One of Blackstone’s smallest bets in real estate became a landmark vote of confidence in proptech — a fledgling sector at the time.
In 2015, the investment behemoth paid $3.3 million for a stake in VTS, a cloud-based leasing and portfolio management platform. Though that was small change for Blackstone, it was a bet made at the highest levels of the firm, including then-head of real estate (and now president and COO) Jonathan Gray to then-CFO Laurence Tosi, recalled VTS founder Nick Romito.
“For them, it was like $3 million — who cares? But they all cared,” Romito said.
Things moved quickly from there, both for VTS and for proptech. The Blackstone investment valued VTS at about $35 million; four years later its valuation was $1 billion. It seems like everywhere you turn now, there’s a new major M&A deal in the category.
Several startups are set to go public via SPAC, including virtual-walkthrough firm Matterport, home-insurance technology firm Hippo and iBuyer Offerpad (whose competitor Opendoor went public via SPAC in December).
This month, VTS struck a $100 million deal to acquire Rise Buildings, an app that tracks tenants’ movements within an office building.
The Real Deal caught up with Romito to discuss the Rise deal, the need for landlords to better understand their tenants through data, and how investor interest in proptech has evolved.
When you started VTS, a lot of proptech startup founders had no background in real estate. Many have since dropped off the map.
They were more your traditional, “I see a problem in a space, I’m so smart, I’m going to fix it.” The venture people thought that was great. The real estate community was like, “I don’t understand a word you’re saying to me. And so I would never buy what you’re selling.” Our industry is uniquely good at smelling bullcrap.
Pre-pandemic, the office building was seen as a boring, stable, cash-flowing asset, which is why pension funds love office buildings in cities such as New York and L.A. You have to question that assumption now. Is your deal for Rise part of trying to help landlords figure it out?
The first thing is getting as close to your customers as you can. It’s one thing that landlords have not been really good at. Their relationship is typically with the broker, or maybe the head of real estate for a company. But it’s not with the end user who’s in that building all day and night, who has real complaints or issues.
We had strong conviction on this kind of tenant-engagement space about two years ago. It was the first time we had seen a category in proptech get so much hype so fast and see some venture capital pour into it. But we saw our customers pay attention. And that put our spidey sense up.
“The first thing is getting as close to your customers as you can. It’s one thing that landlords have not been really good at.”
It makes way more sense for that thing to be a feature in VTS than a standalone product. Because landlords and their teams are very busy. They have short attention spans and they’re not going to log into 14 things.
And so we said, “We’re going to buy it. We don’t want to build it.” There’s too much blood, sweat and tears that have gone into these businesses.
You’ve been through those fights. You’re at the point in your journey where you can decide between building it in-house or taking an M&A approach.
One hundred percent. So we said, we don’t need the best sales and marketing team — we have a 12 billion-square-foot [commercial space VTS says is on its platform] channel. We need the best product.
It’s nice to not have to build everything, because the same passion and obsession that we have for leasing and asset management, people have for other things. And there is a real multiple you can apply to that that is extremely valuable.
And so as we thought about how we can help the landlord get ready for whatever the new normal is, it felt like one of the most critical things to do was to give them an application that allowed their end customer to have a much better experience in the building, and also allowed ownership to really keep a pulse on the happiness of that end customer.
Let’s say Rise is in your system and it’s spitting out these insights. What happens next? What’s the process to then go to a Fisher or Rudin or Blackstone and say, “Hey, I think we have something here that you should think about?”
Data for data’s sake isn’t all that valuable. And because most of our customers don’t have data science teams, they need their technology partner to actually help them make sense of that information.
Just seeing a tenant’s sentiment in a building in isolation is interesting, but it’s not that actionable. If I see that compared to other trends about that tenant, such as how their existing rent compares to the market and when their lease expiration is, well, now I’ve got something to do. I know that this tenant is not happy. That lease expires in nine months. And by the way, they’re paying $30 [per square foot] below market.
Or the flip side, which is that these tenants are extremely happy and their rents are at par, so they can’t play hardball.
If you can’t see that and you can’t use that data in addition to the other stuff you have to know about that company, it just falls by the wayside.
Have you ever been to Eleven Madison Park?
It’s the extreme example of concierge dining. You walk in, they know your kids’ names and that your son may want his hot dog cut up on a plate. They use that experience to take the service to an incredible level. Is there any sign of, let’s call it “concierge commercial real estate,” where the landlord knows your preferences so intimately, that they can do stuff that makes you happier, that makes you just go, “Wow?”
The expectation is going to be that I know what my customers want. Rise has this amazing patent on beacon technology [which tracks movement within a building.] They know what parts of the amenities or the restaurants or cafes are really getting used and at what times. So you start to understand all these things about individuals and the building itself. And you start to build strategies. You can give back to the customers in a way that feels bespoke to them.
Even blue-chip landlords don’t necessarily have that kind of intimacy with their tenants. I wonder if that’s changing.
It’s changing, at a slow pace. The technology helps. But like all things, it’s the people that have to make that change happen for you.
What’s hopeful is you’re seeing owners hire for roles they haven’t historically had, whether that’s head of customer experience or data-science teams. They’re really trying to figure out how to make this stuff come to life.
Let’s talk leasing. Brokers are creatures of transactions — they need them to stay in the business. Given where deal volume is, give us a sense of what’s going on.
It’s not just the brokers, it’s the owners as well. Most of them have looked at 2020 and said, “We’re usually really busy, [now] we have time. Let’s spend this time kind of catching up on all these other things that we didn’t do before.” And a lot of that was around technology.
The way that I looked at 2020 for the brokerage community and for owners, it’s almost the golden age of software for them. If the past five years was the golden age of TV, that just happened for real estate tech, because what Covid did was proved that the way that you did things does not work anymore.
Where does your product go from here? You started with video tours and have completely evolved since.
Today, the VTS operating system knows more about tenant demand in real time than anyone else. We can tell you how fast it’s coming back, which companies are looking, the size ranges of deals being negotiated, rents and tenant improvements.
You can use that information as an owner to set your building strategy or decide, “Do I want to invest in that specific market or do I want to get out of that market?” You’re tracking all kinds of activity — which leads are hot, which are cold. And when those leads turn to an actual deal, you track that too.
Typically, what happened was once that lease was signed, our work was done. Now with tenant engagement, you stay with the customer. And you get to actually monitor their happiness and do things to give them a better experience in the asset so that when it is time for renewal, you know their probability of renewal probably six months before you would have.
As I think about where we go, our proprietary and unique market data is going to live everywhere. In every part of our OS, there will be market data to help you understand how you are doing versus the market, and, “Is this a good decision?” We think that a modern platform should do that. There are other branches you can go into on the marketing and leasing sides. Our challenge is to figure out which of those we build versus which ones we buy.
You talked about how the landlord can look at the asset level and start slicing and dicing a property differently. Is anyone scaling that? Say, “Hey, I found that the third floor of my building is actually great for flex office. I own 100 buildings, let’s try this in multiple locations at once.”
I wish I can give you names because you’d be blown away. But I think our data has supported a few billion dollars over the last four months of refinancings [on the strength] of asset strategies like that.
The financing aspect is fascinating. Do lenders even understand what they’re looking at when it comes to that? You don’t want it to be like “Office Space.”
We only launched this six months ago and it’s an entirely new dataset for our industry. We didn’t have a real-time view into demand. We had comps, which is largely a tenant who’s in the market a year ago — it’s in no way a forward-looking indicator.
Whether you’re doing a refinancing or you’re trying to decide if you should renew someone early at a certain rent, we now have the data to support you. But it’s new, so we have to talk [clients] through what the data means.
How patient is the capital that you’re working with? What’s their endgame?
While Covid hit our industry perhaps harder than any other, the only silver lining for us was our customers needed us more than ever before.
And so it meant going to our board and our investors [which include Brookfield, Tishman Speyer, GLP and Fifth Wall Ventures] and saying, “Hey, remember that budget we had? We have to rip it up. And I know you’re probably scared that it may be a bleak year for software companies, especially those in real estate. But we’re telling you, we have never seen this much activity with our customers in our 10 years of doing this.”
We always optimized for running an efficient, really good business, not growth-at-all-costs where you’re constantly raising money. Because of that, we’ve earned the trust of our investors. And so, when we said we need an extra $10 million this year, they said, “We trust you, go do it.”
Real estate SPACs are all the rage right now.
What’s it called? SPAC? [Laughs]
We’re keeping a very close eye on the market. I think the correction we saw a couple weeks ago was meaningful. There was too much froth out there. As this stabilizes, it’ll be interesting to see where things end up. That allows you as a company to really decide, okay, do we go out? Do we go public? Do we continue our current growth trajectory, maybe do a private round if we need to?
Almost every funding round we’ve ever done, we could have gotten a higher valuation, but we opted for having the right partner who could help us. Lots of companies were like, “I want the biggest valuation and the biggest name.” And I’m like, “Good for you.”
Seems like investor interest for proptech is massive.
Proptech now has a real seat at the table. Every single venture fund has some percentage of that fund that is allocated towards it, which is pretty awesome. With all the SPACs, you’re going to have public proptech companies, which takes the legacy Wall Street investor and gets them into our space. And so you start talking to the long hedge funds, the BlackRocks of the world, the folks who are now investing in a lot of these SPACs and also just want to put money to work in real estate tech and be in there for the ride for a long time. That didn’t exist five years ago. It’s pretty cool to see that.
Every time I speak to you, I have to ask: Are you profitable?
No, we don’t want to be. We’re growing too fast.
Any timeline on it?
We can lever down growth at any point and be profitable. But the markets are not valuing that. All these public companies you’re seeing, the multiples are all about the growth. For us, it’s about growing as fast as we can, as efficiently as we can. We could probably grow faster, but it would increase burn to a point where I wouldn’t be super comfortable.
You’re not doing private jets at this point.
That’d be great, but no.
“It’s competitively unfair if you are sitting back and your next-door neighbor is doing what we know they’re doing [with data]. You’re going to get smashed.”
Is there potential to take what you’ve built and plug it into multifamily, into industrial, into even, God forbid, retail?
We have billions of square feet right now using VTS for retail and industrial. Those are two big asset classes for us. Our growth in retail is primarily because [retail landlords] just need to do what they can to stay closer to their customers to find opportunities, because there’s not a whole lot of them right now.
For the same reasons that retail is getting hurt, industrial is on fire. At the rate at which industrial owners are growing their portfolios, what they don’t want to do is have to hire the equivalent amount of people to manage that portfolio.
What’s interesting about industrial is that ownership is so consolidated. Blackstone, Prologis, and a couple others control so much of it.
In office, you’ve got market-specific versions of that — SL Green and Vornado in New York — but not nationally. Blackstone is one of the best in the world at getting conviction on a space and then just going and saying “we’re going to own that.” Their industrial arm, Link, is two years old.
I’ve asked the Blackstone team and others: “What could possibly make industrial slow down?”
If Amazon were broken up.
That’s the only thing probably that could materially impact it.
We have an industrial advisory board that meets every month, and it’s very different from the office and retail [conversations]. The industrial folks are like, “We send a [letter of intent] out. We tell the tenant, if you don’t sign by Friday, then the price goes up.” That’s the level of demand they have. That is not the conversation anywhere else.
What kind of conversation would you have with a landlord who owns a major Class B building on Sixth Avenue?
I would ask: How are you building your strategy?
If you’ve got two floors coming available, how are you making the decision to divide those floors up or what finishes to put in, because we can now tell you that in this submarket, demand looks like this, let’s build this space, this specific way and capture that. It doesn’t matter if you’re a Class B owner or a trophy asset owner, you are now going to be building and executing a strategy based on real market demand.
The reality is not everybody acts on that information. So, the folks who do are always going to win. But I would probably say to the folks who think that they can kind of sit back and go back to normal: As someone who has a front row seat to the folks who aren’t thinking that way, you’re going to get smashed. The things that the owners are doing with data to make decisions and change the way they operate are material. It’s competitively unfair if you are sitting back and your next-door neighbor is doing what we know they’re doing. It’ll be a bloodbath for you.
We’ll end on that highly optimistic note.
This interview has been condensed and edited for clarity.