By integrating these PropTech platforms into their workflows, real estate investment managers can streamline property acquisitions and due diligence processes, leading to more accurate assessments, faster data processing and improved decision-making, ultimately resulting in better investment outcomes.

Q: What are best practices and the tools to leverage for asset-level due diligence of physical assessments? And could you share specific tools or specific platforms that have demonstrated success in helping managers with their core business operations?

Zander Geronimos, MetaProp: Initially, it is crucial to establish the fundamental property management systems, such as Yardi, RealPage or MRI. These core systems provide a single source of truth for data related to buildings and leases. Next, teams aspire to institutionalize their workflows. In terms of underwriting, Altus and the Argus suite have been consistently enhancing their capabilities. Once the underwriting foundation is laid, the focus shifts to streamlining processes where teams often turn to VTS or Dottid for this purpose. In the realm of acquisitions and dispositions, options like DealPath or Altrio come into play.

Conversely, for teams centered around owner occupancy, leasing and lease management can be effectively handled using Occupier.com. Teams then have embraced HqO, Rise by VTS and Equiem to cultivate stronger relationships with existing tenants. For market-level data aggregation, Cherre proves valuable, while Mapped serves a similar purpose at the building level. In the realm of construction, tools like Briq, Procore and Autodesk come to the forefront. All these examples illuminate the complete life cycle of an asset and underscore the significance of a cohesive framework to integrate them seamlessly.

Sarah Liu, Fifth Wall: Investment managers should focus on tools that can help with asset-level due diligence. For detailed visual assessments of properties, including aerial views, roof condition analyses and immersive 3D scans, managers can look at DroneDeploy, SmartRoof and Matterport. These platforms enable managers to conduct thorough inspections remotely, leading to more comprehensive physical assessments and informed decision-making during the due diligence process.

Energy efficiency tools like Turntide and Runwise run energy audits to provide insights into energy consumption patterns within properties. These tools help managers make data-driven decisions to enhance energy efficiency and reduce operational costs across their real estate portfolios by identifying opportunities for energy optimization and sustainability improvements.

Finally, there are some great workflow management tools like Banner to facilitate better organization and communication, control spend, centralize all project data to one system and report efficiently. 

Q: Do you have any specific case studies or materials that you could share that show how the incorporation of PropTech enhances property-level returns for managers? 

Sarah Liu, Fifth Wall: I certainly do. We’ll focus on two tools I’ve already mentioned – Tailorbird and Runwise – and one I haven’t mentioned yet – Vero. Vero is a fraud screening and leasing tool that offers a transparent picture of who investment managers are dealing with during the application process. After using Vero, RXR Realty found that delinquency rates fell from 4.16% to 0.02%. This equates to around $48,000 in capitalized value per unit. The time it takes to execute a lease also dropped from an average of over six days to a few hours. 

Runwise provides users with energy savings of 21%, on average. This equates to payback nine months after implementation and 100% ROI each year thereafter. 

On average, Tailorbird users see a 1% improvement in a renovation project’s internal rate of return (IRR), an 8% reduction in renovation costs and shortened preconstruction timelines from six months to less than one month. Their new process management tool has also decreased vacancies by an average of nine days per unit by increasing transparency and decreasing delays.

Q: In what ways can PropTech tools help managers efficiently analyze market trends, property performance data and other relevant metrics to identify potential investment opportunities?

Zander Geronimos, MetaProp: Managers need to think of these platforms as a symphony of software. There is a constant evolution of innovation happening both at the incumbent software giants and the tens of thousands of startups. The best way to efficiently manage this is through a taxonomy of goals, problems and solutions across the workflows in a given asset. In this shifting market, managers should constantly be evaluating their pain points and create tags on the solutions, while always having a specific end goal in sight.

The metrics of traction, funding and active assets on a given platform are critical; however, the goal posts will continue to shift. Managers must understand their team’s needs first and foremost.

Sarah Liu, Fifth Wall: PropTech tools provide trusted benchmarking that investment managers can use to make informed investment decisions and capitalize on potential opportunities for portfolio growth and optimization.

If a property manager is looking for ways to set rental prices, a tool like HelloData can provide real-time data on rent prices in specific locations and compare their operating expenses with industry standards. HelloData can also help owners identify areas for potential rental income growth and efficient resource allocation to streamline property management costs.

BeamUp is a security benchmarking tool that can facilitate the evaluation of security measures in properties, comparing them against industry standards and best practices. This ensures that properties meet the required security standards, thereby enhancing tenant satisfaction and retention while mitigating potential risks.

nZero benchmarks a property's energy consumption and sustainability performance by comparing it with similar properties or industry standards. This helps identify opportunities for energy-efficient upgrades and sustainability improvements, leading to cost savings and enhanced environmental stewardship.

There are also connectivity tools like WiredScore that evaluate the quality of digital infrastructure and connectivity within properties and benchmark them against industry standards. This enables managers to ensure that properties offer robust connectivity services, catering to the growing demand for reliable and high-speed internet access, which is crucial for tenant satisfaction and property value.

Other interesting tools on the market, like Replica and Placer.ai, help follow demographic shifts and identify patterns at the market level. 

Q: How does the implementation of digital property management platforms enhance operational efficiency and tenant satisfaction?

Zander Geronimos, MetaProp: It is now an expectation from tenants and operating teams in many markets to have a digital product strategy. At minimum, teams should be initiating pilot programs and experimenting with systems to enhance operational efficiency. This has become more feasible than ever, thanks to the integration of AI-driven technologies and existing API frameworks.

Assessing tenant satisfaction can be achieved through metrics such as NPS scores, ideally reflected in improved rates of expansion and lease renewals. It is crucial to always bear in mind that real estate remains fundamentally centered around interpersonal relationships. Technology does not supplant building managers, but rather enriches their roles.

Sarah Liu, Fifth Wall: The endgame for these tools is to create an efficient, tenant-friendly ecosystem. They help to facilitate transparency and effective communication and deliver a convenient and seamless experience for tenants.

There are many digital platforms that provide real-time access to property-related information, maintenance requests, lease agreements and building announcements. Most will have user-friendly interfaces that allow tenants to conveniently pay rent, submit requests and access essential property information. 

These platforms enable better communication between tenants and property managers, which leads to quicker issue resolution, improves tenant satisfaction and helps with overall retention rates.

These tools match the convenience and efficiency that tenants are accustomed to in other aspects of their daily lives and improves overall satisfaction with the property management process.

Q: Can you share specific examples of how AI and machine learning algorithms can enhance a manager's ability to identify and mitigate risk in their portfolio?

Zander Geronimos, MetaProp: While it is still early for substantial integration of large language models into portfolios due to the industry being in its initial stages of digitization, there are examples of chatbots, image rendering and contextual recognition tools that do currently bring value to managers. Chatbots, for instance, can assist in tenant and resident communications during the leasing process or in addressing work orders on a 24/7 basis. This, in turn, allows managers to concentrate on issue resolution rather than communications. The utilization of image rendering can aid in generating marketing materials and presenting new constructions, all at a significantly reduced cost. While platforms employing contextual recognition to generate lease abstractions have been available for years, they remain valuable tools for asset managers and their legal teams. Our industry is only at the very precipice of leveraging these tools and has a lot of upfront work to get through before we can fully integrate them into our existing workflows.

Sarah Liu, Fifth Wall: There are PropTech tools on the market currently that use AI and machine learning algorithms to assist with fraud detection, appliance monitoring and security management, which are great for real estate managers who want to proactively identify and mitigate various risks within their portfolios. This proactive approach minimizes potential financial losses and ensures tenants' safety, security and overall satisfaction, ultimately contributing to the long-term success and sustainability of the real estate portfolio.

As mentioned, Vero uses AI to analyze transactional data and identify patterns associated with fraudulent activities, such as forged documents or suspicious financial transactions. By continuously learning from historical data and detecting anomalies in financial behaviors, AI can effectively flag potentially fraudulent activities, enabling managers to take proactive measures to mitigate risks associated with fraudulent transactions and activities within their real estate portfolio.

Managers can monitor the performance of appliances within properties using tools like Source7. By analyzing data related to appliance usage patterns, energy consumption and performance metrics, these algorithms can predict potential malfunctions or breakdowns before they occur. This proactive approach to appliance maintenance helps managers mitigate the risk of unexpected equipment failures, reduce maintenance costs and improve overall tenant satisfaction.

BeamUp, which I mentioned before, uses AI to effectively identify and mitigate security risks, ensuring the property's and occupants' safety.

Q: What are innovative solutions that enable managers to assess their ESG impact?

Zander Geronimos, MetaProp: Impact has held significant importance for numerous years and has consistently remained a primary concern for Investors. This is due to the increasing emphasis on both allocator requirements and government regulations. To effectively meet these evolving demands, particularly in the environmental aspect of ESG, teams have turned towards utilizing platforms that primarily aid in establishing a comprehensive reporting framework, conducting regular asset audits and ultimately, eventually minimizing their ecological footprint.

Measurabl has done an excellent job of setting the reporting standard and becoming the leading player. Enertiv has homed in on the real time energy output of assets, and Kelvin developed a product focused on reducing waste in steam heated assets. The assessment must be ongoing and can focus on specific waste outputs as well as the full portfolio to reduce the overall impact.

Sarah Liu, Fifth Wall: Investment managers who haven’t started assessing their ESG impact must start now. The California Climate Law, New York’s Local Law 97, the coming SEC rule on climate risk disclosure and increasing demand from investors all point to the fact that assessment is not nice to have – it’s an expectation.  

PropTech tools that enable managers to track and report on their emissions, like nZero, are becoming more common. While getting started with tracking and reporting may seem overwhelming, it gets much easier year on year once you make a start. Using an asset-manager-focused platform that is right for your sector(s) is critical. 

Finally, managers need to understand what counts as success: get a handle on your material ESG issues, track them and start to focus on change in a few areas. 

Q: Are there opportunities for managers to collaborate with PropTech startups to cater to their specific needs?

Zander Geronimos, MetaProp: There are numerous opportunities for managers to get involved with and work with startups, especially at the early stages. It does depend heavily on the managers’ ability to pinpoint and establish desired outcomes for addressing specific issues. Once managers have done this, a recommended approach is to establish steering committees within their organization to tackle the issue at hand, and subsequently engage with founders who are dedicated to addressing the same problem. This alignment of efforts and objective-setting with a startup mitigates the risk of getting stuck in a pilot phase limbo, ultimately averting the failure to resolve the issue. Incubators and early-stage venture capitalists warmly welcome managers who adopt this framework, and they actively encourage pioneering individuals to assume advisory roles whenever feasible.

Sarah Liu, Fifth Wall: Absolutely, startups and PropTech asset management firms regularly collaborate with investment managers to understand their needs and implement custom solutions. For example, Fifth Wall focuses on creating strategic opportunities to deploy new solutions across asset portfolios. Investors benefit from hand-selected, cutting-edge solutions to their pain points, and PropTech tools gain access to a vast network of influential investors and customers.

Fifth Wall’s Platform Teams facilitate relationships between managers and startups and offer strategic support to ensure managers are getting the most out of the tools they use. We’ve witnessed at Fifth Wall that the role of Platform Teams will be crucial for supporting the operational efficiency of real estate companies as they integrate PropTech in their day-to-day processes. 

Q: What are potential risks that managers should be aware of when integrating PropTech solutions?

Zander Geronimos, MetaProp: There will always be an inherent risk associated with problem-solving, yet it remains crucial to recognize this risk and weigh it against the potential consequences of not addressing the issue. The realm of PropTech encompasses certain risks, including software fatigue, inaccurate data outputs, limited user adoption, user friction and potential disruption to the core business. These risks are still prevalent when employing technological solutions to problem-solving and are often best mitigated through the approach of testing on a small scale, learning from failures and then implementing on a larger scale to achieve successful outcomes. Real estate requires technology to be built for its complex and human driven idiosyncrasies and without that design, there is always a risk to adoption.

Sarah Liu, Fifth Wall: Real estate managers can implement the tools more efficiently and successfully by proactively addressing potential risks associated with the integration of PropTech solutions.

Staff need to be ready to adopt PropTech solutions. It's crucial to address any potential resistance to change, provide adequate training and create a supportive environment to encourage the seamless integration of these solutions into existing workflows.

Managers should carefully assess the scalability and long-term viability of the PropTech start-ups they choose to work with and ensure the technology integrates with their existing technology and other tools they may want to implement. It's essential to ensure that the selected companies have robust growth plans and the necessary resources to support the evolving needs of the real estate portfolio over time.

Managing new cybersecurity considerations becomes necessary when integrating PropTech solutions. Managers should prioritize working with start-ups that have established robust cybersecurity measures and hold appropriate certifications to safeguard sensitive property and tenant data.

CONCLUSION

PropTech has surpassed being just a helpful tool; it is transformative for real estate managers to reimagine and elevate the customer experience. It streamlines operations, reduces manual tasks, enhances tenant satisfaction and provides real-time insights that optimize investment decision-making. PropTech enables proactive management, allowing managers to predict and address issues before they escalate. Organizations can implement this technology to help enhance tenant and stakeholder experiences by utilizing data analytics and AI-driven insights. Embracing this new wave of technology will equip managers with the right tools to adapt to changing market dynamics, mitigate risk in their portfolios and stay competitive.

ABOUT ALLIANCE GLOBAL ADVISORS

Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with over $520 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.

ABOUT METAPROP

Founded in 2015, MetaProp’s investment team has invested in over 150 technology companies across the real estate value chain. The firm manages funds for both financial and strategic real estate Investors that represent a pilot- and test-ready sandbox of 20+ billion square feet across every real estate asset type and global market.

ABOUT FIFTH WALL

Founded in 2016, Fifth Wall is the largest venture capital firm focused on technology for the global real estate industry. Fifth Wall connects many of the world's largest owners and operators of real estate with the entrepreneurs who are redefining the future of the Built World. Fifth Wall is backed by a global mix of more than 100 strategic Limited Partners from more than 15 countries. Fifth Wall believes this consortium represents one of the largest groups of potential partners in the global Built World ecosystem, which can result in transformational investments and collaborations with promising portfolio companies as well as decarbonization technologies.

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Disclaimer:  This blog was originally published in December 2023 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.