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Venture capital investment in 2021 can only be described with one word: epic.
A record-breaking $32 billion flooded into real estate technology and proptech companies globally. The investment activity was a 28% increase from 2020, representing an additional $7 billion in spending, and a 3.2% increase over 2019, the previous record-holder.
At some point, it has become difficult to characterize this growth. Every year, the proverbial rise of the proptech industry steals headlines, either for investment activity or tech adoption or the launch of a new generation of start-ups. To put the $32 billion figure into perspective, proptech investment volume from 2012 to 2018—a period of immense growth for the industry—was $43 billion. So, in a single year, VC investment was nearly three-quarters of the total investment in the sector during that seven-year period. It’s a big number.
More noteworthy perhaps for the commercial real estate industry, residential technology took less than half of the total venture funding in 2021, receiving only 49% of investment dollars. Commercial technology, including multifamily, and construction technology captured 47% of funding, with the remaining 4% of capital invested in miscellaneous real estate technologies.
In all, it was a banner year for the proptech industry, setting the stage for not only increased VC investment in 2022 but more importantly the maturation of the industry. Last year, venture capital favored late-stage start-ups, with 57% of funding invested in Series C and D rounds. Seed and angel funding, on the other hand, captured only 5% of the capital.
Although mature companies captured the most dollars, growth-stage start-ups weren’t totally ignored. Start-ups raising capital for Series A and B funding rounds secured about 38% of the investment volume, showing there was really healthy investor interest across the spectrum.
With increasing venture capital interest, the proptech industry is poised to scale rapidly in the coming year.
Will 2022 Set a New Record?
By all expert accounts, yes. The record funding activity this year along with proptech’s foray into the stock market has made the industry a top target for venture capitalists. In a survey from Center for Real Estate Technology and Innovation, real estate technology investors were unanimous in their optimism on the sector.
The majority of investors surveyed said they plan to make between six and 20 investments in proptech companies this year, and 7% of investors plan to make more than 20 investments, ramping up activity from 2021 when the majority of investors made less than 10 investments. Investors also plan to increase investment volume this year, with 35.7% of investors planning to deploy $10 million to $20 million and 21.4% of investors planning to deploy more than $20 million.
Capital is only one facet of the growth to come. Travis Connors, the co-founder and general partner of venture capital firm Building Ventures, expects proptech to enter the “installation phase” in 2022, meaning that certain proptech companies will emerge as permanent fixtures and leaders in the market. Sarah Liu, VP of Fifth Wall, predicts that the proptech industry will target the SMB market this year with trimmed down software and tech solutions that will allow smaller businesses to compete with enterprise companies. These trends signify proptech’s evolution out of the start-up phase.
Don’t think the maturation of the market will come alongside the end of proptech’s start-up roots. The proptech industry will continue to innovate and pioneer new solutions in response to fervent demand. In a recent EY survey, 93% of real estate owners said that tech adoption was a high or medium strategic priority, and this demand will drive the emergence of new concepts and companies.
Follow The Money
So, where is all of this money going? This year, the sources of proptech demand will be vast. In 2021, investment in construction technology and property management technology had the most growth, according to data from Crunchbase, and the research platform expects those sectors to remain a popular landing for investment capital again this year.
ESG programming will also drive demand for new technologies. Real estate companies will need to invest an estimated $18 trillion to $36 trillion into climate technology to achieve aggressive sustainability plans, many of which have been announced during the pandemic. These companies are calling on the industry to develop technologies to address the increased focus on sustainability, which will continue to drive growth in the proptech sector.
The conversation about proptech is often focused on back-end software solutions that serve real estate owners, investors and developers, but emerging consumer-targeted proptech companies are equally revolutionizing the industry. This trend was accelerated by the pandemic when social distancing required mass adoption of virtual tour technologies, smart and touchless entry systems and AI leasing agents.
These features are now fixtures in the industry, not only because they have proven to be more convenient and cost-effective but also because the more tech-savvy Gen Z is becoming a prominent demographic of real estate consumers. By next year, Gen Z will make up 30% of the workforce, so catering to the needs of these renters in office spaces, retail shops and apartment units, will be crucial in the coming years.
At $32 billion, proptech investment still represents only a fraction of the total $621 billion of venture capital investment volume last year, but investors are clearly bullish on the sector. Many proptech companies have reported that they are raising capital faster than expected, and according to a recent Wall Street Journal article, “This enthusiasm has been stoked in recent months by the big payouts venture-capital firms have enjoyed from earlier investments.” This year, the industry will build, once again, on that enthusiasm.
Tag(s): Real Estate Technology
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