Funding in the PropTech space is continuing at a feverish pace, and although VCs still contribute the lion’s share of the dollars being invested, the secret sauce to success may come in the form of strategic investors; specifically, investors who operate large businesses that can utilize the solution of the company that they are investing in. Think about a portfolio owner that has 30 commercial buildings totaling 15,000,000 square feet. If they invest in a company that has a solution that can be deployed throughout their portfolio, they can nearly guarantee the success of the company by acting not only as an investor, but also as the company's largest customer.
Nothing comes without risk, and it is critical that strategic investors bet on a company that has a best-in-class product, otherwise they can get hit with the double-whammy of a bad investment and a subpar product used throughout their portfolio. Even though this strategy comes with risk, proper due diligence by both the investment arm and the property management team can deliver enormous growth potential.
In prior articles, I covered different ways that companies are investing through strategic partnerships. DivcoWest, the real estate giant with $12.9B of assets spanning 11.6M sf, operates a VC arm that invests in companies that help to optimize the performance of their portfolio, increase tenant satisfaction, and modernize the way that they conduct business. Fifth Wall on the other hand is more of a traditional VC firm, but a significant amount of capital that they raised comes from strategic partners including Lenar, Hines, Equity Residential and over 70 other global real estate firms. Another company which is taking a similar approach is JLL. JLL is one of the largest real estate service providers in the world with 4.6B sf under management. Unlike DivcoWest who owns their assets, the majority of JLL’s portfolio is owned by 3rd party landlords, and JLL provides the property and facility management services to ensure that the assets operate at peak performance. The sheer size of their portfolio makes them an ideal strategic partner, and in 2018 they launched their $100M global venture fund named JLL Spark.
JLL Spark is a division of JLL Technologies. They have made over 30 strategic investments in PropTech startups including HqO, DealPath, Openspace, and Eden. JLL just released their most recent PropTech report that suggests 2021 could be a record-breaking year for PropTech startup funding. On the heels of this report, I had the privilege of interviewing JLL Spark’s Managing Partner Raj Singh. We covered a wide range of topics including their investment strategy, disruptive technologies, and the state of the PropTech industry. Below is the interview.
What is the history of JLL Spark?
JLL Spark was founded in 2017 and announced the JLL Spark Global Venture Fund in 2018. The main purpose of the JLL Spark Fund is to fuel and accelerate innovation in property technology by investing in early to mid-stage PropTech startups. JLL Technologies (JLLT), a business division of JLL, was established in 2019 to build and expand the company’s portfolio of technology products and services to shape the future of commercial real estate. Housed within JLL Technologies, JLL Spark also has a dedicated Growth Team to help portfolio companies leverage JLL’s global business lines. This unique offering provides great value to startups with rapid pilots, feedback, and distribution to JLL’s core business lines and clients.
Is the goal to grow the investments and exit?
We focus on investing in companies that will be financially successful for the fund and create value for JLL’s clients with innovative, cutting-edge products. The goal is to grow our portfolio with companies that can serve a specific client need, expand our service offerings to new segments, or be incorporated within the broader JLL business to deliver solutions to existing clients.
For example, recently we acquired Skyline AI, a leading artificial intelligence (AI) technology company using machine learning models to gain a competitive advantage in the origination and analysis of real estate opportunities. JLL plans to incorporate Skyline AI technology and data into products so clients can better predict future property values, improve cost savings, identify promising investment opportunities and make crucial business decisions. By combining Skyline AI's data analysis with JLL's industry expertise, our clients will see faster decision-making and expanded access to investment trends. Acquisitions such as Skyline AI demonstrate our focus on bringing new offerings for clients and accelerating JLL’s leadership in CRE technology.
If after you invest in a company and you find a better solution out there, will you go with the best option that you can find, or will you go with the technology that you invested in?
We will not push a technology for JLL to sell that we've invested in if there's something better that exists for JLL client needs. We do our best to choose the companies we think will be the winners in the space but operate separately from brokers working with clients on the ground.
I have written extensively about Tenant Experience Apps. A significant amount of funding has recently gone into this space. At my role at Kastle Systems, almost every portfolio that we are meeting with has either deployed a Tenant App, or is in the process of evaluating them. Have you made investments in this space? Do you believe that Tenant Apps will continue to gain traction in the coming years?
Landlords have realized tenant experience apps are a necessity to attract people into the office. We have invested in a few companies in this space, including HqO and Livly. Tenant apps will continue to grow in importance, but I predict there will be an emergence of platform-type companies hosting a wide variety of amenities in one space. The overarching trend seems to be that, as consumers, we want to access all the goods and services seamlessly. Integrated technology solutions will power employee experiences, facilities management, sustainability efforts, and more as companies explore their re-entry strategy to make the workplace more attractive for employees.
A recent JLL study found that 74 percent of employees want to work from the office in some capacity. Offices aren’t going away – but rather, taking on a new role in the hybrid workplace powered by innovative technology solutions. The combination of how employees enter and exit the building, frictionless access to flexible solutions, and tenant amenities will need to be implemented in order for people to want to come back.
What are the biggest opportunities you see for PropTech in the near future?
Beyond tenant experience, the biggest opportunity is around sustainability. Customers are hugely concerned about their environmental footprint and want to see that landlords are making progress to becoming carbon neutral. It is easier to implement sustainable solutions in new builds, but the reality is new construction makes up a very small fraction of the total number of buildings out there. One way we can remediate buildings to be more environmentally friendly in both older and newer buildings is heightened energy efficiency. We’ve made a few investments in this space, such as Turntide the creator of a smart motor system that can reduce energy consumption by nearly 64%.
Another huge opportunity is in real estate financial services. As an industry, we need to get to a place of financing buildings more efficiently. For example, a landlord has all their money tied up in a building and they only make money when selling the building. But, what if they could sell shares of the building instead? Or what if they could make money from it earlier because their financial instruments allow them to securitize the building? We are seeing interesting things happen in this space as people are thinking creatively about how to make the building a bit more fungible and flexible.
Realtime occupancy drives so many decisions in the Commercial Real Estate space. It is such an important metric and many companies are bringing products to market that claim to produce the most accurate data. What is your view of this challenge and have you made any investments in this space?
The approach of using real-time AI sensors to help businesses better understand how space is used is making headwinds. We’ve invested in VergeSense, which uses IoT sensors focused on determining occupancy rates. We have tons of data collected on occupancy, and now we need to determine how to best use this data. Questions we hear clients ask are how does this information change the way a building is run? Or how can we make a new build more efficient by interpreting this data? These are the types of questions that will inform the future of real-time occupancy.
When you make an investment with plans of deploying a solution throughout the JLL portfolio, do you find resistance from your major competitors? Do they hesitate to recommend the solution to their customers because you have invested in it?
We take competitor information very seriously when working with our portfolio companies. There have certainly been instances where competitors invested alongside us, however, we have a specific process laid out to ensure we do not see any competitor information from our portfolio companies.
I recently interviewed the team at Fifth Wall and I questioned them about how sustainable the pace of funding was for the PropTech space. Although so much money is pouring into PropTech, they felt we are still in the early innings because real estate technology had been so underfunded for so many years. What's your thought? Is PropTech funding overheated or can this pace continue?
PropTech funding has seen massive growth in the past few years—in fact, JLL recently released data stating the landscape has grown 300% over the past decade. Additionally, the research suggests 2021 could be a record-breaking year for PropTech startup funding. M&A activity is above $18B so far this year, and as consolidation in the sector continues, we will likely see fewer companies in the PropTech space moving forward. We’re still in the beginning stages of technology adoption across the real estate industry and there is great growth potential for the sector still to come.
I'm a big proponent of flexible real estate. I think that flex represents the biggest disruption to have taken place from an office standpoint for as long as I have been in the industry. However, due to the short term commitments, flex operators struggled disproportionately compared to landlords during the pandemic. Are you bullish on the future of flex?
We are currently looking to do a few deals in the flex space. In the last year, office habits changed drastically and new ways of working were adapted—leading to the rise of new trends, such as flexible office spaces. There will be different iterations for enabling flex in a way that makes sense to both the building and landlord, but ultimately, I think employee habits have shifted to enable flex on a broader scale.