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Spencer Levy
I'm not breaking any news by noting that the adoption of technology into our lives and work has been accelerating rapidly: Computer chips getting faster. Artificial intelligence becoming more powerful and creative. The opportunities for tech to add operational value to commercial real estate is tremendous. On this episode: PropTech and the venture capital efforts that have enabled its advances.
Brendan Wallace
I actually feel like the tech component of PropTech is almost an extraneous and rhetorical term. Everything is tech now.
Spencer Levy
That's Brendan Wallace, co-founder and CEO of Fifth Wall, a PropTech leader that has raised funds to invest in new technologies and partnerships across the real estate space. The investors in Fifth Wall include CBRE. Fifth Wall was also an early investor in Industrious, the tech-minded, flexible workplace provider that CBRE fully acquired earlier this year.
Connor Hall
There's so much activity and it's grown so much and has effectively become institutionalized as an investment theme for the generalist investor.
Spencer scratch
And that's Connor Hall, CBRE's Head of Global Digital Partnerships. Connor helps manage CBREs interactions with the wider PropTech ecosystem at the enterprise level, which includes investing in PropTech funds around the world. Coming up, how venture capital is powering advances in PropTech, defining this emerging area for the real estate business and strategic advice from two active investors in this space. I'm Spencer Levy and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take, starting with the CEO of Fifth Wall, Brendan Wallace. Brendan, thanks for coming out.
Brendan Wallace
Thanks for having me on.
Spencer Levy
And then we have our own Connor Hall, Head of Global Digital Partnerships for CBRE. Connor, thanks for coming today.
Connor Hall Likewise, thanks for having me.
Spencer Levy
Brandon tell us if you wouldn't mind what fifth wall does.
Brendan Wallace
Fifth Wall is the largest and the most active, and I would say probably the most synonymous investor with PropTech. We manage about $3 billion across a number of different funds. And one of the things that makes us unique as a venture capital fund is that about half of our capital comes from big real estate incumbents. CBRE is actually one of our largest and longest and oldest LPs. And we work with CBRE and many of our strategic investors to expose them to new technologies that we also invest in, structure partnerships and integrations, and kind of just help them sit at the bleeding edge of technology and innovation for the real estate industry. I would say the Industrious CBRE, first strategic investment and now acquisition, that's like the center of the bullseye of what we're shooting for. Because if you kind of rewind the clock to where that deal started, we were looking at the flex office space as just a big, secular, exciting trend all the way back in 2017. And we ended up selecting Industrious, investing in it then. I think Fifth Wall might be one of the only investors on planet Earth who have made money, actually, in the flex office co-working space. I don't think we knew that at the time.
Spencer Levy
Brandon, most of our listeners are real estate professionals that are not familiar, certainly on a day-to-day basis, with venture capital. Just explain to our listeners, what is venture capital and how does PropTech fit into it?
Brendan Wallace
Venture capital is the business of investing in high-risk, high-return businesses. And as you might imagine, that's extremely rate-sensitive, right. So, in a very low interest rate environment, like the one we found ourselves in during the beginning of COVID, venture capital predictably boomed and was kind of where everyone wanted to allocate capital. And I would say unsurprisingly, you saw venture grow and you saw PropTech grow. And now that we're in a much higher interest rate environment, obviously that's more challenging for real estate as an asset class, but I would say equally so, that does impact venture capital as well, because it's just harder to allocate capital to these higher risk strategies. But the essence of venture capital is very simple. We raise big pools of money from investors, and then we invest it in singular funds, into about 10 to 30 companies per fund, and what we're hoping to do is hit a handful of winners out of that fund. So, what that means is like hitting a home run two times out of 20 is considered very, very successful. So, it's a high risk, high reward strategy of allocating to very fast growing high risk businesses.
Spencer Levy
To put it in my terms, horse racing terms, it's hitting the superfecta more than two out of twenty times and it's a good day at the track.
Brendan Wallace
Exactly. You're betting on a lot of superfectas in venture capital.
Spencer Levy
Mhm. And Connor, tell us about how you got involved in PropTech and why.
Connor Hall
Yeah, so personally, I've been at CBRE for about seven and a half years now. And I actually worked at a different startup here in the Dallas area prior to joining CBRE, and I effectively stumbled my way into PropTech and was really fortunate that I kind of joined right at the beginning of the run-up. And I've been able to grow and mature along with the PropTech ecosystem. And I, I distinctly remember early in my days at CBRE, and this was fund one and fund two time of Fifth Wall, and I felt like I had a grasp on literally everything that was happening in the PropTech ecosystem, knew every company that was out there, and now it's just not possible. There's so much activity and it's grown so much and has effectively become institutionalized as an investment theme for the generalist investor.
Spencer Levy
And, let's talk about what is PropTech, because when people hear PropTech they think a lot of things. They can think about the IOT, the internet of things, looking around the rooms, everything's getting measured. They can look at artificial intelligence, trying to be predictive. What makes PropTech, Brendan?
Brendan Wallace
It's a very good question. And I actually would say I find the nomenclature PropTech to be kind of constraining because the way I think about our investment mandate is we’re looking for is companies that are strategic for you. Now, if those companies are enterprise software or marketplaces or fintech or AI, or even like true operating businesses. Basically like Industrious, any of that can be highly, highly strategic. So, what I don't like about PropTech is both it's very specific around the prop part of it, meaning it's more than just property – it's construction, it's infrastructure, it's materials, it's industrial IOT, it's energy, it's everything that you just said. And the tech part of it is also fairly limiting and constraining, meaning yes, it is technology, but like most things in the modern economy, technology bleeds into everything nowadays. So would it be an overstatement to say that industrious is a tech company? Absolutely. But would it be an understatement to say it's only a real estate operating business? Yeah, it would, because they use technology in really creative, thoughtful ways. So, all businesses are becoming tech businesses. So I actually feel like the tech component of PropTech is almost an extraneous and rhetorical term. Everything is tech now.
Spencer Levy
Connor, how do you see it?
Connor Hall
I would say yes.
Spencer Levy
Okay. Ha.
Connor Hall
I'm both a real estate person and a technology person, and I think that's kind of been an evolution over time, so I probably started as more of a tech person and I've become a real-estate person during my time at CBRE, but, uh, I'd say that's consistent with how the industry's evolved as well. Early days, we had a lot of folks coming in from tech backgrounds, dipping their toe into the water in our industry. And now you see people who have grown up over the last decade with PropTech as its own domain. And you see real estate folks coming into the industry and starting PropTech companies engaged in PropTech etcetera.
Brendan Wallace
One of the things that's also interesting is if you look at that from the venture capital perspective, you also have very similar dynamic. I remember when we first started Fifth Wall, one of the things I would tell LPs is that I've looked at all of the GPs, all the venture capital funds out there, and I have not found one single GP that has previously worked in the real estate industry. Meaning venture capital is this part of our economy that's supposed to overlap with all of the major incumbent industries, whether that's agriculture or transportation or energy or manufacturing. But for some reason, there was literally no overlap with the real estate industry. Now, this, again, was, quote, way back in 2017, a long time ago. Since then, a lot has changed. But I would say in the same way that real estate and tech were balkanized within real estate, I would also say that was true within tech as well.
Spencer Levy
Connor, from CBRE's perspective, what are we looking for in a quote unquote tech firm to add onto the enterprise?
Connor Hall
Short answer is, it depends. Longer answer is there's kind of two principal ways by which or through which CBRE engages with the ecosystem. The first of which is effectively it addresses – so a company is operating in a space or has a capability that fits a set of digital data or technology capabilities. That we've identified through our own digital and tech strategies for each of our businesses that are highly strategic to our businesses or are going to be really important for the delivery of our services to our clients moving forward. Uh, so set in another way, we look for companies that we think can help differentiate or deliver CBRE services to its clients in a differentiating way. And so, in short, that's what we're looking for. I'll also say what makes us a little bit different from some of our peers in the industry and from VCs like Fifth Wall is CBRE doesn't consider itself an institutional venture investor. So, we don't invest for the sake of participating in the financial upside of the equity we're investing in these businesses. We invest for the sake of furthering, advancing, or codifying some strategic partnership with a company that we want to make sure we have long-term alignment with that business. And, so, that's not to say we don't want to make money on these investments, but the fundamental thesis is different. We're trying to find companies that advance the underlying strategies of our businesses and that help us deliver our services to our clients in a better way, shape, or form.
Spencer Levy
Brendan, what makes Fifth Wall invest in a company? What are – what are the criteria?
Brendan Wallace
I would say it's a few things. So number one, we are looking for financial return. We are managing capital – we manage $3 billion of capital from strategic investors like CBRE, but also –
Spencer Levy
If you don't mind me stopping you for just a moment there because most of the people listening to this are real estate folks and we know that real estate funds go from core to opportunistic. Core funds are looking for maybe a lever 10, Opportunistic lever 20 plus. What kind of returns are you looking for?
Brendan Wallace
We're underwriting to 40% IRRs, um, and –
Spencer Levy
40%?
Brendan Wallace
Yeah, and the way I would say that diverges from real estate is that our loss ratios are much higher. So, we're in a business where very few investments actually drive most of your return. So you're striking out a lot, but you're hitting a handful of home runs, and that drives your portfolio. So, what that looks like is, you underwrite everything to a 40, the reality is probably a third to half of them fail or don't even get close to achieving that. A handful of them far surpass a 30, and maybe you get lucky and a handful of them actually hit the return you're underwriting to, but it's a very high risk investment. Now, that's distinct from real estate, not only in its risk profile, but also in its cash yield, meaning this is a balloon. You're making a single equity purchase upfront, typically into a loss-making business. And then you really don't see any yield or return until you exit, either through an IPO or through an M&A transaction. So, venture is inherently a very, very different asset class than real estate, which is one of the reasons why I think it's always been hard for established real estate operators to be great venture investors. It's just a very different skill set. It's a very different muscle that you're using as an organization. But to answer your question directly, what do we look for when we invest? We look for companies that can generate strong, outsized returns for our investors. But, then, we also look for something that is born of this unique construction of our funds, which is we want to know that companies really like this business and intend to deploy this business and roll it out and contemplate some kind of partnership with them. Oftentimes, we instantiate that with warrants or kind of special structures. But the way I think about it is we want to have an edge. And the reason Fifth Wall has outperformed is because we typically have that edge because we have 110 strategic LPs in our fund. So, it's the marriage of those two things. What Connor was describing as strategic value, we also look for, but we're marrying that to financial return to try to generate these big winners.
Spencer Levy
The size of your fund $3 billion, which is big in the greater scheme of things, not in the great scheme of real estate funds, though it's actually relatively small. How big is this space?
Brendan Wallace
It's a very small space, and I would say candidly in the last three years, it's probably gotten smaller simply because venture capital markets have themselves shrank. I think Fifth Wall is today about 50% to 60% of all dedicated AUM in PropTech. So, let's call it, give or take, we're about half the market.
Spencer Levy
So, market conditions. Right now, and we're recording this episode on April the 21st, we've just had the tariff situation. We're still in the thick of it. It's gotten a little bit better, but still very volatile. For you, Brendan, just looking at the current market conditions, how is it impacting your business? Existing and otherwise.
Brendan Wallace
It has definitely been a very slow last three years for liquidity in the form of IPOs. Basically, IPOs have stopped. I think Fifth Wall had eight IPOs in the span of 15 months, then we basically have had none for the last 36 months. With that said, there is actually some good news in the IPO market, specifically for PropTech. So, there's a company, one of our biggest investments, called ServiceTitan. ServiceTitan went public in December. The company IPO’d at $70 a share, I believe as of today, it's trading right around $120 a share. It's up massively. It has, I think, really validated PropTech as a category because it's probably one of the biggest IPOs ever in PropTech. But, it's also very validating in light of how hard it is to actually execute IPOs right now. So, to be clear, there's not that many companies like ServiceTitan out there. Um, there are I think a handful of businesses in our portfolio that I expect will go out, probably in like ‘26, ‘27. But right now, I don't think you're gonna see anything coming out for the balance of the year. I think the markets are just too choppy.
Spencer Levy
What's a minimum size ballpark before you would consider an IPO?
Brendan Wallace
The question is around revenue or more around enterprise value?
Spencer Levy
Enterprise value for revenue, what metrics do you look at?
Brendan Wallace
I'd say you need a couple billion-dollar company to actually go out and have a real chance of executing an IPO. Otherwise, the float is just so small that you can't get the high-quality investors to take a look. And as it relates to revenue, that obviously varies quite a bit because the revenue associated with enterprise software trades at a very, very high multiple, whereas the revenue associated with a real estate service business trades at a very low multiple. So, it kind of depends on the type of business. But, I would say a good IPO is one that happens in the single-digit billions in PropTech. In all of the IPOs we've been a part of, it's typically been, say, $3 to $6 billion is the window where you exit.
Spencer Levy
Mhm. So, Connor, build it or buy it? These are the questions you probably are asking yourself every day with every company we look at. So, when we look at the build it or buy decision, how do you go through that?
Connor Hall
Yep, so it's actually part of our broader org, and there's two other groups that are connected to mine. Mine's the third group. But the first two, which I referenced earlier, are our digital strategy and our tech strategy functions. The tech strategy answers the build by partner part of the equation for CBRE. So, that is our sort of de facto tech strategy is build by partner. Um, and there are a set of capabilities that makes sense for CBRE to develop, given the type of company that we are, the portfolio of businesses that we have, and the existing tech stack and tech capabilities that we have, as well as overlaid what's happening in the external ecosystem. So, there's a set of capabilities that strategically make sense for CBRE uniquely to build. And, then, on the partner side, these are generally areas where we think A, there may be a fair number of these companies that are addressing this capability in the external ecosystem. They have significant access to capital from the external ecosystems such that they may be able to access more capital as an independent company than CBRE might be able put into that capability if we had it internal. And then C, it might just not be a core capability of CBRE. However, it is a capability that is important for delivering our services, might enable our folks, or could represent some disruption threat from the external ecosystem. So, that's when we will partner and sort of as I referenced before, investment is one manifestation of partnership for us. So, it's a type of partnership. So we consider investment under the umbrella of partnership. Um and then acquisition, there are a number of highly strategic things that maybe have matured in the external ecosystem that maybe didn't make sense to mature inside of CBRE. So, that's kind of broadly how we think about buying, partnering, or building. Said in other ways, when we wanna move quickly, we'll partner. When we want a lot of leverage, we might buy. And then we're really strategic about what we build.
Spencer Levy
So, Brendan, I am black and white real estate guy. And as a real estate professional, I'm going to tell you how I see the world of PropTech through my eyes. Through my eyes, it's really two things. One is the ability to operate the physical environment better. It's partially the internet of things. It may be to understand the space better, maybe to get the services faster, cheaper, stronger. Measurement within the built environment, that's one part. The area where I think we are just beginning is in real estate investing. The predictive capabilities of PropTech, whether it's AI or something else, that will allow me to say, not only do I wanna buy this building, I wanna it on this corner, and I wanna put in this amenity, and then my rent's gonna be higher. I think we're – even though people put in the inputs about labor and traffic and all the usual suspects, I still don't think we are great at that. Those are my two buckets from the real estate person's eyes. What are your buckets, Brendan?
Brendan Wallace
I actually like the framework you just laid out. And it's, I think, a useful framework to look at it through. Because we're in the business of serving the real estate industry, so just using your framework, the way I would say that back to you is you have operating. So, basically, doing everything you gotta do to own, operate, finance, manage real estate. And with that, you can use technology to do that better, faster, cheaper, easier – you know, more data enabled, etcetera. And I would agree with you that we are fairly far along in that evolution. The other side of it is that real estate is a business where you make a lot of your money on the buy, right? You've got to buy the right assets at the right time at the price. No matter how well you operate them, it's very hard to overcome buying the wrong asset at the wrong price at the wrong time. And in that regard, no. I would say we just do not see the level of technological sophistication. Meaning, the judgment that great real estate investors have and the intuition and the underwriting and the meticulous approach to assessing these assets, we have not found technology yet that can meaningfully enhance that. And the reason that's so important is that I think if you were to go back in time to say 20 years ago, operating real estate wasn't that important, meaning you made your money buying and selling, right? You buy low. And you sell high. And that is the business of real estate. And, then, I think as large real estate companies became more sophisticated, they had these big national footprints. New asset classes emerged that were more operationally intensive. Operations became a much bigger part of their business. And that was a huge tailwind for our business and for tech and for PropTech. But, what I think this final frontier represents, and which I actually think AI is the potential unlock to, is how do we actually make real estate investors better at the most important thing, which is picking the right asset to buy at the right time, at the rate price. And I would agree with you, we're like one out of a hundred on that right now.
Spencer Levy
Interestingly, the PropTech guy and the guy who makes no bones about that I'm a real estate guy have actually reached a very similar conclusion because that's where I think we are at that evolution. I think even though we've got all this data, information, terrific investment professionals, we're just not there for predictive capabilities with PropTech yet, but for the measurement operational stuff were pretty far along.
Brendan Wallace
Yeah, I think that's exactly right. And the other thing I would highlight is that we saw this firsthand when you had all this focus on blockchain and everyone was like, oh, we're going to blockchain this, so we're gonna make crypto assets for real estate. And the reality was no one really wanted that. And the reason no one wanted that is that real estate is a very high trust transaction. When you're buying or selling a building, you know a lot about it. You don't deal with not knowing who the counterparty is. And crypto and blockchain is designed for very low trust environments. And, so, a lot of the innovation we've seen in fintech is just simply not applicable to real estate capital markets because they're larger, they're more sophisticated, and there's a reason why people want to work with a group like CBRE when they're buying or selling or leasing space because it's such a complicated transaction that's very hard to intermediate purely with technology. There's a human element that I don't think you'll ever get rid of.
Spencer Levy
Give us a sampling of some of the companies that are under the Fifth Wall umbrella today or where you're a significant investor. What are you looking to invest in tomorrow?
Brendan Wallace
Maybe I'll just give you a sweep of the kinds of companies we invest in. You look at enterprise software, everything that makes the business of owning and operating real estate better. Good example of that is a company you know very well, like VTS. Right, so, that's helping commercial office owners better manage their space. That's like enterprise software. Another side of what we invest in could be more fintech type solutions, where you can buy digital home insurance or title insurance, better and faster and easier for the consumer. When they're buying a home or, ultimately, when they are buying a building, in the case of a more commercial transaction. But, then, we also look at operating companies, companies like Industrious, companies like Opendoor that are buying and selling homes. So, we look at these more asset-intensive, operationally-intensive businesses as well. And if you look at our 150 investments, they kind of run the gamut from enterprise software, consumer software, marketplaces, fintech, hardware, EV charging, batteries – it's such a broad mandate what PropTech is. But, to answer the second part of your question, which is what are we looking for right now? What I am really keenly interested in looking at is the spots of friction in real estate capital markets where I think AI can dramatically accelerate processes and improve outcomes and that could be in insurance underwriting, that could be in mortgage underwriting, that could be in predictive maintenance. We have not yet seen it really have a huge impact on real estate as an industry, but I absolutely think AI will have a massive impact. And, so, we're keenly focused on that category right now.
Spencer Levy
So here comes from the real estate guy a tech idea because I see this as a real problem in our business right now. Let's have it. So, there was a terrible tragedy in Los Angeles – they had the fires. And we had an episode of this show on property and casualty insurance. And the episode talked about, well, what do you do? Maybe it is becoming your own insurance company. Maybe it's building a better building so that you are less susceptible to loss. But here was the punchline. The punchline was that, well, if I build a better building, the insurance company is still going to charge me the same premiums as the person next door in the 100-year flood zone that built a worse building or didn't build their building three feet above the 100 year floodplain. And, so, what I'm suggesting here is that one key missing piece of my business, of our business, is the ability to underwrite the risk of loss accurately, because we're still using 100 year floodplains and dated information and everybody's busy. And, so, if we could find a better way to actually predict loss on your asset, that's a better mouse chat. That's exactly right. Did I just give you a billion dollar idea?
Brendan Wallace
You just gave me a billion dollar idea, I think.
Connor Hall
There's been a ton of innovation around physical climate, risk, analytics and the like over the last few years, right. So, I think even maybe doubling down on the point that the underlying technology exists and the underlying analytics exist, even to understand some of the risks associated with the enabling infrastructure of an asset or the sort of connected points of risk where it might be data center itself, for example, isn't subject to a certain flood risk or some other type of physical risk, but the power grid 30 miles away might be in a floodplain or might be in the high wind zone. So, there are companies out there who have done modeling to understand that. Um, so that technology literally exists today. It's just how can it be used, I think, is the point we're all making here.
Spencer Levy
I'm gonna have everybody put on their crystal ball here and let's just look at the next couple of years. Let's, let's be as actionable as we can in two ways. Number one, where are we going in PropTech in the next couple of years as AI going to hockey stick advancements here? And, then, you know, who is listening to the show? A lot of people who want you to invest in them. What do you tell them?
Brendan Wallace
Two very good questions. Uh, so, I'll answer the second first, because I think it's the easiest, which is solve a problem for the real estate industry and really intimately understand that problem. The real estate industry, as much as PropTech has evolved and as much money as we've made and we've invested, there are still a lot of problems out there. And if you talk to real estate owners, there is no shortage of them and everybody is rooting for you to build a solution that's long-term and viable. So, I would say, try to focus on solving a problem. And to do that, do the thing that has made companies like Industrious so successful, which is really listen to your customers. So, that's my advice for the entrepreneurs out there. In terms of where we're headed with respect to technology over a three-year time frame, yeah, I do think AI is going to be a force multiplier on everything we see in our ecosystem. And the reason is, the real estate industry almost got a benefit by adopting stuff late. The real estate industry kind of napped through the first two decades of innovation. When every other company and industry was adopting enterprise software in the 2000s and 2010s, the real estate industry wasn't. They were still using analog solutions, and in many cases, they still are today. And what's happened is that you've now stacked on all these productivity enhancements that make it even better, meaning most industries went from enterprise on-premise to cloud-based, to mobile enabled, to, you know – AI enabled is kind of the final frontier. Real estate is literally going from pen and paper to all of that in one fell swoop because they've waited so long to adopt technology. So the impact from an ROI perspective is way more profound. At the same time, the friction to adopting technology is very, very high because the real estate is very stuck in its ways because it's done this for so long. So, I guess what I would say is I think we are about to see an explosion of PropTech from an adoption standpoint within commercial real estate on the back of AI, because it's going to be irrefutable how much value it adds to companies.
Spencer Levy
So, Connor, same question.
Connor Hall
Uh, the future definitely tend to agree. I think AI is going to be very transformative for the industry, certainly across both, call it operations and decision-making, whether on the investor occupier side. I also think maybe the thing I'm most excited about is I think AI is gonna dramatically accelerate the commercial real estate industries building out of institutional grade data assets. And I think that's gonna have pretty profound effects, particularly on the investment decision-making side, while the quantitative capabilities of AI and these foundation models from a bunch of the providers are also improving. I think those are going to superimpose on one another.
Spencer Levy
Well, on behalf of The Weekly Take, what a great conversation today on PropTech, Fifth Wall, venture capital, starting with Brendan Wallace, the CEO of Fifth Wall, great job.
Brendan Wallace
Yeah, so thrilled to be here with you.
Spencer Levy
And then Connor Hall, Head of Global Digital Partnerships, CBRE, great job Connor. Thanks for coming out.
Connor Hall
Thanks for having me.
Spencer Levy
For related content and more on the state-of-the-art in PropTech, visit our website, CBRE.com/TheWeeklyTake. You can look for our episode on Industrious, which aired earlier this year, and delve deeper into the ways that real estate is becoming more operational. It might further your thoughts on PropTech as well. You can catch up on other back episodes, too. They're archived on our site and on any podcast platform where you find the show. And as always, we invite you to share this episode, and to subscribe, rate, and review us wherever you listen. We hope you enjoyed this venture into the world of venture capital and prop tech, and we look forward to sharing more timely insights. So stay tuned, and tune into us again next week. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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