Technology for the commercial real estate market sees a boom in investment dollars but also a time for introspection.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN APRIL OF 2016
As an investment product, commercial real estate is still largely marketed in person-to-person interactions and has seen little benefit from the Internet, at least compared to other markets.[contextly_sidebar id=”30iTPk37cuSTBbPtC0RETTYfvHdwsLKh”]And research is largely conducted through proprietary databases closely guarded by the big brokerage firms and information providers like CoStar Group, making little use of new data analytics technology. But the technological advancement of commercial real estate may now be starting to accelerate.
Tech ventures for the commercial real estate industry received some $161 million in venture capital funding last year, up 1.6 percent from 2014 and more than triple the amount invested in such ventures two years ago, according to a recent report by CRE//Tech, which hosts conferences on the intersection between technology and commercial real estate.
The industry is making greater use of technology as more millennial generation professionals enter commercial real estate, as the booming market allows firms to invest in new tools and as market players find utility in functions such as data analytics, the report found.
“Macro technology trends like big data, real-time analytics and increased mobility are enabling new solutions,” CRE//Tech founder Pierce Neinken wrote in the report.
Applications that drew venture capitalists’ interests included platforms for raising real estate investment capital, software for property management and market analytics.
In the biggest venture funding of a commercial real estate technology in the past year, Menlo Park-based Canaan Partners and Lehi, Utah-based Sorenson Partners led a $35 million Series B investment in RealtyMogul.com, the Los Angeles-based operator of an online real estate investment platform.
Using the Web to source real estate investors appears to be gaining some acceptance, if RealtyMogul’s success is any indicator. In January, it connected Helios Properties with lenders for a $16.9 million bridge loan and a $1.5 million preferred equity investment in Helios’s acquisition of a 12-story Class A office building in Rolling Meadows, Ill. RealtyMogul also raised $1 million of $37.5 million in capital sought by St. Clair Holdings to buy and renovate a portfolio of student housing properties near the University of North Carolina, Greensboro, and East Tennessee State University.
“We’re really at an important influx for technology startups in commercial real estate,” said Jilliene Helman, RealtyMogul’s chief executive officer.
That influx was brought about, in part, by legislation passed by Congress four years ago that was meant to encourage the use of the Internet as a means to raise capital for private investments.
The Jumpstart Our Business Startups Act included provisions that would allow the marketing of unregistered securities to the general public. It would also allow for unregistered securities to be sold, in limited amounts, to buyers who don’t meet the Securities and Exchange Commission’s definition of an “accredited” investor. In the past, sales of unregistered securities have largely been limited to accredited investors who are deemed wealthy enough to bear greater risks.
RealtyMogul, which started up in 2013, was one of numerous ventures that intended to take advantage of the JOBS Act. Its plan was to use the Web to sell interests in commercial property.
But it ultimately adopted a business model that met regulatory standards that were in effect before the JOBS Act, with only accredited investors allowed to see the details of its deals or invest in them.
Still, Hellman credits the passage of the JOBS Act for setting up the environment that allowed for the launch of RealtyMogul and its numerous competitors.
Before, “there wasn’t the catalyst to educate the individual investor on the opportunity,” she said. “It really started the conversation around crowdfunding.”
Aside from the $35 million raised by RealtyMogul last July, its competitor AssetAvenue raised $11 million last April in a Series A round led by DCM Ventures. And another crowdfunding platform, RealtyShares, raised $10 million in a Series A round led by Menlo Ventures.
“We believe, like many, that real estate is a large market that has been relatively untapped from a financial-innovation standpoint,” said Jeff Lee, the principal at DCM Ventures who oversaw its investment in AssetAvenue.
That’s largely because, unlike other industries that have seen innovation sooner, commercial real estate isn’t an industry that could easily be “disrupted” by outsiders, Lee said. Experience in commercial real estate is necessary to get investors to commit the hundreds of millions of dollars that may be necessary for meaningful commercial real estate investment. Connections within the market are necessary for finding deals. And underwriting and risk evaluation are skills that must be learned through experience.
And even where commercial real estate could be disrupted, innovation has been slowed by the hold that large brokerage firms and others have over market data, observers say.
“There are some players that are somewhat entrenched,” Lee said. “They tend to control the industry.”
Their grip may be loosened, however, by advancements in mobile technology and cloud computing.
“Technology now has only in the last couple years been able to find the solutions,” said Richard Sarkis, chief executive of Reonomy, a provider of data analytics about commercial real estate.
The New York-based company raised $13 million last year in a Series B round led by Bain Capital Ventures.
In the past, gathering data on the market has been labor-intensive, with heavily staffed firms like CoStar phoning landlords for information, Sarkis said. Now, more data is available online from sources like government databases.
Much of that data is messy and inconsistently reported with standards varying from one database to another. But cleaning it up and analyzing it has been made easier by using the cloud to bring more computing power, more cheaply.
Still, Sarkis says it will be difficult for any new venture in commercial real estate to be successful without the support of its long dominant players.
“A lot of companies have come in with the paradigm that says, ‘I’m going to render all these relationships obsolete,’” he said. “I just think that’s a fool’s errand. No matter how big of a data engine you can build, there’s also going to be an element of who you know and what you find out.”
That’s why Reonomy, which launched its product a year and a half ago, has been marketed as a potential tool for brokers, rather than as something that could allow other market players to do without them, Sarkis said.
“Reonomy is more of an enabler: Let our technology focus on the data collection while you can focus on the relationships,” he said.
It is likely that other new ventures focused on commercial real estate have not figured out a way to serve the market, he said. That is why the recent years’ boom in technology for the commercial real estate market may hit a plateau this year. Several entrepreneurs said that in 2016 some of the new ventures may be acquired or go out of business.
“Commercial real estate technology, in the last two years, has really exploded. If you look at it through the cold, hard lens of what is a viable, sustainable business, there may have been an over-investment in the space,” Sarkis said. “I see this year as the beginning of the rationalization of the space.”