Real-estate venture boom is tested by stock market slide

Real-estate companies collected $12.2 billion in venture funding last year, up 34% from the previous peak in 2019, according to private company data tracker CB Insights.

The number of funds investing in this sector is also increasing. Los Angeles-based Wilshire Lane Capital said Tuesday that it has raised $40 million for its first vehicle, joining an expanding list of real estate-focused venture-capital firms. Backers of the fund include homeowner Morgan Properties, JPMorgan Asset Management and private-equity firm Nile Capital Group.

Venture investors say that in the past real estate was slower to adopt new technologies than other major industries such as finance. It is now creating growth opportunities for property startups – sometimes referred to as proptech companies – which have been accelerated by the Covid-19 pandemic.

Low interest rates and rising stock prices made startup investing more attractive, while homeowners filling malls and office towers are more willing to pay for new technologies like touchless doors, lunch-delivery apps and clean-air filters.

“2021 was a watershed year,” said Wilshire founder Adam Demuyakor.

Now, the recent decline in technology stocks is putting the enterprise’s appetite for real estate to the test.

Share prices of some of the biggest real-estate companies that went public last year, including co-working company WeWork and property brokerage Compass Inc., have fallen significantly. This has made it difficult to justify the high valuations of private companies.

Although money is still flowing, valuations have dropped by more than half in some recent funding rounds, investors say.

Mr. Demuyakor said he is mostly shying away from larger, older companies, where growth in valuations has been strongest, and is instead focusing on new startups. The company’s investments include real estate-fintech companies Asusu and Jetty, and metaverse real-estate firm Everlym.

Real estate companies received little attention from venture investors. That changed in late 2010, when SoftBank Group Corp and other fund managers acquired WeWork, Compass and construction firm Katerra Inc. Started investing billions in companies like

Venture investment in real estate dropped after WeWork’s failed IPO attempt in 2020 and the start of the COVID-19 pandemic, but bounced back in 2021.

Like other industries, real-estate startups have benefited from central banks opening up cash spigots during the pandemic. Alison Cedrish, head of proptech coverage at Barclays, said a surge in blank-check companies targeting real-estate firms bringing in new investors.

Startups are also getting more funding from landlords. Blackstone Inc., Brookfield Asset Management and RXR Realty have emerged as key proponents of the property startup.

“Many of these traditional real estate companies have huge cash balances, and one use is to invest in innovation,” said Merritt Hummer, partner at startup investor Bain Capital Ventures.

Brendan Wallace, co-founder of Fifth Wall Ventures, a real estate-focused venture-capital firm, said that about $3 billion in assets under management comes from real-estate firms. Last week the company said it had raised a new 140 million euros ($159 million) European fund.

Mr Wallace said he expects the boom to continue in part because the sector is new and hasn’t attracted as much money in previous years. “I don’t think you’ve seen the same run-up that you have in other categories of enterprise,” he said.

Other investors say they see parallels in the dot-com bubble. “It feels like that to me,” said Craig Spencer, chief executive officer of real estate company Arden Group, who recently launched a proptech investment venture. “Before that bubble burst, there was an excitement and the spirit of things can only go UP.”

The real estate sector also presents challenges for entrepreneurs and their financial backers. Sectors such as property brokerage and office management have historically had low profit margins, and efforts to long-term leasing space and short-term leasing it may backfire.

Flexible-office operator Nottel went bankrupt last year due to its massive lease obligations; WeWork narrowly escaped the same fate at the end of 2019. WeWork said it has since managed to get more long-term commitments from its customers, thereby reducing the risk.

Former employees said Katara went bankrupt last year after raising nearly $3 billion because it underestimated the complexity of the construction industry. Vendors of software often rely on a few large landlords as customers, who may have little incentive to spend on technology when rents—and profits—are high.

Startup investors say they no longer underwrite capital-intensive real estate companies as if they were agile software firms. The sheer size of the real estate industry is still lucrative, and the growing interest of corporates in making buildings green is creating new opportunities for startups to make money.

“None of the capital has really dried up,” Ms Hummer said. “If anything, it seems that there is as much capital as there was in the market.”

This story has been published without modification to the text from a wire agency feed