Convene’s Ryan Simonetti on The Proptech-Fintech Opportunity

For landlords, a new office lease once promised a decade of predictable cash flows. It made everything neat. Office buildings were easy to understand and value, boring in a way that made them easy to invest in. But this ain’t General Motors — what’s good for the owner of a space isn’t necessarily what’s good for the occupier.

“The average life cycle of a business today in the U.S., birth to death, is under seven years,” said Ryan Simonetti. “Then why would you pay rent for 10? Any CEO that has their wits about them is going to say, ‘I want every one of my expenses to be variable with revenue.’”

That reality, further fueled by the negotiating power that occupiers have in the wake of Covid, has transformed the commercial real estate market, and Simonetti’s company, Convene, is part of that shift. Convene has raised over $250 million in venture capital from the likes of Brookfield, the Durst Organization and RXR Realty, and in partnership with major landlords operates about 1.2 million square feet of flex space in New York, Chicago, Philadelphia and Washington, D.C., that combine dining, health and wellness and design.

Pummeled by Covid and forced to lay off a fifth of its workforce, the company is now back in growth mode and recently made a big push into virtual and hybrid events.

Simonetti, who co-founded Convene in 2009, is a battle-scarred proptech veteran, having started his company well before venture capitalists took real estate tech seriously. He’s also an active angel investor in the space, and in conversation with The Real Deal, laid out the biggest opportunities he sees, particularly at the intersection of fintech and real estate.

Post-Covid, there’s a realization that landlords need to take more ownership of sustainability and wellness. How do you view that shift?

We have to deliver an experience that people want to come to. The table stakes are technically higher for all of us. The good thing for us is we’ve always thought about this in a holistic way. It’s not just about designing beautiful spaces. It’s not just about a great food and beverage experience, great hospitality and friendly people. It’s not just about the technology experience. It’s about all of those things coming together to really create an end-to-end premium workday experience.

For how big and rich it is, commercial real estate doesn’t seem to have too many standardized metrics about what constitutes quality.

The challenge is, we don’t really view ourselves as consumer businesses. There’s no Yelp. We’re not the hotel industry, where I know that there’s a difference between brands. And what’s exciting about where the industry is heading and what companies like ours are doing — we’re consumerizing a real estate experience. Those standards are going to be created by brands, because brands set expectations on what those standards should be. My hope is that as the industry becomes more consumer-focused, by default, we’ll start to create standards that define success outside of Class A, Class B, Class C.

Because those don’t mean anything.

They definitely don’t mean anything to the consumer. I’m a pretty active early-stage investor, and I’ve been investing more of my own personal dollars into the data side of the industry because the reality is, what gets measured, gets managed. The real estate industry has a lot of data, but that data is very opaque. There are a lot of startups tackling this so that the industry can leverage this data to make our buildings safer, make them more efficient, make them more sustainable for asset owners and ultimately make them more profitable. It will actually allow us to make those buildings more experiential in a personalized way. My vision for Convene is that we get so good at this from a data standpoint that we can actually start to anticipate and personalize experiences for individual users in a space.

If I go to the Four Seasons, as opposed to Best Western, I know what I’m getting. What about the landlords themselves? Do you think there’ll be a time when an SL Green building, just by being an SL Green building, is more or less valuable than a counterpart?

I think that landlords would love to and should be investing heavily in building their own brands. I was blown away by WeWork’s stats, something like 35 or 40 percent of all leasing volume in New York. That’s called the power of brand and distribution. Landlords are investing in this, but it’s going to be tough. It’s going to be tough to compete with companies like us that are building consumer-facing brands that know how to sell and market for a living.

That’s why I’ve always been a big proponent of the SL Greens and Relateds and Vornados of the world partnering with companies like us. Because we’re never going to be as good at what they do, and the reality is no matter how hard they try, they will never be as good at what we do. The opportunity there is to acknowledge that and to really find ways to work together and leverage the best of both of your competencies and capabilities.

Some of the giant service providers are making interesting moves on the tenant experience front. What do you think happens when companies like those with access to the capital markets dive deep into your space?

There’s a battle going on right now between the vertically integrated owner-operator that manages their own assets, the property management and facility services companies like CBRE, JLL, Cushman, Newmark, the integrated facilities and hospitality services companies like Aramark, ISS, and the companies like Convene, WeWork, Industrious. Because the reality is what all of us do is converging.

You’re seeing this turf war play out. And you have some people who are acquiring platforms. You have other people that are partnering and investing in platforms, like what Cushman did with WeWork. You’ve got CBRE with Industrious, you’ve got companies like Tishman Speyer building their own capabilities. It’s going to be a really interesting three to four years seeing how this all plays out. We will see consolidation, and we’ll continue to see deeper and deeper alignment between the companies like us and either the vertically integrated owner-operator or some of these bigger real estate services companies who need the capability that we’ve built.

They’re starting to take proptech seriously as well.

What’s happening in real estate today is not too different from what’s been happening in financial services, health care and insurance, which are three industries that have seen, and continue to see, a tremendous amount of new technology and new business models disrupting incumbents. That’s why we’re seeing the venture dollars. That’s why we’re seeing the brains. The quality of founders that are starting businesses in and around proptech is unbelievable. People that were primarily going into either enterprise SAAS or consumer-facing stuff are flooding into the industry to tackle a lot of the problems we have. And I believe over the next 10 to 20 years that technology and new business model innovation will fundamentally change how real estate is designed, built, sold and marketed, serviced and operated and how it is financed.

I was listening to a great interview with a16z’s Alex Rampell about the exciting potential for fintech in transportation and logistics. What do you think fintech could bring to real estate?

I’m fascinated with the blurring line I’m seeing between fintech and proptech. There is a massive opportunity for fintech-oriented solutions to enable the movement of money and payments across that entire value chain across every asset class. Every asset class has a transaction — you buy it, you sell it, you refinance it. You’re getting paid by tenants through some means. All of this stuff is going to be digitized. Look at what Built is doing within construction finance; look at platforms like Flex disrupting the payday lending business where half of all payday goes to cover living expenses, most likely rent expenses. Then you’ve got companies like Otso, which is rethinking the security deposit for commercial office leases because what company wants to park cash in an LLC, making no interest, when that money could be reinvested in the business?

The traditional 10-year lease is no longer the default. How might asset valuations be affected by some of the changes, like short-term leases, partnerships, flex space?

The capital markets haven’t caught up with where the industry is. This is not just about flex space and amenities and how I value a management contract versus a JV, a creative lease, a regular lease with companies like WeWork or Convene. It’s bigger than that.

The average lease term in commercial used to be north of 10 years. Last time I checked, it was barely five. And you know, one of the things driving the gig economy is that companies, instead of hiring X full-time employees, can tap into the gig ecosystem and can get project-based staff.

Now you can do that at an elite level. You can bring in top talent for a specific thing, and then part ways.

You can get a fractional chief people officer, a fractional CFO or fractional head of development, a fractional head of engineering. You can parachute in some of the most talented people you’ve ever met in your life to launch a new product for you for six to 12 months. Real estate has to catch up with the reality of the world, which is companies are going to want more and more flexibility. They’re going to want to outsource more. It’s one of the reasons our workplace product bookings are up 320 percent in the last six months. That’s not just because we’re coming out of Covid. The reality is, many CEOs and many founders have said, “Do I really want to be in the business of designing, building and managing my own office?”

How is it playing out in asset valuations? When you look across Midtown, do you just see a bunch of question marks?

There’s probably question marks. Here’s how we would value Convene: as a percentage of a building, what’s the duration of the revenue, what’s the yield on the revenue, and then if we’ve demonstrated that profitability for a certain window of time — two years, three years — why should that really be valued any differently? Okay, fine. Maybe it’s 50 basis points wider. The reality is if you go back to Convene, we typically go into buildings that are either new development or going through some sort of value-add repositioning. We view ourselves as a strategic ally in leasing up a building and actually changing the metrics of that.

If you have a highly amenitized building, you should get paid a premium for a quality asset. And then also your customers should be stickier in such a building.

The buildings that have partnered with Convene in those situations have outperformed their peer set in the metrics that matter in the Argus model, which ultimately drives valuation. The lending community is working on figuring out what’s the right cap rate, what’s the right risk premium to put on it. Does that change if Convene’s 5 percent of a building or 10 percent of a building? Over the next three to five years, the capital markets will catch up, as will the lending community. There’ll be a lot of clarity on valuation frameworks and how this stuff really should be priced. It’s been done in other industries. It’s not just in the hotel industry, which is nightly rentals. It’s done in multifamily.

Proptech founders are now operating in a space that has a lot more visibility, a lot more capital. Do you think back to when you started, and go, “Man, when I was doing this, there was nothing!”

I laugh about it. When I started Convene in 2009, it was the middle of a financial crisis and nobody was investing in real estate, forget about trying to raise capital for a new business model. There was no real venture capital ecosystem. A lot of the generalist VCs had invested in real estate technology companies in that first generation; most of those investments didn’t work out so well. So you didn’t even get the meeting.

A lot of that was because the industry had been historically slow to adopt. Two, the sales cycles, especially on the B2B side of the industry, are extremely long. Businesses had struggled to sell into the large asset managers that really control a significant piece of the non-long tail of the market. And for all those reasons, there wasn’t a ton of venture capital.

Thankfully you’ve got WeWork, you’ve got VTS, you’ve got Reonomy, you’ve got Procore, a whole generation of companies that were started between 2009 and 2013. You have some of the amazing work that Fifth Wall and Camber Creek did, and some of these others that were able to create dedicated venture funds focused on the sector and were able to get the big incumbents to be their limited partners, creating almost outsourced corporate development and R&D infrastructure for the big asset owners, the big property management platforms and big service providers. That changed the game.

This interview has been condensed and edited for clarity.

Write to Hiten Samtani at hs@therealdeal.com or on Twitter @hitsamty . To check out more of The REInterview, a series of his in-depth conversations with real estate leaders and newsmakers, click here.

Trending

Convene’s Ryan Simonetti on CRE turf wars, space as a branded service and the proptech-fintech opportunity