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Global economic and geopolitical factors, paired with a reevaluation of values, have led to a realignment of proptech investment, recent reports show.
Total proptech venture capital investments hit just $1.491 billion in the first quarter of 2024 — a 12.4 percent year-over-year decline from $1.7444 billion in Q1 2023,and a far cry from a peak of $7.444 billion tallied in the first quarter of 2022, data from the Center for Real Estate Technology and Innovation shows.
Credit: Center for Real Estate Technology and Innovation
On a weekly basis, investments showed “high volatility” during the first quarter of 2024, CRETI noted. Week 1 investments only hit $15 million, compared to a high of $254 million seen in week 6 of Q1 2024. Investments were also made sporadically, rather than consistently.
A report with similar finding released earlier this month from Valley Bank also showed that 70 percent of industry-wide investment in proptech last year was generated by venture capital across 144 deals representing $2.9 billion — the lowest count of completed transactions since 2017.
“This decline can be attributed to a number of economic and geopolitical factors,” Valley Bank President Tom Iadanza said in a statement. “Rising costs of capital, overall economic unease and fears of geopolitical tension along with changes in supply chains’ speed and cost propelling revisions upward for construction and renovation created a cautious environment. However, proptech investment activity continues to showcase pockets of resilience and represents a critical avenue for the gradual evolution of the global property sector.”
Despite the striking decline in investment, CRETI’s managing director said that early data from 2024 shows investors are continuing to make moves, but in a very cautious, measured way.
“Q1 2024’s proptech venture capital landscape exhibits a cautious yet strategic investment approach, with significant funds allocated to promising areas despite the overall decrease in total capital,” Ashkán Zandieh, managing director at CRETI, said in a statement. “This indicates a market where investors are more judicious, seeking to balance risk and reward in a sector experiencing dynamic changes.”
Bright spots in proptech where investors remain optimistic include companies innovating with AI or those finding solutions to transition away from fossil fuels and unsustainable building practices, in the face of ever more robust federal regulations in these sectors.
“While both the real asset and venture capital sectors have faced headwinds in recent years, we believe technology will continue to play an increasingly critical role in shaping the future and advancing the long-term sustainability of the real estate ecosystem,” Chris Green, founder and CEO of GreenPoint Partners, said in a statement. “As dedicated investors targeting opportunities at the intersection of real assets, technology and sustainability, we remain incredibly optimistic about innovation, investment and growth across AI adoption, the energy transition and decarbonization-focused technologies.”
The following areas are ones in which Valley Bank and CRETI noted investors are continuing to put their money.
AI adoption
AI is increasingly being implemented in different ways across the real estate industry.
When it comes to proptech specifically, Valley Bank’s report noted that AI will continue to be an important tool when retrofitting and improving energy consumption or emissions rates across the industry, as well as in the ongoing development of smart home tech. Augmented and virtual reality for property management and building modeling also continues to benefit from refinements in AI.
Demand for AI-driven automations of back-office processes, data analysis and marketing remains strong as well, Valley Bank’s report showed.
Green building and energy transition tech
Regulations requiring more green construction methods and materials will continue to bring funding into these areas to generate innovation, Valley Bank’s report noted, especially through digitalization.
Seventy-five percent of demand for low-carbon office space in the U.S. is still unmet, according to JLL’s Global Real Estate Outlook 2024. In Europe, 57 percent of demand for low-carbon office space has not been met, and in the Asia-Pacific, 59 percent of demand has not yet been met.
As global trends toward more sustainable forms of energy and decarbonization continue, demand will remain steady in proptech for new tools to support this drive, including via upgrades in materials like mycelium bricks (bricks made of 100 percent organic material) and geothermal heat pumps (pumps that use the earth’s natural temperature to enable more efficient heating and cooling of a home or its water).
For instance, VC giant Fifth Wall announced in 2022 its $500 million close of the firm’s inaugural Climate Fund, and at the end of 2023 closed an additional $340 million into its climate strategy, reflecting its commitment to decarbonizing the real estate industry.
“As regulatory changes also enforce retrofitting, changes in construction plans, and other adaptations, more capital deployment opportunities should emerge for the swiftest-moving, most successful green real estate companies,” the Valley Bank report stated.
Property management and transaction solutions
The proportion of deals around property management and transaction solutions increased in 2023, which may indicate where firms will continue to invest moving deeper into 2024, Valley Bank’s report said.
“This focus suggests that firms were prioritizing cost-saving and revenue-boosting implementations to costly, lengthy digital processes via automation,” the report stated. “Physical property management, deployment of energy-saving devices and analytics packages also were prioritized.”
As an example, Juniper Square, which runs a real estate investment management platform, landed $133 million in growth capital from several firms, including Blue Owl Capital, Fifth Wall, Redpoint Ventures and others, in February 2023.
But more traditional real estate players also latched onto strategic consolidation and acquisition in these areas, including Zillow, which bought Follow Up Boss, a platform that helps agents handle lead management, for an estimated $500 million in October 2023.
As the number of long-term renters in the U.S. has continued to rise in response to affordability barriers in owning a home, investment in proptech for the rental market is also growing, and will likely be seen as a stable investment in upcoming years.
Cost-saving, revenue-boosting tools and young companies with potential
Neal Kapur, managing partner at VLY Ventures Digital Banking and a contributor to Valley Bank’s report, said that looking ahead further into 2024, “priorities remain concentrated on proving out swifter paths to sustainable, recurring revenues and growth grounded in good fundamentals as opposed to relatively high burn rates. As a result, businesses that are more closely connected to value propositions that target increases in efficiency or ease, lower costs of operations, or brand-new sources of growth that could help pad bottom lines are all being prioritized.”
Investors are also keen to put their money towards young companies that show potential for long-term sustainability.
Based on CRETI’s Q1 2024 Proptech Venture Capital Insights report, VC’s showed a clear preference for early-stage investments, with 30.57 percent of investments going towards seed funding and 23.14 percent to venture rounds.
The median deal sizes for pre-seed and see funding by VCs actually increased from $3 million in 2022 to $3.3 million in 2023, Valley Bank’s report showed, while later-stage funding declined.
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