Real estate has long been an intriguing investment vehicle. And while memories of the Great Recession may still loom large in potential investors’ minds, money continues to flow into commercial and residential real estate. That trend is expected to continue, and one can look back at investment winners of 2016 to predict who will secure the most attention (and investment dollars) in 2017.
If last year is any indication, the safe bet is on real estate technology solutions and services providers.
CB Insights reports that in 2016, real estate tech companies raised $2.6 billion across 235 deals. The third quarter alone notched 53 deals, marking seven straight quarters with more than 50 deals closed for real estate tech startups, until that streak was broken in the fourth quarter with 49 deals.
Yes, Mark Twain once quipped, "Buy land, they're not making it anymore." But today, land and buildings are not the only investments that present significant moneymaking opportunities. Technology companies that facilitate investing, buying and selling processes are also attracting millions in venture capital.
2016 Winners
The first group that made significant gains in 2016 are companies that connect buyers and sellers, led by online real estate platform Zillow.
Zillow was one of the success stories of real estate tech in 2016 — its stock share price has risen more than 42 percent, thanks in part to Zillow’s announcing better-than-expected third-quarter results in November. More than 140 million unique users visited Zillow Group's five consumer-facing brands in an average month — up 13 percent year over year. This growth beat analysts’ expectations to boost shareholder value, particularly for early investors like TCV and Benchmark Ventures.
Other winners in this category include Compass, which combines data collection and analytics with expertise to help sellers accurately price and market their homes to appropriate buyers, and Clara Lending, which uses data to streamline and customize the lending process. These companies each secured major third-quarter funding, raising $75 million Series D and $27 million Series B fundraising rounds, respectively.
Another group of real estate tech winners resides in the sharing economy sector. Younger folks pinching pennies for food and rent often crash at friends’ apartments or houses, essentially sharing their expenses. In 2016, it became clear that more seasoned generations and businesses are embracing this sharing economy as well.
Consider how WeWork is changing the way companies use office buildings. It raised $430 million in 2016 to transform floors and entire buildings into collaborative “co-working” spaces. On the residential-sharing front, market leader Airbnb raised $555 million in 2016.
Predicting the 2017 Winners
For 2017, the question becomes, “Who is the next Zillow, Airbnb or WeWork?” One answer lies in looking to solutions and service providers that serve a rapidly growing yet underserved segment of the market: the entrepreneurial developer.
Technology exists today that makes the buying and selling process easier and more efficient. This enables small- and medium-sized developers to expand their network of potential investors and other partners, and strike more deals than they could have even three years ago.
Sharing Economy - Consequently, the burgeoning sharing economy will continue to thrive. According to a study by Hitwise that examines space and financial sharing activity, more than 143 million Americans visited space-sharing sites (sites that offer shar
ed or rented spaces such as homes, rooms or offices that support travelers or people who need a temporary space) during the first three months of 2016. The report also found that visits to space-sharing sites have jumped 169 percent since 2014.
Online Investing - One can also expect developers and investors to increasingly turn to capital raising platforms in 2017. As consumer technology and entertainment companies have learned by partnering with Kickstarter and Indiegogo, crowdfunding breaks down “old money” barriers between buyers and sellers, and the same holds true in real estate. Interested backers no longer need gobs of money to become real estate investors, creating more opportunities for smaller developers.
Internet of Things - The Internet of Things (IoT) trend appears to bring tremendous investment and business opportunities to virtually every sector of the economy. Real estate is no different. More city officials and urban planners are moving ahead with projects to build “smart cities” — using technology to manage city assets, improve service efficiency, reduce costs and resource consumption, and improve quality of life. Developers look to companies like Connecthings to modernize people’s everyday interactions with public transport, city services and local commerce. As a result, cities will likely attract more startups and young, tech-savvy residents.
Mergers and Acquisitions (M&A) - 2017 may see a variety of M&A’s, according PropTech Angel Investor Zach Aarons. These include M&A’s between two young companies, and when larger companies buy out smaller companies, as seen when CBRE acquired Floored to kick off 2017. As nearly identical companies both grow simultaneously, they may find that an acquisition or merger would be a mutually capital-saving business move. In addition, an increase in acquisitions indicates a maturing real estate tech market.
A New Mindset
The real estate technology market’s sustained growth may depend on more than just new technology platforms and the rise of the smaller developers. Industry professionals must shake off their fears of embracing new technologies. Change can be intimidating, but for real estate professionals, these trends and the companies taking advantage of them could make their jobs easier, more efficient and more profitable. The investment collections of 2016 winners, and those poised to join them in 2017, are evidence that this evolution is already underway.
