PropTech Investing in an Uncertain Landscape
Arnaud van der Wyck of Concrete Ventures Dishes on Investing With Confidence in an Industry Full of Uncertainty
By Reid Carroll (MBA 2022)
Over the last twelve months, articles claiming to know the future of real estate have become fixtures on LinkedIn feeds everywhere.
Strangely, this swell of content has done little to increase consensus.
Today, a reader might see "Five Reasons That the Workplace Will Become Extinct" followed further down their feed by "The Office Is Not Dead. Here’s Why."
Or "The Retail Apocalypse Is Not Happening" and "Why the Physical Store Model Is Dead" soon after.
Many of these articles are written by smart people who support their theses with insightful arguments. There are good reasons to think that any of them could be right.
They can't all be right though, and therein lies the conundrum - the fact that there are grounds to believe in divergent futures may indicate that nobody can predict the future of real estate. Against this backdrop, investing in PropTech - placing bets on which startups will transform the real estate industry - seems particularly challenging.
Will employers elect for hub-and-spoke office models, or will they keep one central office and allow their employees to work from home more often? In the first scenario, investing in the flexible office sector could pay off in a big way. In the second, the winners might continue to be software providers who facilitate collaboration between employees in the office and employees at home.
Conflicting narratives can also be laid out for the retail and residential sectors. Do physical stores need to be reinvented in order to fight off e-commerce, or do they need to be reimagined as extensions of online stores? Is co-living a fad, or is it the future?
All this makes investing in PropTech seem to be a daunting proposition. How can an investor make smart bets in an industry where the best minds can't agree on what's next?
To answer that, the LBS Private Equity & Venture Capital blog spoke to Arnaud van der Wyck, a managing partner at Concrete Ventures who has extensive experience in both real estate and venture capital.
According to Van der Wyck, a crystal ball is not a prerequisite to making sound investments. He instead stressed that PropTech investors should keep perspective on the broader technology-driven trends across society, and understand how they will impact real estate in the coming years.
Concrete Ventures, a PropTech venture capital firm founded in 2016 by Taylor Wescoatt, is well suited to this task. They have advised and invested on behalf of real estate giants like JLL and Starwood, who sought out Concrete for their familiarity with those exact technology-driven trends.
Van der Wyck spoke in detail with the blog about the technologies across residential, office, and retail real estate that he and his team are most focused on. He kept coming back to three principles: take advantage of data, enable flexibility, and focus on consumer experience.
Take Advantage of Data
Van der Wyck stressed that the ability to "collect, store, and process large amounts of data" is opening up value-generating opportunities that have never existed in real estate. "For the first time in real estate, we are starting to measure everything," he said.
It is a simple concept which has been proven in industry after industry - data allows companies to better understand their customers, their problems, and the context that they operate in.
Real estate will be no different. Measurement and data collection will allow building operators to optimize the way they run their buildings, regardless of where their sectors are headed. As a matter of fact, this collection of data may be what drives change in their sectors.
In retail and office settings, operators can now track footfall, space utilization, sales conversions, and more. On the building management side, owners can now track operational metrics such as energy usage. (Concrete Ventures has invested in one such company, Measurable, which tracks and reports on ESG metrics.) In the residential sector, data is powering automated valuation models that enable institutional investors to target single-family properties.
Data will be a key to keeping up with customer preferences and capturing new value, no matter where any of these sectors are heading. For data-centric startups, opportunities for adoption at scale abound.
The uncertainty around property usage is not only a problem for landlords and tech investors. Many prospective tenants will soon be faced with the unenviable task of making real estate commitments in an incredibly uncertain environment.
"You are not, as a retail owner, going to want to sign a ten year lease anymore," said Van der Wyck.
The same goes for employers faced with decisions on office space right now - flexibility will be among their most important considerations.
These demands are forcing landlords to find solutions which offer more flexibility to tenants, a development that Van der Wyck says is here to stay.
This is because flexible lease terms combined with data on space performance will allow tenants to maximize the value of their physical spaces. Tenants can experiment with new concepts, collect data, and then adjust their strategy accordingly. This might mean backing out of the strategies that don't work, or doubling down on the concepts that do. Importantly, this aligns with the incentives of landlords, who can command higher rents if they have a consistent supply of tenants who are maximizing the value of their spaces.
This win-win configuration for tenants and landlords can only be achieved by leveraging technology. To this end, Concrete Ventures has invested in companies such as Appear Here (short term retail) and Hubble (flexible office), which are marketplaces for matching tenants and operators. According to Van der Wyck, these businesses are "well positioned to deal with change in demand and to be at the forefront of whatever the new normal is going to be."
The rigid structures of real estate leases will soon be relics of the past, much like how long-term cable TV plans have been replaced by more customer-friendly models. The companies that successfully enable flexibility will create new value for all parties - and be in position to reap the rewards.
Focus on Customer Experience
Leveraging data and monetizing flexibility will provide value to the real estate industry, but they are not solutions for maximizing revenue. Data insights must be acted upon, and flexibility must lead to iteration. Both principles provide opportunities to improve customer experiences, which can be monetized.
As the era of long-term leases fades in the rearview mirror, so too will the notion that landlords are only responsible for handing over four walls and a set of keys. "One of the things we discuss with our partners is that it is all about experiences," said Van der Wyck.
In retail, this might be seen through a store which determines that their target customers value a frictionless checkout experience above all else. A neighboring store, by contrast, might learn that their target customers will purchase at a higher rate if a store is filled with the latest virtual reality technologies for trying out products.
In office, co-working and flex-office have grabbed market share from traditional providers by focusing on customer experience. Through these alternative models, tenants can select the ideal office space for their needs, choosing from a range of amenities, price points, and features. Going forward, the office space providers who are best able to match feature combinations with the specific needs of their target customers will be the ones best positioned to succeed.
Finally, a focus on customer experience in the residential space means that landlords must first start thinking about their tenants as customers. With so many opportunities to leverage technology in order to improve tenant experiences, residential owners and operators will have to choose between adopting an experience-focused strategy or falling behind.
The three principles of data, flexibility, and customer experience can be framed as forces driving change in real estate. By focusing on these forces rather than on specific predictions, Van der Wyck and his team can make smart investments in an uncertain landscape.
Concrete Ventures expects to close a £100 million fund later this year. It seems like a safe bet that these principles will enable them to invest that capital effectively - even if nobody can predict the future.
Reid Carroll is an MBA Candidate at London Business School. Previously, Reid held engineering roles at WeWork and JB&B in New York City. Reid received a BSE cum laude in Mechanical Engineering from Case Western Reserve University.