PropTech: The Convergence of Real Estate and Technology
Key Takeaways From Blueprint
Property Tech (“PropTech”) encompasses the software and services that fuel the real estate industry – simply put, it is the technology that supports people who buy, sell, research, market and manage properties. With continuous headlines spotlighting real estate valuations, housing supply-demand imbalance, interest rate hikes and the looming impact of commercial real estate debt, the real estate sector is a dynamic market that is top-of-mind for investors. The emergence of PropTech creates additional compelling opportunities for traditional real estate and/or tech investors.
Baird Global Investment Banking’s PropTech coverage is uniquely positioned given our cross-team collaboration between our Real Estate and Technology & Services Investment Banking groups. Members of our team recently attended the Blueprint Conference in Las Vegas to meet with industry leaders and investors within the space.
There were several topics that dominated the public panel discussions as well as the Baird team’s discussions with companies and investors at the conference, including the following sector trends:
- Flight to Quality: Sponsors are laser focused on profitable businesses, businesses on the path to profitability and the burn rates of PropTech organizations. Companies that don’t solve operational efficiencies and enhance the bottom-line cash flows, will not be in vogue and garner the capital and customers needed for sustainability and growth. Nevertheless, high-quality organizations that are resilient to macro-dynamics and interest rate volatility are still ascertaining accretive financing and high valuation multiples due to scarcity in the market.
- Growth Capital Raising Reset: The sector has been negatively impacted in 2023 by the broader tech market reset. Several PropTech companies that went public via SPAC or raised capital via private financings in 2021 have materially decreased in value and are more cash-strapped than ever before. The weekly average PropTech funding near mid-year 2023 is $198 million, significantly lower than the $545 million in 2022 and $512 million in 2021. Venture Capital firms typically fund companies for a 24-month runway period, resulting in the current PropTech company landscape needing additional growth capital in the next 12 months.
- Broadening Sub-Sector Capital Allocation: While the residential market remains strong, over the past 12 months, there has been a broadening in capital deployment from Venture Capitalists and Private Equity into the commercial and construction real estate sub-sectors. Historically, multifamily startups have received the bulk of capital investment because of the increase in renters in the U.S., but the appetite for commercial and construction solutions is increasing.
- M&A Consolidation on the Horizon: Given this year’s macro-economic dynamics around inflation, high interest rates and fears of a potential recession, PropTech companies will see more consolidation in the space as a result of increased investor confidence in the Federal Reserve’s economic outlook, and customers looking for a more comprehensive end-to-end solution that increases cash flow and decreases operational costs, at scale. Wall Street Banks commentary at the conference centered around a resurgence in M&A activity in the next 12 to 24 months.
