Out of many, one: Inside proptech’s record year of M&A

In the year of the platform, dealmakers sought to create a whole greater than the sum of its parts

Jan.January 04, 2022 07:00 AM

A lot can change in a year.

In the spring of 2020, after the coronavirus had shuttered the U.S. economy and wrecked confidence in many commercial real estate markets, the proptech venture capital firm MetaProp made a daring prediction: The ballooning crisis would not derail or even stall proptech investment, innovation and deal flow — it would supercharge it.

While the shape of this market shock has shifted some near-term fortunes, more than anything it is serving to galvanize the real estate industry’s engagement with technology and should work as a catalyst for the industry’s further maturation,” the firm wrote at the time.

As a prominent early-stage proptech investor, MetaProp is not an impartial observer, but a year and a half later its declaration seems prophetic. In 2021, investors funneled a record amount of capital into the proptech ecoystem — $9.5 billion through mid-November, according to CB Insights — generating massive funding rounds at eye-popping valuations and fueling an unprecedented level of M&A. By the end of the summer, there had already been $18 billion of M&A deals, by JLL’s estimate, putting the industry on track to easily surpass 2020’s $21.9 billion high-water mark. The year also witnessed several high-profile public debuts via SPAC mergers (SmartRent, Better, Sonder) and IPOs (Procore, Blend). 

Proptech has carved out an identity of its own, operators see the benefits of applying technology across their portfolios, and investors are realizing significant returns, according to Chris Gough, a managing director at GCA, an investment bank that’s active in proptech deals. 

What’s gotten late-stage growth equity investors so excited is the fact that the market is so big, but in many ways still so young,” Gough said.

The influx of capital and momentum in the public markets has revitalized an industry that, just five years ago, seemed to be sputtering. Proptech company formation and capital-raising boomed in the early teens, but by the middle of the decade valuations had plateaued or were sinking. There were some success stories but no unicorns, and it wasn’t clear what benefits property owners and managers were seeing from adopting technology — if they were adopting it at all. When it came to fundamental change, real estate, one of the last holdouts in the digital age, was on the fence.

The tide had already started to turn by 2018, as a handful of established startups like WeWork in the coworking space, Katerra in modular construction and Compass in residential brokerage, armed with significant funding from investors outside the industry, challenged dominant incumbents and their business models, according to Zak Schwarzman, general partner at Metaprop. 

WeWork and Katerra have since imploded — WeWork was later reborn and taken public with different management at a much lower valuation — but all three were transformative for the industry, Schwarzman said. 

They were direct challengers to incumbent real estate firms in a way that the industry was not really used to seeing,” he said. 

Then came the pandemic. Real estate was set adrift by the economic shutdown, and proptech offered a lifeline. Technology solutions promising greater flexibility, transparency, efficiency and control quickly went from being “nice-to-have” add-ons to “need-to-have” tools for many property owners experiencing an existential crisis. 

The year of the platform

Real estate’s adoption of technology was hampered by the paradox of choice. 

As of the end of 2021, there are more than 8,000 startups offering a seemingly infinite number of point solutions — tech designed to tackle one specific problem. Owners and operators frequently suffer from “vendor fatigue” with proptech,  Brookfield Ventures’ Judah Siegal said at a December conference.

A recent wave of consolidation may help. Many dealmakers have focused on combining solutions and building out tech platforms — flexible tech foundations capable of addressing multiple problems and of being rapidly scaled across real estate portfolios. In 2021, nearly 90 percent of the 119 M&A deals through the third quarter were driven by “strategic consolidators,” according to GCA.

The leading platforms emerging in proptech will be “really valuable,” Siegal said. “They’re going to work with the industry — in partnership with the industry — to bring about the digitization that we all agree commercial real estate needs.” 

M&A activity in 2021 happened across the sector but was concentrated in three categories: residential real estate, construction and workplace management. 

VTS, the leasing and asset management platform, was one of 2021’s biggest dealmakers, acquiring the office-tracking app Rise for $100 million in March and the office-app developer Lane Technologies for $200 million in October. 

To help landlords prepare for the post-pandemic new normal, it was critical to give them and their tenants an application that would enhance their experience in the building — and give landlord the ability to “keep a pulse on the happiness of that end customer,” VTS CEO Nick Romito said in March of the Rise acquisition.

Landlords don’t want to have to integrate 20 different technologies themselves, said Ryan Masiello, VTS’ co-founder and chief strategy officer, but instead want two or three systems within their organization that have all the gravity.”

The company’s growth strategy, Masiello said, has been largely customer driven — another refrain in 2021. The pandemic forced proptechs to focus — rather than seek to fundamentally change the industry, they looked to meet real estate operators’ urgent, evolving needs.

To lure tenants back to office buildings, for example, landlords would have to offer superior services for tracking health, ensuring workplace safety, and understanding how space is used. So VTS shifted to focus on tenant experience, and acquiring established third-party players in that field proved to be a quicker route to meeting the demand, Masiello said.

If anything, we probably would have leaned into building the solutions ourselves rather than buying them, but Covid certainly accelerated the overall value proposition and need from the customer base,” he said.

JLL’s rationale for its $300 million purchase of the building operations platform Building Engines was similar. Building Engines already had significant traction with owners and property managers, helping them lower costs and improve rents, tenant experience and sustainability. 

The flexibility of Building Engines’ platform and its ability to support an entire tech ecosystem were key considerations, said Sharad Rastogi, president of JLL Technologies, the commercial real estate giant’s proptech arm. Properties today increasingly function like computers, and computers need a flexible operating system, he said. 

Think of this as a platform on which you can bring a number of different technologies for managing human resources, energy, tenants,” he said. “That’s the value proposition.”

Friends, not foes

What stands out about many of 2021’s proptech combination deals is their fundamentally collaborative — friendly, in a word — rather than hostile, character. 

Deals manifested from long-term relationships, as was the case with JLL’s purchase of Building Engines and, on the construction tech side, Hilti’s $300 million purchase of the jobsite management platform Fieldwire (Hilti participated in Fieldwire’s Series B and C rounds). In those cases, the target was looking for additional funding and a larger customer base to level up, the buyer wanted to expand its software offerings and a combination suddenly made sense.

The challenges that we faced during the last 18 months have led to this incredible thirst to truly understand productivity and to invest in serious software backbones,” said Martina McIsaac, head of Hilti North America.

Some of the year’s other large transactions, including  construction project management software platform Procore’s $500 million purchase of the liens payment platform Levelset — its first major acquisition since going public — and Altus Group’s $200 million purchase of the data firm Reonomy, did not even begin as M&A talks, but as conversations about potential strategic partnerships. 

It wasn’t about cost,” Procore CEO Tooey Courtemanche said of the company’s Levelset purchase. “It was about just speeding up our overall strategy.” 

With the Levelset deal, Procore stepped squarely into fintech for construction, said Darren Bechtel, founder of Brick & Mortar Ventures, a firm focused on the construction industry. He expects Procore to become a “much broader solution provider” in construction.

They are far from done,” Bechtel said of Procore. “This is the era of collaboration, of people working together. If you can de-risk a construction project or provide greater confidence in schedule and cost, that is huge.”

In Reonomy’s case, the company had success in raising venture capital — close to $130 million from investors including SoftBank and Bain Capital Ventures — but struggled to scale and become profitable. Its revenues for the 12-month period ending Sept. 30 were just $18.3 million, with losses of $16.9 million. The Altus deal, said Reonomy co-founder and former CEO Rich Sarkis, was “a one-plus-one-equals-three epiphany.”

Sarkis downplayed the importance of the full-stack platform in the field of commercial data and analytics, which he said is no cure-all nor even always desirable. Interoperability, or allowing systems to “talk to one another,” in the way that multiple apps in the smartphone ecosystem communicate with one another, is the supreme value creator, he said. Reonomy data will “flow through” Altus’ software, and the interplay is what will generate novel analysis.

That interoperability is not easily achieved if you don’t have companies coming together,” he said.

In each of the aforementioned deals, sources said there were no bidding wars involving third parties, and there were no major layoffs associated with the combinations — a common occurrence where there is overlap between the two entities’ operations. Proptech platforms are in growth mode, they said, and hiring is a priority.

Hot, or overheated?

As the proptech sector has matured, pricing has become more transparent, and there’s a better understanding of the relative value of companies than ever before, insiders said. But some see the high price tags on M&A deals and the lofty valuations that have attended recent funding rounds as a sign that the proptech field is overheated. 

The proptech ecosystem has become plagued by “fantasy pricing,” Peter Lewis, chairman and president of real estate investment firm Wharton Equity Partners, said, citing recent SPAC deals. Series A rounds of $15 million or more also should give investors pause, he said.

We’re moving to that part of the market, which I’ve seen before, where valuations creep way ahead of where they should,” said Lewis, forecasting a wave of privatization deals as newly public companies experience a “day of reckoning.” 

Reonomy’s Sarkis shares Lewis’ view. There are a number of proptech startups that have raised significant capital in the last 12 months that do not have a customer base, he said. “I do believe there are businesses being funded substantially that have not yet figured out a true, viable, sustainable model,” Sarkis said. “And not all of them are going to figure it out.”

In a twist, the frothy valuations themselves may generate a wave of M&A, as companies that have been unable to gain traction seek an exit, even at a hefty discount, the pair said. Many point solutions, Lewis added, would be better served as part of a consolidated platform than attempting to forge a path on their own.

Wharton Equity Partners, for now, has limited its investment to proptechs riding the coattails of multibillion-dollar businesses “that have a tidal wave of push behind them,” like robotics, Lewis said. In October, it invested in the $200 million Series C round for Fabric, an automated warehouse tech startup. 

I’d rather pay a billion dollars for a company that is in a $50 billion industry, that’s at the beginning of its climb,” he said, “than pay $5 million for a company that could go down the tubes pretty quickly.”





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