Pioneering the efficient frontier of Proptech for Alpha

Pioneering the efficient frontier of Proptech for Alpha

We are witnessing the longest economic expansion on record, and the economy is facing liquidity, economic, policy and social headwinds, including tightening monetary policy with Quantitative Easing ending. Central banks continue to increase net liquidity globally—injecting trillions of dollars into the marketplace—quelling yields and shoring asset prices. With historically high governmental debt levels, it will likely become challenging to assess risk and generate a return that outstrips the impact of easy monetary policies. Against this backdrop, and in the coming years, investors, managers, developers, operators, and owners will leverage real estate technology to drive efficiencies, growing alpha.

Real estate technology is a collective term that refers to startups that offer technological innovations, products, or business models for the real estate market. Within real estate tech, three primary subsectors have emerged: real estate Fintech which focuses on removing the frictional cost of information, providing real-time and transparent information (such as Blend); Contech which focuses on the way we plan, design, manufacture, and installation of components, and build structures (e.g. Buildops); and Proptech which focuses on extracting additional revenue and margin from the property with the use of technology (like Roofstock). According to Crunchbase, in 2019, more than $16 billion in venture capital poured into Proptech real estate startups. Real estate is a fragmented asset class and has also experienced unprecedented growth, complicated by ever-changing socio-economic patterns, and behavioral preferences. Yet the sector has not caught up.

Multifamily is one sector that has, in the past, been technologically stagnant but has recently seen a flurry of activity. Stringent underwriting standards for single-family home mortgages coupled with home prices at all-time highs and little-to-zero real wage growth have contributed to a fundamental shift in homeownership percentages, leading to a sustained increase in renter demand. Proptech real estate companies and industry players are rapining these macroeconomic challenges by offering flexible, turnkey apartments— geared towards the retail consumer. Dissatisfied by an archaic rental process, today’s new renter is yearning for seamless customer experience—from leasing to move in—with fewer transactional costs. These demographic, economic and financial shifts are driving apartment occupancy levels and rental rates higher and these trends will likely continue across the country, further fueling growth.

Multifamily is one sector that has, in the past, been technologically stagnant but has recently seen a flurry of activity

At this point in the cycle, developers and property managers are laser-focused on achieving greater growth in net income to combat potentially stagnant cap rates, and any value loss in the event cap rates rise. Regardless of the directionality of rates, history has shown less correlation between interest rates and real estate multifamily cap rates than is commonly thought. As markets are arguably perfectly priced, these constituents turn towards margin enhancement activities to manufacture operational alpha—increase yield, by leveraging Proptech rental models to provide solid risk-adjusted returns. These long and short stay models achieve several goals:

1. Attracting good credit tenants
2. Ensuring low portfolio vacancy
3. Keeping maintenance and service costs low; and
4. Reducing the risk of delinquency

The appealing risk profile and quicker lease-up ability has led to a surge of growth and activity in the ‘on-demand’ short and mid-to-long term rental space.

Regardless of cycles, population pressure will continue in the US, and it will remain an expensive place to develop, redevelop, buy, rent, and live. Companies that embrace Proptech and invest in their operating platform, and leveraging scale and technology, will deliver best in class returns. By the same token, real estate technology is disrupting traditional incumbents by removing the frictional cost of information and providing real-time and transparent information, making markets and operations more efficient and driving value. Proptech’s fresh perspective has the opportunity to deliver outsized returns in settings with moderate risk, preserving principal preservation.

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