Despite corporate giants like The Walt Disney Co. and Amazon.com Inc. demanding employees return to the office at least part of the workweek, and the increasingly prevailing sentiment from management that working from an office is best, office buildings in the 10 largest U.S. cities sit less than half full.
With falling property values in some cities and rising interest rates, the commercial real estate industry is at a crossroads.
So too is the startup sector that services this industry. Known as "proptech," this collective of startups that provide software and other tech services to CRE firms has seen a dramatic pullback in funding since the tech boom of 2021.
Proptech startups raised $19.8 billion in 2022 compared to $32 billion the year prior, according to data from the Center for Real Estate Technology and Innovation. Even as venture capital trends downward across sectors since 2021, proptech startups face a unique challenge: selling to an industry that's still reeling from the pandemic.
"In proptech in particular, it's hit hard because the real estate industry has been hit hard by the interest rate increases," said Raj Singh, managing partner of JLL Spark, the real estate firm's venture capital arm. For CRE firms, the software they buy today can't be a "nice to have," Singh said, but rather a must-have service that helps reduce costs or drive more revenue. The product proptechs are building must have a direct impact on a company's bottom line.
"Because of the way the real estate industry is right now, it’s just harder for companies to sell into that industry when they don't have somethings that's an immediate ROI."
Another challenge for proptech startups, Singh explained, is that many companies still aren't certain the number of employees who will be in their physical office space in the near or long term. That has led to firms doing smaller projects with startups, like pilot tests, instead of larger-scale purchases.
JLL Spark has invested $380 million into 45 startups since it launched in 2017. It backs around 8 to 10 new companies per year, and about the same number of follow-on investments annually, Singh said. However, its pace of new investments will slow in 2023, Singh said, as it, like many venture capital funds across the country, invests in current portfolio companies in need of capital during a down market.
Startups in the industry that have undergone layoffs include Lev, a commercial real estate lending platform that held multiple rounds of cuts, including 34 employees in May. Juniper Square, a software startup used in commercial real estate deals, cut 14% of its staff last year.
Despite the headwinds facing the sector, not all proptech startups are struggling. Singh pointed to Boston startup HqO, a communication platform for building tenants, which is finding success with its tool for better engaging people in a workplace. Shared Studios, based in New York, has built a physical portal used in office conference rooms and break rooms to connect employees in different locations. And companies like Silicon Valley-based Vergesense, which makes physical sensors for office spaces, are helping companies better quantify how many people are coming into the office.
And others are still landing deals. Leap, a Chicago startup that helps e-commerce brands launch physical retail stores, raised $15 million in June on the heels of a $50 million round it raised last year. Seattle commercial real estate data startup Prophia landed $10 million late last year. Accelerate Wind, an Alabama startup making wind turbines that can be installed at the edge of a building's roof to power clean energy, was selected by the U.S. Department of Energy for a national pilot project.
Proptech itself is a relatively young space — around 10 years old, Singh said. It's a crop of startups still trying to get their footing in a market that hasn't always been quick to adopt new technologies, Singh said.
"It's still in the early innings," he said.
Singh said as interest rates come down, the CRE industry will stabilize, and so will proptech startups. In the meantime, Singh said startups need to "ride through this rough period" by cutting costs and delivering products customers need most.
"You’ve got to survive to thrive. [You need to think] 'how do I make sure my company is still around to take advantage of the opportunity when it comes?'"
