In proptech, the early bird doesn’t always get the worm.
It can take a lot of time to overcome owners’ reluctance to bet on a new product, and those long sales cycles have been the undoing of many a startup, according to Christopher Yip.
“Historically, there’s not been a first-mover advantage because the worst thing you want to do is deploy a new technology in your portfolio and have the startup fail,” said Yip, a partner at RET Ventures, a venture-capital firm that focuses on the rental sector and counts major landlords Essex Property Trust, Invitation Homes and Starwood Capital Group among its investors. “We think what we’re doing is working, because we can get a group together, vet and validate a solution, and build that solution.”
RET led the Series A round for SmartRent, which went public in a SPAC merger this summer, and has also invested in Amenify, Kasa and Measurabl. The firm raised $165 million for its second fund in June. The Real Deal caught up with Yip, who joined RET after over a decade at private equity giant TPG, to talk about the game-changing opportunities in the rental space and to break down some of the thornier issues that the industry needs to tackle around affordability, sustainability and institutionalization.
There’s been a big shift over the last few years in how Wall Street sees the rental housing asset class.
We’re in the golden age of investment and innovation in proptech, and the institutional rental ecosystem is a good microcosm of that. Participants in the industry are looking at their operations and saying we are behind — in terms of the percent of revenues we spend on technology and innovation and in terms of centralizing business intelligence and process. And how we use that data and analysis to drive decision making, whether it’s on the acquisition and underwriting side, the asset management side, or in property management.
We think there is, frankly, a generational opportunity here to help find and build startups in the space and bring solutions to the industry.
What were some of the key triggers of this institutionalization?
Broad institutional capital flows looking for these asset classes, saying that multifamily is a defensive asset class — it’s somewhat countercyclical in a recession. So we have a tidal wave of capital flowing in. And what is being realized is that as these portfolios grow, the management needs more technology to be feasible across a national footprint.
There’s an interesting back-and-forth happening between the startups in this space and the large landlords who are their natural customers.
I have my SmartRent mug with me. We were very proud to lead their seed and Series A and follow their journey. Some owner-operators have also made investments and been pilot customers. That is exactly what we seek to do. We have a group of 45 strategic investors who together operate almost 2.5 million units of rental real estate. Our mission is to look at the world through their eyes for startups that are innovating and can build solutions that can be deployed in these institutional portfolios to drive ROI.
There’s this blurring line between proptech and fintech. How are you seeing that play out in rentals?
We are seeing a lot of startups going after rental deposit alternatives and flexible-lease payments, so that in tough times, you can get credit and be a week late with your rent payment. Lease guarantees may help owners and operators underwrite a different nontraditional credit profile of a renter… some of the business models are shaking out.
“There’s not been a first-mover advantage because the worst thing you want to do is deploy a new technology in your portfolio and have the startup fail.”
We invested in Get Covered, an insurtech platform focused on helping property owners build a relationship with their residents around renters insurance. We made an investment — which we haven’t announced, yet so I can’t talk about it — focused on the long tail and it’s basically a banking product, using that bank account as a wedge to provide ancillary products to that underserved, mom-and-pop rental owner.
You’re also seeing companies with rewards programs. Bilt has a credit card program which helps you earn points with your rental payment that could be used towards a down payment in the future.
Landlords may be open to experimentation, but often have to answer to more conservative investors and lenders. I wonder how that works.
At an asset-allocator level, for better or worse, the way you manage your portfolio is you look at demographics and statistics across the portfolio — credit scores, delinquencies, vacancies. So that is a bit of a challenge in that there’s some of this experimentation and piloting down at the property level, but does [it flow up to] the asset manager two layers up? I don’t know if that linkage is quite there yet.
Everybody’s in a little bit of a wait-and-see. How are some of these products actually impacting delinquency and creditworthiness? We have an investment in a short-term rental platform called Kasa. Multifamily owners can see a significant bottom-line benefit to mixing in 5, 10 percent of their units to be short-term rentals and realize a premium or offset vacancies in the portfolio. But the lending community hasn’t quite gotten on board yet.
The same tension is playing out on the commercial side with more flex-office space replacing space on a long-term lease, and that’s something those valuing commercial buildings are still thrown by.
That’s right. And on the acquisition front, if you are traditionally valuing a building at a four cap, how does that change? Hopefully it doesn’t sink to the lowest common denominator and say, because you have 10 percent STR, now it’s a seven cap — that would not make the math work.
You closed a $165 million fund in June, which puts you among the largest funds in proptech, but in the broader VC world, it’s relatively small. I’m curious about the cap table and how it changes as more generalist VCs get into the space with the ability to write fat checks. Do you find yourselves getting crowded out?
We have been very deliberate about our fund size because we think we can add the most value at plus-or-minus that Series A stage. Where we can really help the entrepreneurs is accelerating their commercial traction. We can lead rounds, own a meaningful percentage of the company, get the benefit of the hard work that we’re doing with our strategic group in terms of the ownership and the upside.
I truly do not see ourselves as competitive with the generalists. There are businesses in the proptech ecosystem that the generalist VCs are a better fit for, such as B2C companies, marketplace companies that scale quickly. Sometimes we like taking on the harder projects — it’s a B2B enterprise sale, there’s a long sales cycle.
We see the generalists coming in at a Series B or C stage for some of our companies where we’ve proven out the initial commercial traction. And the generalists have been generally great partners, bringing their skillset around scaling and team building and access to the broader capital markets to help our companies grow. That’s a very healthy partnership.
Let’s talk construction tech. Katerra’s failure was a warning to those trying to overhaul the construction industry all at once. The market opportunity is gigantic, but it’s a very capital-intensive business and not easy to innovate.
Even if the attempt fails, there are lessons learned. The industry’s moving forward. And we see that across everything from commercial construction to multifamily and single-family.
Coming back to Katerra: Construction is already laden with risk. There’s the financial risk of the project, there’s the timeline and execution risk. So do you want a startup to be your general contractor? Do you want a startup to be your supply chain and manufacturing asset base? The lesson learned was there’s too many eggs in one basket, too much risk. We have strategic investors who unfortunately have half-built projects with Katerra who now, because it was a somewhat proprietary approach, cannot finish them. And the industry said, “We can’t do this again. Whatever happens from here, we can’t have that happen again.”
There’s a wave of innovation in the wake of that — and I think [portfolio company] Juno is a great example. They own the IP behind the technology that makes it all come together. They own the layouts and the configurations that drive efficiency around permitting and engineering. They have vetted third-party suppliers, and they’re bringing that all on-site in partnership with GCs, project managers and developers. We’re big believers in that approach. Construction projects have bonding requirements. Who’s going to backstop the bonds on construction performance and milestones? It’s probably not going to be a Series A startup with $20 million in the bank.
There’s political risk as well. Messing with construction workers and labor unions is a minefield.
Adoption by the trades is vital to the success of any construction tech. We see this on the single-family side with innovation, whether it’s panelized construction or modular, where some of our LPs have A/B tested them, and the trades who need to do the onsite labor are not seeing the productivity advantages, and therefore it’s not holding together.
Let’s talk ESG, which is on every big owner and investor’s mind. There’s so little transparency when it comes to ESG metrics, and a new investigation revealed that one of the most popular standards doesn’t measure a company’s impact on the planet as much as it does the planet’s impact on the company.
We have a working group that’s been meeting quarterly on ESG. We’re bringing together the heads of sustainability at many of these institutional owners and operators and collaborating on what are shared pain points. One of the dialogues is around the lack of clear data and analytics that are needed for portfolio reporting that led to our investment in Measurabl.
Nobody is served by greenwashing. This is not about just trying to check boxes and get credit for things. I do think that progress is going to be made by being able to make business decisions and point to ROI from ESG investment and deployment.
Should the E be separated from the S and the G to make it work? We’re talking about the environmental impact of an industry that is the biggest polluter by several metrics.
I don’t have a great answer. We are seeing the emergence of industry standards around scoring portfolios for their carbon impact. We are seeing local municipalities — like in New York with Local Law 97 — taking matters into their own hands to set targets and drive compliance with penalties. But I think we’re in a little bit of the Wild West of trying to figure out what’s the right metric. What are we solving for? I think a lot of our institutional owners are asking that question.
We are also very focused on the S and G. There’s a lot of attention on carbon and climate change, but we want to also have a dialogue around affordability and housing access. Technology can make affordability programs more efficient and accessible and more easy to implement for institutional owners.
You talk about wanting to push affordability, but at the same time that this greater institutionalization in single-family rentals has happened, rents have gone up a staggering 12 percent this past year across the sector.
One does have to look at the data points with perspective. In some markets, yes, rents are up over a two-year basis. But we are in an environment with quite a bit of inflation. You’re getting at a point around, what is the implication of institutional ownership on broader affordability? It’s hard for me to wade into it.
Generally speaking, it’s hard to argue that an institutional owner of what might have been an underinvested, poorly maintained, single-family mom-and-pop rental… that bringing the quality of that real estate stock up, managing it professionally, marketing it broadly, providing that rental as an alternative to a family as a high-quality housing unit relative to necessarily needing to buy — I don’t think that’s a bad thing. When you get into the weeds and look at the numbers — how many homes the iBuyers are buying and selling to SFRs versus homeowners — of course, when you look in the moment, there’s a tension there.
It’s a golden period for single-family rentals. But this business attracts a lot of heat, and with that might come attention from regulators.
There’s a necessarily rising bar there, to ensure that renters, mortgage applicants and homeowners are treated fairly, and I’m sure that regulation will play a role in that.
I think we are starting to see some of the drawbacks of the big data underwriting approaches to decision making, where some of the more subjective factors — alternative credit histories, not getting insight beyond a binary approved/declined, whether it’s a rental decision or a credit decision where a human decision-maker might have had more leeway. We’re seeing that tension playing out, with the broader innovation technology side clearly driving towards data-driven, black-box decision making and a pushback saying, “Is it resulting in equitable decisions?”
What could we expect from a connected home in the next three to five years, from the landlord’s perspective?
The institutional connected home was far lagging the consumer’s. We were living with Ring doorbells and Nest thermostats and you still had large portfolio owners manually keying locks and having thermostats that they couldn’t turn down when the unit was vacant. The success of SmartRent is in large part the early innings of a recognition that we need a solution that works for institutional portfolio owners at a national scale.
Thus far, it’s been focused on access control, HVAC and maybe leaks. Now there’s obviously all the consumer functionality — that’s almost table stakes.
The next wave is connectivity. Traditionally, it’s been: My apartment signs up for an internet connection. I have a router. When I move out, I disconnect. It turns off. There’s no ubiquitous connectivity in the building.
“We have strategic investors who unfortunately have half-built projects with Katerra who now, because it was a somewhat proprietary approach, cannot finish them.”
So how are you running your institutional infrastructure in the building, which is increasingly controlling locks, thermostats, leak sensors? How are you doing that when you don’t have connectivity in your building? A lot of these buildings had maybe a shared DSL line in the leasing office, but it certainly doesn’t reach the 12th floor and Unit F. It’s sort of an obvious point, but I think there’s now recognition.
Looking ahead, 10 or 20 years, it’s not the connected apartment, it’s the connected building. And maybe, by the way, that should be a service to the resident like it is on an airplane. I can just log on, pay my $35 a month and be able to walk around the building and visit my friends and have a ubiquitous connection.
So there’s that as the foundation, and then we’re gonna see all the IoT devices coming in. Energy and resources flowing through the building are the next big opportunity. The opportunity is to connect what’s behind the meter and in front of the meter. Traditionally, the resident pays the electrical bill and [resident usage] is the largest component of the electrical load in the building, but the building owner actually has no control or influence over that. How do large apartment buildings participate in demand-response programs? How do we incentivize and give residents credits and gamify? The ability to say, “If you turn off your appliances or don’t use X, Y, and Z between 7:00 and 9:00 p.m., we’re going to give you a credit.” And I think we’re at the early stages of doing that in a rental property at the institutional level. Which ties neatly into the ESG focus.
As proptech has evolved, has the discussion about when and how to exit — whether through an acquisition or a merger — changed?
There’s a strategic commercial lens to that and a capital markets lens. One can’t ignore that over the last two year we’ve had great public equity markets. We’ve had the SPAC markets. Of course, when you have opportunities to raise larger amounts of capital from the public markets and get those valuations, companies go down that path.
From the commercial perspective, what we hear from almost all of our institutional owners and operators is we need fewer vendors. Not more. Which is kind of an oxymoron because we want more innovation, but we want fewer vendors. They require integration with the existing technology stack, they require vendor management, they require the right pricing and contracts. There’s a very strong desire to see some of these smaller-point solutions coalesce into platforms that are financially stronger, that are more strategic partners to the ecosystem.
A pretty typical decision point for one of our companies is at a Series B or C stage. Do you raise capital and invest in the platform to broaden the offering, cross-sell and build? Or should you be part of a broader platform? We find a lot of our companies at that decision point.
We’re seeing an emerging group of financial backers. We have companies that have been successful say, “We’re still growing nicely, 75 percent annual growth. I don’t know if I want to sell, but it’s time to revisit the cap table.” And so we have private equity firms who are focused on these verticals who have been great partners for some of our companies to say, “Your founder takes a little bit of money off the table. We’ll put some primary capital on the balance sheet and maybe you’re a slower-growth business from here, but let’s keep building.”
As early-stage investors, that’s great. We can continue to participate in the company and it solves goals for the founding team. There are increasingly good options for founders in this space and it doesn’t have to be all or nothing.
This interview has been condensed and edited for clarity.