Portfolio Owners Are Becoming Investors in PropTech:
An Interview with DivcoWest
Without a doubt, we are currently experiencing the most exciting time period in the history of PropTech. The pandemic accelerated the need for innovative solutions in real estate, and money has been flooding into this space at an unprecedented pace. While traditional VC firms still play a huge part in the startup ecosystem, money has started to flow in from another source: large portfolio owners and property management firms. This strategy makes a lot of sense for multiple reasons. For starters, real estate firms have a keen sense for the problems and opportunities that they face, and arguably they should have a discerning eye for companies that are building the right solutions for those very problems. More importantly, their real estate holdings provide a built-in customer base to deploy the solutions that they are investing in. With portfolios in the tens of millions of square feet, large owners and managers can rollout these solutions throughout their own portfolio, which can generate significant traction for the products that they are investing in. The downside is that if they bet on the wrong horse, and then deploy the solution throughout their portfolio, they can get hit with a double whammy. Companies like Brookfield have been investing in PropTech startups pre-pandemic, but the pace of investments and the number of companies getting in on the action has definitely picked up. Below are some examples of investments that have recently been made by Real Estate Companies
Brookfield: Convene, Lane, VTS, LATCH, Building Connect
RXR: Convene, Metropolis, Lyric, Eden Workplace, The Guild
JLL Spark: OpenSpace, Lev, HqO, Atmos
CBRE - Industrious, Matterport, Comfy, Realync, LiquidSpace
Tishman Speyer: VTS, Lyric, OpenSpace, Agora
I recently had the opportunity to spend time with one of the nation's premier property owners: DivcoWest. They have a wide ranging portfolio across just about every sector of real estate which includes $12.9B of assets spanning 11.6M SF. DivcoWest has quietly been making investments in PropTech companies for a number of years and is excited to grow their venture investing efforts. They are vetting a significant amount of potential investments and may be announcing a number of new deals in the months ahead. I was lucky enough to have the opportunity to sit down with Breton Birkhofer on DivcoWest’s venture team and interview them on a range of topics including their investment strategy. It was one of the most compelling conversations that I have had on this subject.
You mentioned that DivcoWest has made venture investments in the past, but you have really formalized your venture investment strategy over the last year. Tell me about some of the investments that you have made so far, and explain why the timing is right to accelerate your venture investing.
Since 2014 DivcoWest has been investing in early and growth stage PropTech companies. We are focusing on companies that are transforming the future of real estate in urban environments. We look for the technologies having the biggest impact on every stage of the development life cycle, across asset classes. Our investments include HqO, Honest Buildings (Procore), Matterport, Mynd, Kitchen United, Measurabl and Metropolis. Our goal is to partner with founders to accelerate growth by unlocking access to key customers/partners across the real estate industry and opening access to all of the expertise at DivcoWest. Post-Covid we have seen an acceleration of deal activity in the market driven by a number of factors. Covid has forced the real estate industry to adopt new technologies at a much faster pace and in many new ways. Meanwhile, there has been an increase in the velocity of venture capital dollars chasing the fast-growing technology companies. These forces have converged to unlock a ton of exciting new ideas and has made for a really fun time to be involved in the industry.
How does DivcoWest integrate portfolio companies’ technology into your real estate portfolio? How do you think about adopting innovation and technology beyond your venture portfolio?
We cast a wide net to evaluate a variety of different technologies. We are certainly excited to invest in technologies that we can leverage across our real estate portfolio, where we can potentially add value to the portfolio company while generating direct benefits for our real estate portfolio; whether through increased operational efficiencies, improved tenant experience, or enabling better outcomes for our real estate investments. We also meet with many companies that aren’t currently raising money at the stages we invest, but have a great solution, and we are not shy about testing and deploying these technologies across our portfolio. We are also interested in investing in companies where we are not a direct customer, but can connect them to the right customers in our network to the benefit of all sides. We look for investment opportunities where we know we will have the opportunity to influence the outcome in a meaningful way.
COVID has accelerated the need for PropTech when it comes to providing confidence to your tenants about a healthy and safe return to the office. How are you using technology to provide your tenants with peace-of-mind?
DivcoWest has done a lot on this front, and technology is playing a significant part in facilitating the return of people back to the office. DivcoWest is following the best practices when it comes to making physical space safe - signage, hand sanitizer stations, reconfigured lobbies, etc. In addition, there are a few different categories of technology that are becoming increasingly important to ensure a safe and productive return to the office:
Safety: Air quality sensors and analytics, HVAC optimization and autonomous control
Access Management: Touchless access control at doors, turnstiles and elevators to ensure tenants can safely and seamlessly get in and out of spaces
Visitor Management: Hands free visitor management solutions to ensure that prescreened guests can safely get in and out of the buildings, while efficiently allowing unannounced guests to get screened and approved to enter the buildings.
Occupancy Analytics: Actionable occupancy analytics that tenants and landlords can rely on to determine how space is being utilized in real-time - making office space reactive to the ever changing needs of users
Workforce management tools: Occupiers and their employees are going to need a wide variety of new tools to be fully productive as they go back to office as they are operating in a more hybrid and flexible environment than ever. Innovative new solutions are needed to manage physical resources in a space, to be more deliberate with space planning, and to get more out of existing space as their workforce evolves. Hybrid workforces require tools to manage the communications and shared resources needed when all team members are not working under the same roof. We are very bullish on tenant experience platforms like HqO (as an investor and customer) which can act as the hub to connect many of these solutions together into a unified offering.
There are so many different solutions that are being introduced to the market on a fairly regular basis. These include everything from Tenant Engagement Apps, to Building Automation Solutions, to Co-Working/Flexible Real Estate Software. How do you determine which solutions are right for your portfolio? Do you beta test different products in different buildings? When you do decide on a technology platform, do you think about it on a portfolio-wide basis, or do you analyze every asset on an individual basis?
We have an approach where we test and pilot different solutions and iterate as quickly as possible to implement the best ones. We want to identify which solutions work, which ones don't work, and which ones can scale before we make a significant decision to standardize portfolio-wide. We want to see as much as possible so that we can vet the best solutions; our goal is always to roll out the very best technology and amenities. We initially start out by introducing new solutions to one building (or potentially a small handful of buildings). We test, measure effectiveness, and validate each solution in a live environment before we make a big investment to standardize across our portfolio. Our goal is to have the best solutions deployed across our portfolio to create the most efficient operations on our side while creating the best experience on our tenant’s side. We are particularly proud that our in-house technology team has the ability to integrate different data sources into our tech stack and build their own applications on top of it. Our objective is to continue to harness more and more data so that we make more informed asset decisions over time.
I’m sure that you see a lot of really innovative PropTech solutions. What type of solutions excite you the most? Where do you see the biggest opportunities in the near-term? If you were speaking to a group of entrepreneurs that were looking to build a solution, is there a particular challenge that you would want them to build technology to address?
There is a lot that we are excited about because there is such a flurry of innovation emerging at such a rapid pace in PropTech. There are a number of categories that we are particularly excited about, including:
Occupancy Analytics: Commercial and industrial occupiers are demanding more real-time insight into how a space is utilized. The collection of data is only half the battle. One of the biggest needs is innovative tools to action the data that is collected. This will help to design, optimize, and manage space in the most efficient way possible. Building owners and occupiers are collecting more data than ever and utilizing technologies such as artificial intelligence for everything from better control of the building systems, to how employees interact with the building. Employers and employees want a more tech-enabled, amenitized experience in the office and many solutions are emerging in this area.
Workplace Management Tools: We are also excited about the new workplace management tools that are emerging. These provide efficiencies in how occupiers can take control of their space. We are seeing exciting new technologies and business models around space design and planning tools, integrated access control, vendor management tools for both the landlord and the tenants, and platforms to manage hybrid workforces and their resource needs.
Space-As-A-Service: We are also excited about the continued amenitization of real estate space which is following the path of residential and bleeding its way into all other asset classes. The most innovative landlords will continue to recognize that there will be more and more demand for not just physical space, but a more holistic or omni-channel workspace solution. It’s more about how the physical space connects with the digital space, which we believe is a requirement to drive productivity for tenants. Lease terms may be changing going forward and there may be a host of new requirements. We are seeing this driven by the tenant experience platforms on the commercial side. Some interesting examples include more flexible furnished apartments without long-term leases, short-term rental platforms blending multi-family and hospitality assets, and even Co-Warehousing - combining flexible access to co-located office and warehouse to scale your e-commerce business.
If I was giving advice to an entrepreneur, one of the biggest unsolved challenges is advancing the tools needed to take action on ESG data. ESG is a very hot topic at the moment and it plays an increasing focus for real estate companies in the face of operating cost volatility, climate risks, and regulation. There is a lot of building data available now, but new tools are needed to unlock everything that is required to measure, report and take action on ESG performance. A huge opportunity exists in a solution to translate all of this data, to not only take action but to really figure out how to monetize that action. Our portfolio company Measurabl is doing some great work here. The holy grail of ESG is to figure out the dollar impacts of some of these changes, as well as the risks of not making them. This will require new types of technology, new types of automation, new types of data science, and modeling tools to determine how to manage these critical building decisions in a way that is automated and scalable. The data and tools also need to be available in a way that can be adopted not just by the Blackstone’s of the world, but all of the real estate companies big and small.
The pandemic has created a huge disruption in the office sector. Some people are saying that the sector has changed forever. Do you agree with this sentiment, or do you expect that things will return to exactly where they were 12 months from now?
We are not believers in the notion that the downtown offices are dead forever. We are starting to see activity in many of our geographies to suggest that the office market is coming back in a meaningful way. But it’s hard to tell exactly where everything shakes out. Certainly the office space needs are changing for many large employers. There may be a little deemphasis on the large urban based office HQ, but we believe that these types of reductions may be offset with additional distributed spaces along with a higher ratio of square foot per person. We will likely see a reversal of the trend from the last few years of putting as many people as possible into as little space as possible. A lot of this is driven by the fact that many tenants are getting serious about new ways to operate in more flexible space, like neighborhooding, hot-desking, and shared desks. There will likely be opposing forces with some shrinkage in some parts of companies’ real estate footprint, while they simultaneously add space in other areas closer to where their employees live.
The office is not dead. It is really about changing the office to meet the needs of the tenants. We will see a push to an omni-channel workforce mentality from a more hybrid workforce. There also must be capacity in the office so that hybrid employees have a place to work on the days that they do come into the office. Just as important, they need to have access to everything needed to be productive, wherever they are that day. As a result, there will be plenty of need for physical space (even if the functionality and location changes).
While there has been huge disruption in the office sector, there has been tremendous growth in the residential sector. What opportunities are you excited about in residential?
We are very excited about the residential space as DivcoWest recently announced a partnership with Atlas Real Estate to invest in the single family rental market across the western U.S. and we’re also quite active in the multifamily residential sector. Our view is that many institutional owners are going to need new tools and tech-enabled services to invest effectively in SFR. The reason why we believe that capital has not flowed as freely into this space in the past is due to the heavy lift on the operational side. Technology can overcome some of these scaling challenges on the operational side. Institutional capital investing in SFR will look for more turnkey solutions, and many of these solutions are getting built now. It's not just on the property management side of the business, but technology can streamline all of the services involved in a real estate transaction including brokerage, insurance, and financing. A more data driven approach can identify the opportunities to find and invest in these assets in a scalable way across markets. These big institutions are unlikely to go and pick a bunch of different local managers to roll out to their national portfolio. They need a platform which centralizes these services regardless of geography. We are investors in Mynd and are really excited about the platform they continue to build to serve SFR owners. Retail owners will benefit tremendously as well because they will have access to all of these new institutional grade tools which they can then leverage. This will hopefully lead to a democratization of access to this asset class.
Does Every Dollar Have the Same Value?
When it comes to fundraising, this author does not know if every dollar has equal value. I would argue that taking a dollar from a company who is an expert in the field and has a customer base that can immediately be leveraged, may carry more value than a dollar from a source whose main contribution is capital. That is not to discount the value of a VC who has invaluable experience in helping startups navigate the challenges of scaling. Ideally, if a startup is fortunate enough to source funding from a mix of traditional VC firms, and leading real estate companies, they would get the both of both worlds. DivcoWest’s venture team is exceptional, and they are building an exciting portfolio (Honest Building was acquired by Procore in 2019 / Matterport is planning to go public via a SPAC). DivcoWest is a company to watch, and I highly recommend PropTech entrepreneurs who are actively fundraising, to get their pitch deck in front of their venture team.