Special Series: What’s the PropTech New Normal Post-COVID-19?
COVID-19 is changing the PropTech landscape. A massive influx of capital in recent years pushed innovation and new businesses into the sector prior to the pandemic. An estimated 3,400 companies were vying for market share during the June 2019 Realcomm | IBcon RE tech conference. At that time, the biggest challenge was discerning which startups and technologies were capable of driving long-term value in improving systems and processes for real estate.
Grappling with the coronavirus aftermath, CRE companies’ expectations and needs are changing. Part VII of Realcomm’s coronavirus special webinar series features PropTech perspectives from Blackstone, Pegasus Capital Advisors and 2Five1 Consulting.
PropTech: Where to invest time and effort?
Partnered with industry peers, Realcomm is monitoring an adaptive list of technology applications and related business issues during COVID-19. Many smart buildings currently leverage these technologies, but new pandemic guidelines have amplified real estate’s outlook on building systems.
Wayne Pryor, Founder of 2Five1 Consulting, sees a new trend with venture capitalists, one he calls a “winnowing of the herd.” More mature, advanced companies are favored over startups because they can grow and scale to address business needs. “This crisis has actually accelerated the trends that we were already seeing, which is more M&A activity. You're going to see more focus on which companies are for real versus which companies may not have a real value proposition.”
CRE business models need to shift from strict valuation on new technology to concepts that solve legitimate problems and project growth, said Blackstone Managing Director, Innovations John Fitzpatrick. “You’re going to see a ‘flight to quality’ and away from risk. For the companies that are really solving use cases - this event has served as a catalyst for them to push their future vision. Those will be your ultimate winners.”
Panelists agreed that well-established and well-funded companies or startups have the upper hand as owners and investors seek solid solutions. Before coronavirus hit, there was a notable shift toward better profitability and speed to market. “I think that's going to be a much bigger conversation going forward,” said Pryor. “If I'm going to bet on you, when do you get to the point where you’re a sustainable business? Because we just can't keep throwing money at you.”
Pete Scarpelli, Operating Advisor at Pegasus Capital Advisors explains an aggregation model may be the best way forward. The pandemic might be an impetus for approaching the valuation challenge by creating "roll-up strategies": bringing together disparate ideas that might be great features but are not full businesses. “One of the biggest obstacles for making that happen is this concept of valuation - being able to find the deal structure that would enable such a thing.”
Evolving building ecosystems and customer experience
Occupant and tenant experience presents another opportunity amidst COVID-19, but one that’s less clear cut. There’s a need to adapt apps and building technologies designed to improve customer experience, but rapid changes in building ecosystems make it difficult to map new demands and needs. The panel expressed caution in a knee-jerk reaction to acquiring in-the-moment tech - it might not be useful on a long-term basis.
“I think it's just too early right now to understand what that really looks like when we return,” Fitzpatrick explained.
Blackstone has been successful in utilizing its tenant app in recent months, Fitzpatrick said. The technology keeps people apprised with regular updates about returning to work or using the gym and other services. He stressed that PropTech is only one component of a smart, connected building, “There are apps that are not generally deemed in the PropTech realm; they need to plug into this ecosystem to truly work. If you have a closed mindset that is just PropTech, I think you're going to have a half-baked solution.”
In the short term, Scarpelli noted, existing technology can find new uses, like wayfinding apps that facilitate physical distancing and help prevent crowds from forming. He cited a term “layered defense” for buildings that enable new and existing technologies to build atop of one another.
Taking advantage of unexpected opportunities
The coronavirus pandemic has created unexpected, yet favorable positioning for CRE companies that are flexible and resilient:
Downtime planning: While many business sectors have slowed or stopped, PropTech continues to present great opportunities. Pryor’s consulting firm expected a somewhat dormant period but now sees companies advancing projects originally slated for one to two years out. They are taking advantage of this interval and will be better suited for re-entry when that time comes.
Talent acquisition: Organizations that are surviving and thriving are focused on an important resource: human capital. Many will use this opportunity to acquire skilled talent that has become available.
Managing cycles: Pryor said that building owners and landlords look at PropTech in relation to their business and ability to use the space; they tend to focus on scaling up, “We need to start looking at not only scaling up, but also how to scale down.” He calls for companies to manage cycles within a crisis that can both ramp up bandwidth and bring down service while adjusting cost structures.
Data analysis: Smart companies will leverage crisis data to shape long-term strategy, Fitzpatrick said. “Use this as a catalyst to change some of the legacy process to make your buildings and company better. That is the right long-term strategy to win.”
Pryor summed up the state of PropTech in the COVID-19 era: “There's a phrase, ‘Never let a good crisis go to waste.’ It accelerates whatever trends are already in place and causes everyone to focus on what's important or valuable. In the end, you hope it drives a certain level of adaptation, and potentially drives transformation as well.”
Realcomm’s coronavirus coverage provides CRE insight and perspective on business continuity plans, cybersecurity and health-safety for commercial and corporate real estate. Check out the webinar series and articles in the Realcomm Weekly Briefing.
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