CRE Proptech Begins to Overtake the Residential Market

Last year, the outlook for the proptech sector turned grim. After a historic period of growth in 2020 and 2021, new economic headwinds and an aggressive monetary policy have curbed the roaring market growth. 

Investors began to scrutinize the business fundamentals and growth potential of new start-ups providing technology-based solutions to the real estate industry, and venture capital volumes fell sharply. 

A closer look, however, reveals that the backslide in proptech funding has been driven by the residential market, not the commercial sector. Major real estate technology companies like Zillow, Redfin, and RocketMortgage experienced substantial losses in 2022, leading to widespread layoffs. 

Zillow’s home flipping business, for instance, lost $420 million last year, while Redfin’s home flipping division lost $18 million. Both companies were forced to lay off a substantial portion of their workforce. The disruption effectively warded off venture capital funding for residential proptech, or companies creating technologies for the homebuying sector. 

The real estate investment sector is another story. Proptech companies operating in the commercial space are continuing to perform and are holding investor attention, particularly for seed and early-stage funding rounds. Here is a look inside the ups and downs of proptech, and why there is still optimism for commercial real estate technologies. 

2022 Proptech Venture Capital Investment

The proptech sector had a challenging year. Venture capital investment fell 38% from $32 billion in 2021 to $19 billion in 2022, the lowest year for investment in the sector since 2018, according to research from CRETI. 

Overall, late-stage funding rounds had the sharpest decline, down 19% with 38 fewer deals in 2022 than in 2021. Most experts agree that mega-funding rounds, where companies have secured large sums (i.e., hundreds of millions of dollars) of venture funding are a thing of the past. As a result, declining volumes could become the norm as the industry stabilizes after two consecutive years of robust growth.  

That is the big picture, but investment trends in the proptech sector are more nuanced. Early-stage and seed funding rounds have been flat year-over-year, and investments in series A rounds saw only a modest decline, showing that funding is still available for novel ideas. 

When filtering out the mega-funding deals, which skew up the numbers, investment volumes are even more promising, with only a narrow decline in venture capital investment, Zak Schwarzman, a general partner at MetaProp, told The Commercial Observer. 

While there is reason for optimism, venture capital providers are more conservative and selective in their investment decisions. Nish Patel, the managing partner at Inertia Ventures told CRETI, that investors will more closely scrutinize business fundamentals, including burn ratios, unit economics, and runway. It will no longer be enough for tech start-ups to have a good idea; companies will need to be good stewards of business with a solid strategy for growth. Businesses that meet this criterion will be able to secure funding.  

Commercial Real Estate Proptech Has Legs

Separating commercial and residential venture capital funding activity is challenging. Research platforms didn’t bifurcate the data in 2022, due to the decrease in overall activity, representing proptech as a single market, even though it serves multiple industries. Anecdotally, however, commercial real estate proptech companies have outperformed the residential technology market. 

Proptech funding rounds are a good indicator that the market is trending away from residential-focused technologies. In 2022, each of the top 10 proptech funding deals was secured by a company serving the commercial or real estate investment markets. By comparison, all but one of the top proptech funding rounds in 2021 were for residential technologies focused on providing solutions to the home-buying market. 

Development technology company Veev was the top deal last year, securing $400 million from VC firm Bond. Flow, a start-up that helps developers reach stabilization faster by leveraging social media marketing, secured $350 million in funding, and Roofstock, a website providing advice and data to mom-and-pop investors, secured $240 million in funding, rounding out the top three deals. 

It wasn’t only deals at the top of the list that fit this trend. Commercial- and investor-targeted technologies secured healthy funding across the broad spectrum of deals. Crowdfunding platform CrowdStreet secured $43 million; commercial real estate life-cycle management company VTS secured $125 million; and Northspyre secured $25 million in Series B capital. The list goes on. Business Insider’s annual list of top growth proptech companies in the coming year is made up almost entirely of investment- and commercial-targeted technologies. 

VC Investors Target Automation 

VC investors are practicing caution when vetting prospective businesses, but they are still bullish on the way that technology is reshaping and revolutionizing the industry. In particular, VC funds are targeting technologies backed by automation and data and analytics. All of the start-ups to secure significant funding in the last year are leveraging automation as part of the platform. 

Veev includes an automated design lab and data monitoring, and Flow uses automation to execute social media posts where they will be most impactful, for example. Crowdstreet and VTS are both incorporating automation into the technology to deliver better results, efficiency, and accurate data that inform investment and development decisions.  

Northspyre deeply understands the benefits of automation. The cloud-based software leverages automation and machine learning to deliver more predictable outcomes to developers. The system automates administrative tasks, organizes data to improve access to information, and uses proactive learning and forecasting to create stability in the business model. 

These features have a real impact on the bottom line, shaving budgets down by 6% and reducing overages by 66%. The benefits of increased accuracy, reliability, and productivity are particularly useful in a market with deteriorating fundamentals, helping to offset market uncertainty and giving developers downside protection. 

Not every year is going to be record-breaking. The proptech industry is coming off two years of historic growth and facing the most challenging economic fundamentals in its history. It makes sense for investors to take a pause and assess the emerging dynamic—but in this case, it isn’t an indicator of market sentiment. 

Despite new challenges, investors are optimistic about the future of proptech, commercial real estate investment, and automation. When the three converge, well that’s the new sweet spot.