If you work in commercial real estate long enough, you’ll hear the word “PropTech” thrown around. The real estate industry was slow to adopt new technology for a while, but that’s starting to change, and that PropTech word is coming up with increasing frequency. The nation’s most prominent commercial real estate brokerages have invested nearly $1.5 billion in real estate technology deals over the past few years, and they don’t show any sign of slowing down. The number of real estate tech companies has increased by 300 percent over the past ten years, according to JLL data. Nearly 8,000 PropTech companies identified by JLL have collectively raised more than $97 billion in equity funding in the past decade. These investments are changing the real estate world dramatically.
Most of the time, real estate firms invest in PropTech startups, and very rarely do they try to develop tech on their own. Big real estate brokerages like CBRE, JLL, and Cushman & Wakefield have made extensive tech investments within the past five years. CBRE has invested $400 million in seven PropTech deals over the past decade, while JLL Spark, the firm’s venture investment arm, has invested $363.8 million. Property technology is spreading to almost every area imaginable in real estate, including artificial-intelligence-powered underwriting, robotic process automation to help brokers, virtual construction tours, and much more.
While It’s rare for a real estate firm to build its own technology in-house, it does happen occasionally. One successful example of this is Prologis’ Clear Lease, a platform that streamlines leasing for the warehouse REIT. Despite some scattered success at building in-house PropTech, many real estate experts think firms even trying to do so is unwise. “Very few real estate firms can do it correctly. It’s a heavy lift, and there’s diminishing returns,” said Zachary Aarons, Co-Founder & General Partner at MetaProp, the innovative PropTech venture capital firm based in New York City. “There are probably only about 12 real estate firms that could feasibly do it and, among them, only about 2 or 3 of them can successfully pull it off.”
Aarons explained that JLL, Prologis, and large public companies might sometimes succeed, but it’s hard to sell their tech solution to competitors. Understanding the technical details and competitive landscape can also be difficult for property firms that might not have a background in tech. His firm takes an advisory role for many of its investors, “if you’re being advised by someone like us, the process can be much less daunting,” he said.
Harder than it looks
Some companies prefer the competitive advantage of owning their own tech, but the market moves so quickly that it’s hard to keep up. Executive time is expensive, and deciphering answers to the thorny challenges of developing in-house tech can waste too much of it. Buying a PropTech solution is often much cheaper and quicker to deploy, and it’s easier to pass off the costs to tenants than when developing in-house.
Real estate firms also depend on a limited number of employees when building in-house tech, which is partly why only large firms like JLL Technologies pursue it. For example, JLL Tech has built solutions like Azara, a business intelligence platform that provides real-time access to real estate portfolio operations. For smaller real estate firms, institutional knowledge disappears with the workers if they decide to leave the company, a problem that’s not as acute at a PropTech firm or large outfit like JLL Technologies that’s solely focused on one thing.
“Trying to be innovative while developing in-house tech, while competing with the market is much more difficult than it seems,” said Kevin Shtofman, Chief Operating Officer of NavigatorCRE, a provider of a CRE operating platform. He said about 80 percent of NavigatorCRE’s clients try to develop their own tech first before coming to them. “Some very large institutions have tried to develop their own tech over the years,” Shtofman said. “They spent years and millions of dollars only to discover better options on the market.”
JLL Technologies, a business division within the firm that builds and delivers PropTech solutions (like the aforementioned Azara) and software for property management and other functions, was started in 2019. JLL Tech is a mix of homegrown and tech acquisitions, furthered by JLL Spark, a $100 million global venture fund that has invested in 14 PropTech startups. The brokerage is looking to add more tech talent, as it employs more than 3,000 people globally within JLL Technologies. Ian Fyfe, Director of Product Marketing at JLL Tech, agrees that buying PropTech solutions is often the best way to go. “As well as build versus buy, you can also do nothing,” said Fyfe. “But that’s very risky. If you do nothing, you get left behind.”
If buying PropTech is the best solution, Fyfe said there are some things to keep in mind. You can buy a solution from a new startup, but there’s a risk the company won’t stick around. Plus, many new startup’s solutions are very siloed in the beginning. Buying from a larger, more established PropTech firm can be safer because they have a longer track record. Big firms like JLL Tech are gobbling up startups all the time, such as their recent $300 million acquisition of Building Engines, a property management and operations platform provider. The advantage of working with big firms like JLL Technologies is that they have the money and resources to provide products like this and a vast pool of developers working on them, constantly tweaking and improving the software solutions.
One feature at a time
There are still cases where building PropTech in-house can work, despite the skepticism of some experts. Suppose a real estate firm thinks they have the so-called secret sauce and a hugely innovative idea that no one else in the industry has. In that case, they may try to develop their tech themselves to garner a competitive advantage. The bigger the real estate firm is, the more magnified the aspect of the debate of build versus buy becomes.
The NRP Group is an example of one that’s had success with building in-house PropTech. The company is a vertically-integrated developer, owner, builder, and property manager of multifamily housing. Since its founding in 1994, it has developed more than 35,000 apartments, and it currently manages more than 19,000 residential units. The NRP Group has grown rapidly in recent years, and so has its approach to technology. When they looked at new ways to value their assets, they couldn’t find something on the market that fit their needs. So, they assembled an in-house tech development team and started small.
The result was NRP Connect, a tool that allows the company to gauge its development pipeline in real-time. They started deploying the tech in 2015, a custom solution they keep for themselves that they haven’t put on the market. “We started slowly with one feature at a time, but it’s now become a business-critical application for us,” said Rachel Johnson, Chief Information Officer at the NRP Group. “It’s a full-fledged software solution that we use every day.” She explained they never really debated build versus buy. Instead, they simply focused on something small at first that eventually grew and evolved. They have an internal team assigned to NRP Connect and business analysts that enhance, adjust, and add features. Plus, they’re always very focused on cybersecurity.
Johnson is proud of what her team has accomplished, but she admits that buying PropTech is often the best way to go if you don’t have the internal resources to build yourself. “I have a software development background, so it was a natural fit to build for us,” she said. “We get exactly what we want, and we can change NRP Connect however we want. There’s only so much customization with vendors that you can have.” The customization aspect has been important for NRP Group. When the pandemic first hit, they had a team of people who quickly reconfigured NRP Connect to reflect changes in their business practices instead of waiting on a vendor to do it. Plus, Johnson said the project had only been a modest expense. “We’re spending less than 1 percent of our budget on it,” she said.
Johnson said real estate firms shouldn’t be intimidated about building in-house. “Go small, do many small things, bite off a little bit at a time,” she advises. She said no one at the company was forcing them to build NRP Connect overnight, but there has been some pressure to move too fast. She told me they’d done an excellent job of staying within their resources and doing only what they could handle.
Another option in the build versus buy debate is partnering with a PropTech startup, which has become increasingly common. Real estate firms can fund startups and help them grow and then benefit from the fruits of their labor. An example of this is what Tishman Speyer, a global owner and developer of Class A real estate space, has done by creating a SPAC and merging with smart-lock and building management software startup Latch. Tishman Spyer helped Latch go public, injecting around $450 million into the startup. The real estate firm has also announced a dedicated PropTech VC fund and raised $100 million for the investments. Tishman Speyer would like to use the fund to make its portfolio more efficient, but the primary purpose is to turn a profit.
So, what’s the best move for real estate firms? Build PropTech, buy it, or partner with a startup? The answer isn’t always clear-cut. Whatever real estate firms end up doing, they increasingly need this technology in a rapidly changing industry. They’re all in an arms race over who can provide and utilize the best tech solutions the fastest. Investments in PropTech for large brokerages and firms are also reshaping how these companies hire as they add a slew of new designers, engineers, and data scientists.
The debate over building versus buying PropTech is tricky, and most experts advise against the log slog of building in-house solutions. It’s difficult, expensive, and risky, but it’s not impossible, as firms like NRP Group have shown. Real estate firms will continue to weigh their options carefully because one thing’s for sure: investments in property technology will only continue to multiply.