DC Discusses: Digital transformation in property technology

Market overview – Single family

As the residential market continues to flourish, tech solutions that facilitate virtual real estate transactions from end to end continue to be highly sought out platforms.

Macro drivers:

Demand for homes continues unabated as sales reached a 14-year high in 2020[2] – concurrently, the shortage of residential homes rose to 3.8m, a 52% increase compared to levels in 2018[3]. For homeowners, the market frenzy has collectively increased their home equity by over $1.5trn over the course of 2020[4]. We expect this momentum in home sales activity to continue and further drive the need for real estate technology solutions and investor interest in the space.

Market update:

Market leaders continue to aim at becoming ‘one-stop shops’ for the homebuying journey, looking to garner fees at every leg of the process – from agent commissions to receiving a cut on mortgage, title and escrow. Key areas of focus have been around consumer data access (specifically lead generation) and tools to facilitate virtual transactions
Public market activity remains very strong:
- Redfin’s $608m acquisition of RentPath[5] and Thoma Bravo’s $10.2bn buyout of RealPage[6] demonstrate the ‘landgrab’ for value among strategic and financial buyers
- Compass’ public listing on the NYSE[7] looks to be one of many to come with other real estate players, such as Offerpad[8], Sonder[9] and Matterport[10] joining in on the SPAC boom to go public
In the private market, investor activity has been non-stop – recent funding highlights the pace and scale of investment in the space:
- Notarize tripled its valuation to $760m after a recent $35m round in March 2020[11] and Side increased valuation by 7x to $1bn on the heels of a $35m Series C in November 2019[12]

We believe tech solutions that facilitate virtual transactions will see significant interest from investors over the next 6 – 12 months, and the development of these platforms continues to reshape the landscape of the single-family real estate market.

Market overview – Multifamily

While some headwinds are likely to persist, we believe that the multifamily market is positioned to rebound in 2021.

Macro drivers:

The rental market is beginning to show signs of recovery as the percentage of tenants meeting rent payments rose to 80.4% in March 2021 – whilst this is still a decrease from 84.5% in March 2020, it was a substantial improvement from 75.4% in December 2020[13]
Federal support in the form of $25bn of rental assistance from the American Rescue Plan and possible extensions of the national eviction moratorium continue to stoke optimism in the market[14]
Vacancy rates are expected to increase slightly to 5.8% in 2021, while rent is projected to drop only 0.2% (a considerable improvement to the 2.9% decrease in 2020)[15]

We believe real estate tech-focused assets can further accelerate recovery in the sector and will generate additional interest from buyers and investors.

Market update:

Throughout the pandemic, digitization has become top of mind for property managers, focusing on key functions such as:
- Tenant management to ensure occupant engagement, satisfaction and safety
- Property management to achieve higher operational efficiency
- Smart home features / tech integration given impact on housing / rent decisions
Investor interest in platforms continued into Q1 2021, with multiple M&A transactions and capital raises highlighting unabated transaction appetite[16],[17] – the most notable being the acquisition of CoreLogic by Insight Partners and Stone Point Capital for ~$6bn[18]

With the expected rebound of the market, we believe this will in turn further drive M&A activity in the space, positioning the multifamily market for stronger deal flow in H2 2021 and beyond into 2022.

Market overview – Commercial

Commercial real estate (CRE) leaders have moved beyond the question ‘is digitization necessary?’, with the focus becoming how to employ and use technology to remain competitive.

Macro drivers:

While recovery in CRE continues to remain uneven, overall positivity remains with pent-up demand for retail goods is hopeful to drive higher in-store sales which in turn is expected to increase leasing activity
Logistics / warehousing is expected to maintain momentum given e-commerce adoption and office utilization is approached with cautious optimism given vaccine rollout
Some bright spots can be observed across CRE, such as retail rent collections reaching 87.7% in March 2021, the highest rate since the onset of the pandemic (compared to 40% in April 2020)[19]

Despite an uneven recovery in the commercial market compared to single or multifamily, strategic and financial investor interest in digital solutions continues with the promise of life after Covid.

Market update:

Recent surveys indicate 85% of respondents believe technology is crucial in return-to-work planning – tenant engagement and ensuring a safe work environment will be critical, both of which have been top of mind for buyers / investors[20]:
- VTS’ acquisition of Rise Buildings will bolster its competitive positioning as property managers urgently seek to improve / personalize occupant experience[21]
- CBRE’s $200m investment in Industrious seeks to meet rising demand from tenants for agile space solutions[22]
CRE tech adoption has historically lagged behind other industries, resulting in significant greenfield opportunities and first mover advantage
Strategic and financial investors are eager to capitalize on this advantage, which has been showcased in the significant deal activity in Q1 2021

As CRE leaders look to remain competitive, we expect to see higher investor interest in assets that make digitization more efficient.

Conclusion

Based on current macro-economic conditions, and unprecedented momentum and innovation in the real estate technology sector, we believe investor interest and M&A deal flow will continue to accelerate into H2 2021 and beyond.

For more information and insight into the US Real Estate market, please reach out to our team.

DC Discusses: Digital transformation in property technology

Market overview – Single family

Market overview – Multifamily

Market overview – Commercial

Conclusion

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