Fifth Wall, the proptech VC launched by Brendan Wallace and Brad Greiwe in 2016, has been flooding the internet with headlines over the past few months. Among the stories: investment from Knight Frank, Redevco, Ivanhoé Cambridge and PGIM; and not one, not two, but three blank cheque companies launched, with a $2.2bn (£1.6bn) take-public of smart home technology platform SmartRent just announced through the first of those SPACs.
The firm has come a long way since launching its first pure proptech fund in 2017 – a $212m fund with investment from CBRE, Prologis, Hines, Host Hotels, Lennar, Equity Residential and Macerich. At the time, proptech was just becoming “a thing” in real estate and Wallace and Greiwe were hailed as pioneers and brave for launching a fund that would invest only in this new sector of the industry.
A lot changed over the following years. That first fund had seven limited partners, now Fifth Wall has more than 70 from 15 countries around the world and some $1.7bn of funds under management. The bravery, it seems, has paid off.
“At that time, proptech wasn’t a thing,” says Wallace, reminiscing from his ski house in Park City, Utah – his personal Fifth Wall HQ during the pandemic. “We raised our first fund into an environment of financial investors saying we don’t even understand what real estate technology means.
“I remember at the time saying, if it isn’t today, it certainly will be. That 13% of the US economy, the largest industry, is about to collide with technology and there are literally going to be hundreds of billions of dollars of enterprise value created at this intersection.”
That first fund, says Wallace, had a 100% hit rate, identifying companies such as Open Door – then an $800m company, now a firm valued at $15-20bn – VTS, and home insurance platform Hippo, which in March this year merged with special purpose acquisition company Reinvent Technology partners to go public with a $5bn valuation.
The second fund, which closed in 2019, was more than double in size, raising more than $500m and was the first of Fifth Wall’s growing suite of funds that attracted international investment. British Land and SEGRO invested from the UK, Gecina from France, Merlin from Spain, plus Mitsubishi Estates, Temesek and City Developments from Asia.
Proptech was now definitely a thing and traditional real estate players were starting to realise that they needed a specialist vehicle to help them make the right decisions in investing in this brave new world.
Multi-dimensional collisions
But while Wallace is uber confident in Fifth Wall’s ability to invest well in tech on behalf of real estate – having unparalleled access to the tech opportunities out there and understanding of the unique pain points of the property sector, even he admits that he had not expected the growth of tech in real estate to have exploded across quite so many levels.
“This collision of real estate and technology is a lot more multi-dimensional that we originally thought,” he says. “The original incarnation of Fifth Wall was proptech. We invested in technology for the physical plant of real estate. But now we understand it’s more nuanced than that. There’s this geographic dispersion and there’s these other kinds of orthogonal collisions between e-commerce disruption and retail real estate and technology or sustainability in decarbonisation and technology and real estate. The collision is just a lot bigger than we had thought.”
The outcome of that bigger collision was the launch of more nuanced funds. A climate tech fund, a retail tech fund and a European proptech fund. All three have attracted large investment from traditional real estate firms around the globe.
Canadian investor Ivanhoé Cambridge has ploughed $85m into Fifth Wall, with $25m of that going into the climate fund, while Knight Frank, BNP Paribas Real Estate and PGIM and Redevco have all invested in the firm’s European proptech fund. All investing to ensure they remain close to the very best tech that could transform their businesses. Both funds are yet to close but are expected to raise around $200m and €100m (£87m) respectively.
Culpability and opportunity
Wallace is clearly most passionate about Fifth Wall’s climate tech fund and the role that real estate has and needs to play in investing in the smart technologies that should be able to make a real difference to the global climate challenge.
“As big as the real estate industry is in the economy, it is even bigger when it comes to climate change. And that is troublesome,” he says. “There’s culpability in the climate crisis, but there’s also opportunity.”
He adds: “The real estate industry is definitionally going to become the single largest consumer of climate mitigation technologies. The most sure-fire conclusion anyone can draw about climate tech is that the real estate industry has to be its biggest customer.”
But consumption should not just be about deploying green technologies, says Wallace. He wants to see real estate investing in research and development. Something it has been woefully poor at.
“We looked back over the past 10 years and saw that the real estate industry in the United States, over the last decade, in aggregate, has invested $94m into the R&D to mitigate its climate impact. That is a shockingly low number,” says Wallace. “It is almost nothing and rounds down to zero when you consider the magnitude of the real estate industry’s contribution to the problem.”
Wallace doesn’t believe real estate can individually solve the problem. He says too many real estate businesses are investing in deploying technologies rather than helping deliver new technologies and that individual investment in new technologies will not amount to enough capital, and, of course, that real estate companies won’t do it well.
It is no longer sufficient to buy other people’s technology. You have to be a positive, proactive actor and contributor in the crisis. I think that is incumbent on every industry, but especially on real estate
What they need, he says, is a collective. A Fifth Wall climate tech fund. The fund will have to work hard, however, and it will need a lot of investment if Wallace wants to achieve his ambition of shifting the dial. And he knows it.
“From where we are today, in terms of the best climate mitigation technologies available to the real estate industry, to where we need to get to is literally hundreds of billions of dollars of R&D spend,” he says. “And if the real estate industry is not contributing to that, I think they should start asking themselves some hard questions. It is no longer sufficient to buy other people’s technology. You have to be a positive, proactive actor and contributor in the crisis. I think that is incumbent on every industry, but especially on real estate.”
For Wallace, neither cashflow, NAV nor even proptech are going to be the most important elements of the real estate sector in five years’ time: decarbonisation will be.
Real estate’s enforced transformation
The business of real estate has gone from being a builder and operator of buildings and a collector of rents, to being data businesses. The next stage of its transformation will see it become a sustainability business. And that transformation, says Wallace, will not be elective. Regulation will force it; the capital markets will demand it; and consumers will accept nothing less than carbon neutrality.
Self-confessed optimist Wallace is hopeful, however. He believes the industry can and will rise to the challenge.
“I think the most visible and important people in the real estate industry are going to be those that embrace this imperative to decarbonise the whole industry,” he says. “The CEOs of real estate companies that embrace this now could become the Elon Musk equivalent for the industry.”
He adds: “I think the real estate owners who shirk that responsibility and say: ‘no, we’re real estate owners. We are in the business of building buildings. We’re not doing technology. We’re not doing environmental investment. We don’t need to worry about the social downstream implications of our assets’, they are on the wrong side of history. And history will be unforgiving to them.”
The CEOs of real estate companies that embrace this now could become the Elon Musk equivalent for the industry
Tech, sustainability and social impact have never been more talked about in real estate than it is today. Hundreds of billions of dollars are being raised to invest in real estate tech as a solution. The SPAC frenzy that began in 2020, albeit now slowing, has seen mountains of cash raised. Some $745m of it through three Fifth Wall SPACs, one of which has made its first investment, merging with smart home technology platform SmartRent in a $2.2bn take public.
“My view is that this secular collision between real estate and technology is one of the most profound things happening in the economy,” says Wallace. “Hundreds of billions, perhaps even trillions of enterprise value are going to be created at this intersection and what’s incumbent on us to do is expand our network to capture the various features and contours of this collision.”
Wallace says he wants Fifth Wall to be a harbinger of change in the real estate world, shepherding a new mindset around what the real estate industry is and what it means.
“The earth is shifting under the real estate industry’s feet and the future is one of much greater responsibility,” he says. “It’s a technological future. It’s a sustainable future. And I think of Fifth Wall as being an instrument of that change.”
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