[Note from editor: Originally published on Thomvest’s Blog]
We recently published a real estate market map, which includes hundreds of technology companies that are transforming how residential real estate is bought and sold. Today, we’re following that post up with a new market map focused on commercial real estate (the map is available in PDF format here).
Broadly defined, commercial real estate (CRE) includes any property owned to produce income. In total, more than 100 billion square feet of space in the United States is devoted to commercial use. Because commercial property is acquired for investment purposes, it differs from its residential counterpart in several important ways:
- Commercial real estate is a diverse asset class that can take on many forms: office buildings, retail stores, malls, apartment complexes, homes, hotels and more.
- Every property is analyzed for its ability to generate income. As such, property values are closely tied to projected revenues and cash flows.
- In most cases, there is a leasing component to commercial property ownership (which is the main revenue-generating activity), whereas in residential real estate properties are often owner-occupied.
- Commercial properties are actively managed by teams responsible for leasing, routine maintenance, improvements and amenities to ensure that the building is suitable for occupants.
As the map above indicates, there are hundreds of technology companies across every aspect of the commercial real estate lifecycle, from property search and financing, to leasing and ongoing management. Ultimately, every company on the map exists to improve the way real estate professionals manage their businesses. The approach these companies take to delivering value, however, can vary widely. We’ve outlined five key areas of innovation:
1. Modernizing tools and processes
From a technology perspective, today’s commercial real estate industry continues to rely on decades-old software platforms. Much of the industry still runs on Excel, resulting in data that is static, siloed and error-prone. To their credit, CRE operators are eager to modernize — 27% of senior managers are investing in “significant improvements of operational processes and related technology” according to a recent KPMG survey.
The good news is that many entrepreneurs have recognized the need (and associated market opportunity) for more sophisticated tools and processes. In the last five years, we’ve seen a wave of purpose-built software platforms within commercial real estate. Companies like VTS, BuildingEngines and RealMassive aspire to develop “operating systems” for CRE — centralized platforms that aggregate and deliver information in real-time and on any device. These platforms improve how teams manage their day-to-day operations, collaborate, and make decisions.
2. Data to inform better decisioning
We’ve seen huge growth in the breadth and depth of data available to real estate professionals. There are thousands of data points on specific properties, leasing comparables and market conditions. The challenge, of course, is in aggregating data into a single platform and making it actionable. To properly assess the risk return profile of each property, a large amount of variable data needs to be obtained, mapped and interpreted. Several emerging analytics platforms help investors do just that — informing nuanced insights about long-term value, risks, the true costs of a particular transaction, and more.
Data is being utilized across every aspect of CRE — from prospecting (Reonomy), to valuations (HouseCanary), to site selection (LocateAI) and leasing (CompStak). As these platforms mature, we expect further sophistication around analytical capabilities, such as broader adoption of AI/ML-based models.
3. Novel approaches to real estate financing
Traditional banking institutions have become increasingly risk averse to lending for real estate in response to regulatory requirements and market pressures in the post-financial-crisis era. However, non-traditional, non-bank lenders have largely stepped up in their place to provide financing for real estate development, construction, and acquisition.
New investment models like crowdfunding have democratized access to real estate investments, enabling developers and investors to transact online. For instance, PeerStreet (a Thomvest portfolio company) enables accredited investors to invest as little as $1,000 in high-yield real estate loans that that had previously been restricted to institutional investors. Platforms like Cadreand CrowdStreet help real estate developers more efficiently raise equity capital for their projects.
4. Technology to drive down operating costs
Like any business, controlling costs are a critical component of managing commercial properties. The need for cost management is becoming particularly important as asset prices in CRE continue to rise. Among commercial operators, KPMG found that 58 percent of companies are pursuing various cost-related strategies to improve bottom-line results, especially implementing technologies to address inefficiencies and process improvements. Several companies are helping owners better manage their properties, including HappyCo, Honest Buildings and Mynd.
We’re also seeing new building technologies that analyze building data derived from IoT devices to reduce energy and maintenance costs. Companies like BuildingIQ and Enertiv can help real estate operators prevent equipment failure, optimize building performance, and manage resources across a huge property portfolio within a single dashboard.
5. Better utilization of space to drive incremental revenue
Finally, we’ve seen tremendous growth in the number of companies that seek to help real estate owners derive more value out of their properties. These companies are taking underutilized real estate assets and monetizing them in novel ways. This is happening across every property type — from short-term rentals (Stay Alfred), to office (Industrious and Knotel), to retail (Storefront).
Dennis Frenchman, a Professor at the MIT Center for Real Estate, refers to the trend as real estate fracking. The two largest real estate technology companies to be founded in the last decade — Airbnb & WeWork, — are pioneers of this model. Airbnb allowed homeowners to rent out unused rooms on a per-night basis and monetize otherwise empty space. WeWork popularized the co-working model, in which the company reconfigures office floor plans to accommodate a higher number of users and rents space on a per-desk or per-suite basis.
[Note from editor: Originally published on Thomvest’s Blog]