Real estate is a massive market. PWC estimates the global stock of institutional real estate at tens of trillions USD and growing. Add to that the lower quality stock and the market size probably is well over 100 trillions. Thus, real estate certainly is one of the biggest asset classes out there, if not the biggest one. As software is eating the world, it is also impacting, in many ways, the world of real estate. And if an industry that is trillions dollars heavy gets impacted by the Internet, things ought to be interesting.
Tech in real estate is not exactly a new thing. Bringing real estate listings from newspapers to online is a process that started in late 90’s. The software that is meant to make the work of real estate agents and managers more efficient has been around for some years now and is continually evolving. These general trends have been receiving large amounts of attention and investment.
What we have been witnessing in the real estate space so far was mostly about tech and Internet improving the efficiency of old established processes, or as CB Insights put it, reshaping how real estate is bought, sold and managed. In our portfolio, a good example of a startup addressing this trend is Propertybase, a cloud based CRM solution for the real estate industry, in which Christoph made an investment as a business angel.
But there are ways in which the Internet impacts the real estate market far beyond pure efficiency improvements. I find the areas in which Internet solutions change the patterns of how real estate is being used most interesting. I think that they have the potential to fundamentally change parts of the real estate market and thus open up exciting opportunities for value creation for startups. Below, I will dive into a few examples.
So far, the most pronounced, although indirect, impact of the Internet on the ‘usage patterns’ in the real estate market was imposed by the rise of e-commerce. As sales of goods and services shift to online, the demand for offline space to sell these goods goes down. The structure of the remaining demand changes. Large discount outlets located just outside of cities suffer and prices for such property go down. The remaining demand tends to focus on the more accessible locations and new formats for commercial real estate usage are popping up.
The impact of e-commerce on commercial real estate seems so pronounced that serious financial institutions run studies about this phenomenon (here is one by Aviva).
Probably the most prominent direct example of how the Internet changed how we use real estate is Airbnb, the well known company that enables everyone with a spare room to compete with hotels. It represents, already now, the biggest ‘hotel chain’ in the world, without owning any real estate. And it is truly global and democratic, as it offers something for ‘everyone everywhere’, from the cheap rooms way into the luxury category and business travel. It has totally changed the way we think about room rentals.
Another one are co-working spaces, like wework or the Berlin based Factory, which enable companies to have a spot in a fully equipped office, available right away, without the long-term commitments needed for a typical lease. Co-working spaces use the Internet to acquire customers when spots become available and to use their spaces more efficiently. The co-working space category is growing very quickly - driven by the trend towards more flexible work, but also by the availability and maturing of technologies needed to put together such offerings.
Interestingly, data shows a significant decline in the average length of lease for commercial real estate across all categories. It is hard to say whether the Internet has much to do with this, but I would think so.
No wonder that startups jump on this trend for short(er) term commercial real estate demand and try to fill it. Startups like Deskbookers (a Point Nine portfolio company), PopupImmo or The Store Front are all very good examples.
If one tries to categorize the above into trends, it seems that there are four main ones:
Buying and selling real estate has shifted a lot to online platforms and will continue to do so. This makes the market more liquid and efficient.
Utilisation - technology helps make the usage and management of buildings easier and more efficient - and thus cheaper.
We now do online more and more of the things that we were doing offline before. Be it discount shopping or dealing with a bank. This reduces the demand for commercial real estate needed for these activities and changes the demand structure for real estate in the respective areas.
Booking (as in the case of Airbnb or booking.com) - the Internet enables real estate inventory to be offered to users in real time. This allows for better utilization of capacity and yield management, and thus, counter-intuitively, might drive more (and better) capacity into the market, as real estate projects that might not have been profitable before can be made profitable now.
We already made some investments in these areas and here are some recent examples from our portfolio.
I believe that the trends outlined above will result in changes of real estate prices and definitely are something for people buying and selling real estate to watch. More importantly for me, they will continue to offer tremendous opportunities for startups. We will keep on watching this space closely and hope to make more investments in real estate related startups, preferably in SaaS and marketplace businesses trying to address these big shifts that are happening.
I am sure the above list of four trends is not perfect and the trends might be overlapping or I might be missing something - please feel free to comment or add to it.
Many thanks to the Point Nine team for reviewing the early versions of this post.