Fifth Wall Reveals Partners for New Wave of Proptech Investing

Until two years ago, proptech was the next big thing. Technology and innovation were going to disrupt the hidebound ways of real estate and construction, revolutionizing those industries and making savvy investors rich.

Then the music stopped. Darling startups such as Katerra and Knotel crashed, and WeWork vaporized at least $13 billion before going through bankruptcy. Compass burned through billions of dollars as well and stopped calling itself a technology company.

“Too much money flowed into the space,” said Brendan Wallace, CEO and CIO of Fifth Wall, which describes itself as the largest asset manager investing at the intersection of real estate and technology. “It became too easy to start a proptech fund. … Because of that, you had less sophisticated investors making allocation decisions.”

But proptech is not dead. In fact, it may be in the early stages of a rebirth.

Wallace points to three signs: ServiceTitan’s initial public offering last month, CBRE’s acquisition of Industrious reported Monday, and Fifth Wall’s launch of a new flagship fund, announced today.

All three involve Fifth Wall, so it’s a biased opinion, but the numbers speak for themselves. Software firm ServiceTitan, one of Fifth Wall’s largest investments, went public Dec. 13 with a $9 billion market capitalization and has maintained it. Industrious, a flex office company that was Fifth Wall’s first big bet, in 2018, was valued in the CBRE deal at approximately $800 million.

“It’s indicative of a momentum shift,” Wallace said in a phone interview. “All are trailmarkers on a really exciting narrative around where proptech is going to go.”

It remains to be seen whether Fifth Wall’s new flagship fund succeeds, but Wallace argues that the roster of big real estate players supporting it reflects renewed faith in proptech. Limited partners in the fund include Lowe’s, Public Storage, Ryman Hospitality Properties, Federal Realty Investment Trust, Kite Realty Group, Titan Group, Independence Realty Trust and Riyadh Valley, as well as institutional investors.

Fifth Wall did not disclose the size or target size of the fund, but said it would be similar to its previous flagship fund, which had a $400 million goal and closed at $500 million.

The investments it makes will be guided by what’s been learned from proptech’s first boom-and-bust cycle.

“What’s exciting and confidence-inspiring is that the companies and venture funds that survived came out more profitable … and with better business models,” Wallace said. “I think you’re seeing a flight to quality.”

Looking back at high-profile proptech failures, he said, “Real estate and construction are complicated and idiosyncratic industries. If you don’t understand them, it’s really hard to make money.”

WeWork had a charismatic salesman in Adam Neumann, but his previous experience as a CEO was with Krawlers, which made baby clothes with built-in kneepads. It lasted a few months.

WeWork signed long-term leases and subleased to customers on a short-term basis, a mismatch in the duration of assets. “That was the poison pill that killed WeWork,” Wallace said.

Knotel, a WeWork rival which eventually filed for bankruptcy and was bought by one of its investors, Newmark, had a similar strategy. Industrious’ flex-office business model better aligned the company’s interests with that of building owners.

Katerra’s misplays were symbolized by its shipping of timber from the rainy Pacific Northwest to the desert of Phoenix, where it sat on job sites and warped.

“You can’t just point software at construction and expect miracles,” Wallace said.

He added, “Many venture capitalists have learned that not everything can be changed. It still takes six hours to fly from Los Angeles to New York.”