The Arbiters of Tech

Can direct investment in emerging PropTech shield multifamily operators from disruption while creating a preferred asset class for investors?

With Real Estate Technology Ventures (RETV), John Helm is sitting at the fulcrum between emergent PropTech startups and the multifamily REITs and owner-operators seeking both first mover advantage and a hedge from disruption by directly investing into the technology innovations RETV funds and helps bring to market.

Billed as the first industry-backed, early-stage venture fund connecting emerging real estate technology companies with a network of multifamily influencers and their portfolios, RETV was successful last year in raising $108 million from limited partner investors, including Aimco, Boardwalk, Essex, MidAmerica, UDR, Starwood Capital Group, and Cortland, to fuel its Fund I.

In total, 23 LPs representing over 1 million multifamily units signed onto RETV’s debut fund, hoping to gain competitive advantage from early access to technology while managing the risk of deploying unproven or even antagonistic solutions across their properties. In return, the LPs serve as a proving ground for RETV technologists, offering up portfolios for product testing and development, providing direct feedback to tech company innovators, and ultimately serving as a catalyst for systems to quickly scale across a portion of the fund’s units.

“It’s a safety in numbers sort of thing,” says Helm, the former Marcus & Millichap chief financial officer turned entrepreneur who successfully piloted both AllApartments/Springstreet and MyNewPlace from fledgling startups to pay-dirt exits. (Homestore acquired AllApartments in 1999 for $150 million, and RealPage acquired MyNewPlace in 2011 for $74.4 million.) “The pace of technology is speeding up, innovation is speeding up, and the mainstream VCs in Silicon Valley see real estate as the last, big, wide-open opportunity for investments. A lot of capital is flowing into real estate technology whether the industry participates or not, and we think it is much better for them to have a horse in the race.”

While it may have been first to the stage, RETV certainly isn’t alone in offering a vehicle for multifamily operators to invest directly into emergent PropTech companies. In July, Los Angeles–based Fifth Wall announced the close of a $503 million fund backed by firms such as Cushman & Wakefield, D.R. Horton, Equity Residential, Hines, Lennar, and The Related Cos. Lennar is also running a pilot program as an LP for Chicago-based 94 Ventures, which will likewise seek to connect multifamily operator investors with early-stage tech companies for product development and deployment.

Over $14 billion in venture capital was invested globally into emergent PropTech companies across the first half of 2019, according to a midyear report by CREtech.com. That’s a 309% increase in funding over the first half of 2018, with the report noting a continued trend toward larger deal sizes and an increase in corporate venture capital as real estate companies turn to PropTech for solutions to help with streamlining processes and optimizing operations.

“You could certainly invest to make money off of the fund or you can also become an LP to find products to enhance the customer experience, and I think we go for the latter,” says Jerry Davis, president and chief operating officer of UDR, an early signatory to RETV Fund I and a major supporter of the fund’s investment into SmartRent, a smart home technology solution for deploying and controlling smart locks, thermostats, light switches, and leak sensors.

Deployed across 20,000 UDR units, SmartRent is part of the REIT’s strategy for enhancing the prospect and resident experience with a self-guided touring platform and self-service control of in-unit smart technology and voice-command devices. “We have chosen to go early in multiple investment situations because of the prospect of enhancing the portfolio and moving UDR closer to where we want to take our operations from both a resident experience and cost mitigation standpoint,” Davis says.

Steve Lefkovitz (left), with RealtyCom Partners and the Joshua Tree Conference Group, talks with the Multifamily Technology and Entrepreneurship Conference attendees.
Hardy Wilson/Joshua Tree Conference GroupSteve Lefkovitz (left), with RealtyCom Partners and the Joshua Tree Conference Group, talks with the Multifamily Technology and Entrepreneurship Conference attendees.

Busting the Multifamily Tech Vendor Paradigm

The mechanics of RETV Fund I allows LPs to do just that: Sign on as passive investors and gain visibility into emerging tech, or act as a testing bed for new technologies to gain disproportionate advantage to solutions that eventually scale across the industry, as early-stage corporate venture capitalists typically enjoy deep pricing discounts not afforded to the general market.

The test bed model is likewise embraced by Nine Four Ventures, a similar real estate technology fund in pilot and co-founded by Laramar CEO Jeffery Elowe and venture capitalist Kurt Ramirez. “It’s really a land and expand approach that allows the tech companies to play in a sandbox,” says Ramirez. “Aside from just building relationships early on to get opportunities to scale, the pilots are an interesting way to provide honest two-way feedback that could otherwise be challenging under a traditional vendor-client model.”

Steve Lefkovits is a partner with RealtyCom Partners and the executive producer for the Joshua Tree Conference Group, which launched the Multifamily Technology and Entrepreneurship Conference in 2013 with the same thought of connecting early-stage technology entrepreneurs with C-suite multifamily owner-operators and venture capitalists, partly in an effort to break away from the vendor-client mentality that had spawned plodding and combative sales and deployment cycles in apartment tech.

“These funds are an investment-level reason to get together and talk about technology and align as partners to finance innovation. It’s a much better conversation than the adversarial process of a vendor selling to a suspicious buyer,” Lefkovits says. “Investors/multifamily owners are investing to capture the benefits of large-scale growth in the multifamily industry among their peers and competitors while drastically shortening the time from idea to development to scale to deployment to the benefit of the tech startup.”

For SmartRent, the acceleration has been remarkable, progressing from a $3 million seed round in September 2018 and a $5 million Series A allotment in November 2018 to a Series B funding of $32 million in July, which included direct investments from UDR, Essex Property Trust, Starwood Capital, and Bain Capital Ventures in addition to RETV capital. In terms of unit count, the company has installed into 40,000 units in just 15 months, with another 66,000 units under agreement for 2019, representing a year-over-year increase of 149%.

“The idea of the fund has been in the back of my mind since MyNewPlace and Rent.com,” Helm says. “Quite a few large REITs had invested in Rent.com, and when I raised capital for MyNewPlace, Essex, UDR, Lane, and ConAm were all investors, and it proved to me the value in having operators on board for proof of concept and scalability—the value of having some guys on the same side of the table so I wasn’t just a vendor, I was an investment, which opened their organizations up.”

Preferred Technologies, Preferred Assets

While the altruistic vision of nurturing tech entrepreneurs into the historically luddite arena of multifamily operations is a laudable one, there is also a defensive posturing built into owner investment in PropTech. By moving from client to influencer to investor, REITs and owners participating in funds like RETV are playing a decisive role in electing the technologies that are offered broader access to the nation’s apartment communities, and buffering themselves against the kinds of industry disruptions that Airbnb and Uber exacted in hospitality and the taxi industry, respectively.

“Honestly, disruption is putting it mildly,” says Ramirez. “Technology has begun to enable every part of every facet of the industry, challenging owners to play more offense, get smarter on leasing and marketing, use analytics to target the best renters, and differentiate properties to offer something that makes people want to stay there more than somewhere else. What we are seeing is increased pressure for operators to apply tech solutions to their business, and they are doing it because renters are demanding it and investors are demanding it. They are getting squeezed on both fronts to operate at peak performance.”

For the winners in that endeavor, Ramirez sees the kind of portfolio-wide income enhancement that catches institutional investor interest and follows a logic that where the technology goes, the capital investments into development and large-scale acquisitions and dispositions will follow.

John Helm
Hardy Wilson/Joshua Tree Conference GroupJohn Helm

Operators like UDR see PropTech funds, particularly those steered by multifamily industry veterans like Helm, as a way to clear through the white noise of technology offerings and move forward with point solutions that have been vetted, tested, and show promise of scaling to bona fide, long-term service providers that can boost elusive net operating income increases.

“The amount of competing technology solutions for one business line can get confusing, and a lot of times those options are close in capability,” says Davis. “RETV goes through the vetting process pretty extensively, and some innovations we have jumped into and reaped a big benefit. Sometimes those solutions are more suited for another LP or we may have already solved that problem, and as always there are only so many things you can roll out at one time.”

The Vision at Wilshire, UDR’s 150-unit project in Beverly Hills, Calif., is one of the REIT’s many properties to deploy SmartRent technology incubated and scaled via the Real Estate Technology Ventures Fund I.
Natalie Wizmann/SN PhotographyThe Vision at Wilshire, UDR’s 150-unit project in Beverly Hills, Calif., is one of the REIT’s many properties to deploy SmartRent technology incubated and scaled via the Real Estate Technology Ventures Fund I.

Exit Opportunities

Likewise, the $108 million in RETV Fund I is probably positioned to deploy only a handful of technologies, hardly making Helm and the fund’s LPs the arbiters of ops future in multifamily, at least not yet. Other entrepreneurial startups can still benefit from direct, off balance sheet investments from firms, and the major property management software platforms—including AppFolio, Property Solutions, RealPage, and Yardi—continue to develop their own solutions or position themselves for acquiring the companies that find a niche and scale.

James Grady is the founder and CEO of Package Solutions, the maker of package management solution HelloPackage, which counts Gables Residential (among other apartment owners) as an investor and early adopter. “RETV is on our radar, and we have been in discussions with them,” Grady says. “The fund offers a tremendous opportunity to connect with forward-thinking apartment operators who are open to, and actively seeking, technologies that will best improve both their operations and the resident experience. Gables likewise has been intimately involved in developing and refining the software platform from both an operational perspective but also in how we bring the product to market.”

Like many tech entrepreneurs, Grady has given some thought to exit strategy in the multifamily space and thinks the most likely scenario would be an acquisition by a larger player. To that end, owner-operators who have either invested directly into startups or have become an LP in RETV or other funds will ultimately get the win-win from going all in on technology investment, by realizing not only the early access to technology and investor discount pricing, but by scoring on the multiple should a startup be acquired by a platform player or external tech company like eBay, Amazon, Apple, or Google.

“We’re looking for technologies that are going to transform an area of our client’s businesses,” says AppFolio senior vice president of investment management Nat Kunes, who points to the company’s January acquisition of conversational AI startup Dynasty as emblematic of where the firm finds acquisitive value in the apartment tech arena. “AI for leasing essentially replaces all the back and forth of scheduling showings and prequalification, but unlike the scripted response of chat bots, conversational AI gets smarter and learns from its interactions with prospects. That was very unique and different in the market, and those types of game-changing technologies are what we look to acquire in our business.”

At RETV, Helm is mum on the prospect of signing on LPs for a Fund II (the SEC strictly prohibits the marketing of funds in advance of filing a Form D notice of offering of securities), but to think the career entrepreneur is one and done with helping to bring a new model of technology deployment to multifamily is likely missing the greater point: that the disruption of RETV isn’t so much about bringing new, transformative technologies to multifamily as it is bringing the multifamily players (along with their deep pockets of capital) directly to best-in-class technologies as they emerge.

Count UDR, for one, as sold on the model. “We’re always excited to learn and have product being brought to us that enhances our platform,” says Davis. “As long as new technologies are being invented to make our operations and our residents’ lives easier, the funds create a more robust pipeline of innovation. That’s a format that works for us, and one that has become a preferred avenue for investing in technologies.”

The future of apartment tech

At NAA’s recent Apartmentalize conference in Denver, the future of apartment tech was the subject of several of the educational session. Here is a summary of some of what was presented.

Setting a focus

The Apartmentalize conference is a huge event with over 11,000 attendees, 1,400 exhibitors and 80 educational sessions. While it is an excellent forum for gathering information on a variety of topics, it would take an army of attendees to take it all in. Consequently, Multihousing Pro elected to focus on the future of apartment tech.

10 innovations in 10 years

An early session sought to identify 10 technologies which may have the greatest impact on the operation of multifamily housing in the coming 10 years. The technologies are:

Augmented and virtual reality. Virtual reality in particular is expected to impact operations by enabling virtual self-guided tours of the property. It is expected to increase the trend of residents signing leases for properties that they have never actually visited.

Autonomous vehicles. Not only should operators consider having pick up and drop off points for automated vehicles, but they may also be able to reduce their parking area since a lot optimized for autonomous vehicles can park cars more densely than can a lot designed for human drivers. Autonomous flying vehicles are also coming.

Delivery via drone or robot. This is being done in hotels today. Drone delivery of food will soon be available in Dallas and San Diego.

Battery power – both for cars and for local energy storage. Batteries can be used along with solar panels to provide power to your building when the sun is not shining. The popularity of electric cars will drive demand for charging stations at multifamily properties. Electric scooters and electric-motor-assisted bicycles will also require charging outlets to be available. Providing charging options should be a chargeable amenity and therefore a source of ancillary revenue for the property.

New money – cryptocurrencies. These may provide alternative rent payment systems.

Artificial Intelligence. AI is seen as an enabler of other technologies such as chatbots, smart building management and facial recognition. Chatbots are already in wide use. At one property, a chatbot was rated the number one customer service rep by users. Facial recognition is also being implemented both to identify customers and to do criminal background checks. Facial recognition systems also can track an individual as he walks around a property.

Gig economy – residents can be both users and providers. Gig workers may not have traditional income documentation. People working from home may want a den or office available.

Social media as customer service. Consumers expect instant response when they post to social media. Operators need to respond to all comments and know when to take their interaction with a resident off of the public forum.

Smart home technology. Communities are being built with connected devices to provide real time remote monitoring. The data collected provides the basis for implementing predictive maintenance. Voice assistants will increasingly be used by residents to interact with the property, as by reserving facilities or scheduling rent payments.

Automation. The presenter played a tape of a Google Assistant calling a salon to schedule a hair cut appointment. It is likely that the woman who answered the phone had no idea that she was speaking with a computer. Listening to it was both wonderful and creepy at the same time. In any case, bots are expected to automate more functions as time goes on. By 2029, 25 to 35 percent of leasing transactions are expected to be done without a leasing agent, and a quarter of maintenance requests are expected to be called in by machines.

Futurecasting apartment tech

A later session took a look at apartment tech that may be implemented in the next few years. While the shorter time horizon pared the list of technologies somewhat, it should come as no surprise that many of the same technologies were discussed. Technologies that were highlighted in this session were artificial intelligence/business intelligence (AI/BI), chatbots and smart home features.

AI/BI is expected to impact all areas of the multifamily housing business from influencing what projects get built with which features, to improving operational efficiencies, to enabling predictive maintenance.

Chatbots are expected to off-load some of the more tedious functions from apartment staff. These include providing routine information to potential residents who call into the site, to taking maintenance requests from current residents. Chatbots are expected to free up staff to focus on providing the best possible experience to residents.

Smart home technologies, including smart locks, lights and thermostats, will increasingly be considered features that residents expect you to provide. Multifamily operators will have to develop policies regarding residents bringing their own devices onto the property. Keeping responsibility for integrating these devices with residents is key.

To support all of this new apartment tech, good internet connections are required. Focusing on your communications infrastructure is one of the best things that you can do to future-proof your property.

With great power comes great responsibility

A concern raised in this session involved the privacy issues raised by smart apartment tech. Specifically, the California Consumer Protection Act (CCPA) was brought up both for its requirements on data protection and also for its requirements that businesses holding data on a consumer be able to purge that data from their system if requested to do so by the consumer. Similar requirements are expected to soon be put in place across the country.

If you missed the conference, the NAA sells a product called Rewind, which includes videos of most of the education sessions. It is available here.

The Next Wave of Innovation: Automation, Artificial Intelligence and Blockchain

A primary focus of the 2018 NMHC Spring Board of Directors Meeting was the impact emerging technologies like automation, artificial intelligence and decentralized ledger systems (blockchain) will have on the multifamily industry over the coming years.

Donald Davidoff, President of D2 Demand Solutions moderated a session focusing on AI with Wayblazer’s CEO Noreen Henry and IBM Watson’s Neil Sahota. Davidoff has been exploring the potential roles that AI could play in the apartment sector and noted that he sees a number of opportunities, including in marketing, hiring, service requests, smart home controls, pricing valuations, concierge tour guides, chat bots, call coaching and security.

When considering how to most effectively deploy new technologies, Wayblazer’s Henry recommended that apartment owners and managers “start with specific, concrete areas where it (AI) can have a significant impact. These areas need to those that have good data that you can use to train AI such as maintenance requests and calls. IBM’s Sahota agreed with the “start small” approach, noting that adopters of AI shouldn’t underestimate the need for training. Owners and managers will need to teach machines the basics and for that companies will need the subject matter experts to educate them.

The session concluded with Davidoff asking the ever-present question when it comes to AI automation – what will happen to today’s jobs? Sahota noted that “the jobs of tomorrow are going to require all new skill sets. The goal of AI and robotics is to take more of a role in administrative tasks and free up individuals for critical thinking. AI will upend industries and we, as a society, need to start grappling with the consequences that entails.”

In addition to AI, another session delved into what Blockchain is and why it is relevant to the multifamily industry. The panel was moderated by Stephanie Furhman of Greystar. Industry experts, James Conrad Johnson of Oaken Innovations, Gerald Reihsen III of Reihsen & Associates and Kyle Wood of Perkins Cole were the panel speakers.

The discussion began with defining Blockchain. Blockchain is a digital record keeper that publicly records transactions in a block and links to similar blocks of transactions chronologically – hence creating a chain. The panel noted a recent Forbes article, which explained that industries that use a lot of paper for record keeping would be affected the most initially. Because the multifamily industry is one of these industries (because of leasing, real estate transactions, etc.), it could be greatly impacted.

The panel also discussed various ramifications of implementing this technology – one of them being issues of privacy and security. Reihsen pointed out that the data stored with Blockchain can be encrypted and there are various applications that can be used with it to keep that data private and secure. The panel elaborated on this by explaining that Blockchains are generally permissioned and private. They prioritize identity over anonymity, selective endorsement over proof of work and assets over cryptocurrency.

To close, the panel illustrated a scenario in which Blockchain could be used in the multifamily industry. Blockchain could assist during the leasing process to help to generate a credit score for potential residents. “Although [multifamily] residents may not know it, Blockchain will change user experience,” Johnson explained. They also listed utilities, property acquisition and MLS as other potential multifamily areas that could be affected.

Six Areas of Real Estate Tech Set to Grow

Real estate tech investment has gotten serious. Venture capital invested in the space tripled from 2016 to 2017, buoyed by major investments in co-working giant WeWork and brokerage Compass. Excluding those mega deals, real estate tech firms raised around $7.7 billion last year. This compares to less than $500 million just a few years ago.

During the 2018 NMHC Annual Meeting, a panel discussion brought three real estate tech investors together to discuss where the money was going in commercial real estate and how it might affect the multifamily industry. The discussion, moderated by Randall Jenson, CFO of Berkadia, included participants Clelia Warburg Peters, co-founder and partner at MetaProp; Jacob Mienert, analyst with Navitas Capital; and John Helm, managing director at RETV Management.

Panelists discussed the growth of investment in the sector. Noting that start-ups had already pillaged most every other tech investment category, RETV’s Helm said investors saw the real estate sector as the “last frontier in venture investing.”

Moreover, despite the significant investment growth, panelist said the market was far from tapped out, noting that in 2016 there was roughly $70 billion in venture capital floating around and yet just $2.5 billion found its way into real estate tech. “We’re still relatively under invested,” said Helm.

“The broader venture capital community has discovered real estate tech,” added Warburg Peters, “But the smartest money is coming from the people sitting at the intersection of new tech and legacy real estate know-how.” 

To that end, the group noted a lot of interest in trying to leverage artificial intelligence (AI) and predictive analytics to improve efficiency and transparency in business decision-making. More specifically, the group identified six areas of focus for real estate tech investors and providers. 

Leasing. Everyone loves the idea of AI-powered chat bots, around-the-clock digital rental agents that can help start a customer relationship by answering simple questions and providing common information. But beyond that, real estate tech investors are looking more closely at companies that use web-based software to essentially scrape social media outlets for data that can pre-qualify prospects. 

Helm said such digital solutions help accelerate the sales cycle by pre-populating pertinent information, reducing the need for manual data entry. Moreover, by automating the process based on a set of universal pre-qualifying guidelines, real estate companies may be able to reduce Fair Housing-related risk. “It’s better because you can put in decision rules and have a safer system,” he said. 

Warburg Peters added that investors are also seeing opportunities in short-term rental platforms like Airbnb or Home Away. She noted the emergence companies like Flip, a subletting platform, in creating a more liquidity marketplace for leases. “But that’s the Wild Wild West,” she said. “It’s still unregulated. But a lot of younger people aren’t interested in making even a one-year commitment.”

Investment analysis. Similarly, investors are very interested in companies that are working to harness data in the public domain-everything from geospatial data to consumer data to zoning regs and beyond-to help identify, evaluate and close potential real estate deals faster.

Warburg Peters said that investors’ interest in these solutions “is very focused on retail right now.” Many are looking for solutions that can essentially predict the value of a retail site as well as provide critical insights on everything from identifying the right retail client and optimizing the site for retail down to determining which corner you should be on.

However, she said she was also interested in companies like Envelope, which “focused more on the enormous regulatory burden that is borne particularly in urban environments.” This could include zoning restrictions, subsidized housing requirements, air rights and more. “What used to take months and millions of dollars in lawyer fees can be done in hours or a few days,” she explained.

Construction. For Navitas Capital’s Mienert, the construction space is an area ripe for tech disruption and that’s where his company has focused a lot of its dollars. The company invested in Katerra, a tech company that aims to drive efficiencies through the design, development and construction process to drastically reduce the time it takes to bring apartments to market.

“This is a really unique company that is changing multifamily,” said Mienert.

While there’s been some controversy around how solid the company’s reported $3 billion pipeline is, the panel agreed that there were opportunities to better leverage technology in the construction space. Panelization and pre-fab construction and more efficient supply chain managements are areas in need of tech investments, but panelists also noted how tech advances are fueling growth in arbitrage companies-Why Hotel being an example-that can help stabilize properties faster, reducing financing risk and carrying costs. 

Amenitization. Real estate tech investors are also intrigued by companies that use technology to enhance the resident living experience, be it through a network of service providers or crowd sourcing for insights into the most desired amenity packages. Top picks include companies like Hello Alfred that allow residents to digitally outsource household chores. “I also really like tech companies that are focused on bringing activities to unused space in a building,” added Warburg Peters.

Some are making the case that short-term rentals could be considered an amenity, both as on-site hotel space for visiting guests and as income-producing amenity for residents. Helm noted that there are still investor concerns about how these companies can perform over the course of a full real estate cycle.

“The regulatory environment is still very scary,” he added. “There are a number of municipalities like Berlin, where they just kicked Airbnb out of the city.” However, he also noted that many of these companies have already evolved, allowing property owners to set limits and have more control over the process.

Smart homes. Without a doubt, real estate tech investors are seeing huge potential in the smart home space. However, it’s not just about satisfying young millennials need for more consumer technology. Investors also are interested in smart home operating systems that can deliver value to the property owners, be it through additional revenue, cost savings, operational efficiencies or transparency.

For Mienert, “it’s really about finding centralized solutions that are already pre-installed,” he said. That’s why he’s looking at companies like Iotas, which provide a turnkey suite of networked smart home products that provide data and learning to the property owner on the back end. He provided an example of a Class B property in Texas where the company was able to boost rents $45 a month by installing smart thermostats, locks and Alexa in the units. “We were able to get the integration of all the functionalities without having to install anything,” he said.

Brokerage businesses. With no real automated approach to automated valuations, the panelists saw a big opportunity for real estate technology in the businesses operating under brokerage models, with the appraisal, insurance and mortgage industries being obvious starting places. All also saw the emergence of Blockchain technology, which offers a digitized, decentralized public ledger of transactions, as potentially revolutionary in the so-called “PropTech” and “FinTech” spaces.

Several said that they had made investments in online real estate insurance and appraisal companies, as these areas of the finance and transaction market have largely been untouched by tech advancement. “CBRE probably has a couple hundred appraisers and like five tech people,” noted one panelists.

The idea is that technology can help automate some of the more vanilla-flavored transactions, whether they be small or simple executions; the end results would be speedier and more consistent results. “High complexity deals will need human intervention,” explained Warburg Peters, “But those folks still need a strong tech background.”