Lessons In Working With Institutional Real Estate Firms

Eight hard-won lessons from a decade working with 110+ of the largest global real estate owners and operators

Today’s Thesis Driven is a guest letter by Brendan Wallace, CEO and Chief Investment Officer at Fifth Wall, a venture firm with $3 billion under management backed by a global mix of 110+ strategic limited partners from 20+ countries, including BNP Paribas Real Estate, British Land, CBRE, Cushman & Wakefield, Hilton, Hines, Host Hotels and Resorts, Kimco Realty Corporation, Lennar, Marriott International, MetLife Investment Management, MGM Resorts, Related Companies, Starwood Capital, Toll Brothers, and others.

Real estate and technology did not make fast friends. While seemingly every other industry embraced the rise of the personal computer, Internet, and mobile—creating massive amounts of value in sectors like e-commerce, fintech, and information technology—real estate, for the most part, stood on the sidelines. Other than property management systems—which had been in use since the 1990s—real estate had little incentive to adopt technology: Times were good! Space was being leased! Why rock the boat? Someone in our office has a Facebook account, we’ve already got a tech person! 

This attitude caused the real estate industry to sleep through most of the Internet and mobile revolutions of the early 2000s. In a way, real estate has never been comfortable with technology or innovation. Real estate’s business model since the beginning of time was assembling a collection of assets in the best “location, location, location” possible across a cut-and-dry collection of office, retail, industrial, hotels, and apartment properties. Such was the conventional way, no technology required—beyond a little Excel.

But in the mid-2010s, times changed: real estate CEOs went from managing a portfolio of assets to building platforms. REIT investors were underperforming, generalist investors were taking an increased interest in real estate, and technology began disrupting the way business was done in the real estate industry, giving way to real estate owners in non-traditional sectors (data centers, healthcare, cold storage and logistics, and single-family rentals) becoming market leaders. Generalist investors didn’t care if you had the best buildings and highest rent on Park Avenue, they wanted to know your plans for future growth. They were buying into companies, not buildings. So investors expected them to act accordingly.

Since 2016—right about when the real estate industry was waking up to technology—I’ve made my living in venture capital at a real estate technology firm I founded called Fifth Wall. I like to think I’m not your stereotypical shoot-from-the-hip venture capitalist (don’t we all). But I think I might be able to back that up: we’re unique because our model centers around partnering with the world’s largest owners and operators of real estate across every asset class. This is our network of 110+ strategic LPs across 20 countries, and we have a Partner Coverage team internally whose sole focus is listening to their problems (no one knows their problems better than the real estate industry) and identifying places where technology might help (they’re less good at this part on their own).

As you can imagine, we’ve learned quite a few lessons—some more hard-won than others—working with these institutional owners of real estate. We like to think of ourselves as diplomats between our often old-school strategic partners and our often new-school real estate technology portfolio companies. We do our best to bridge the two-generation gap that often exists between these two spheres. 

In today’s letter, I’ve packaged up the top 8 lessons we’ve learned working with institutional real estate firms on adopting technology. These will be helpful to anyone working with institutional real estate firms: proptech founders, real estate corporates, investors, integrations teams, startup employees, aspiring entrepreneurs, and more.

ONE: “Proptech” might not be the best term for real estate technology

This may be controversial coming from one of the bigger fish in “proptech,” but I don’t think it’s the best term for real estate technology. It’s both too inclusive and too exclusive, which is ultimately misrepresentative of the businesses we want to partner with and invest in. Let me walk through why: 

“Proptech” is too inclusive because there are businesses within “proptech” that are innovating in real estate, but are not really venture-backable companies. These are typically businesses trying to create a new form of real estate. They may be differentiated, creative ideas, but they can’t scale quickly and efficiently—for instance, this is that new paddle club or that concept for rooftop dog parks. These may be innovative and they may even use technology (an app for booking court space!), but they won’t become large businesses quickly and aren’t right for venture capital firms or our network of partners. (That’s not to say they wouldn’t eventually, though—many businesses like this can scale over decades.)

At the same time, “proptech” is too exclusive because there are lots of interesting software and tech platforms that touch real estate, but aren’t involved in the brick-and-mortar of real estate. These are platforms that rarely get used in a traditional real estate organization, but maybe get used by their counterparties or their tenants. Our portfolio company Bilt Rewards, which offers a credit card that lets renters earn points by paying rent, is a good example: most people look at that and just think “fintech.” But it’s also proptech—it’s real estate payments!

In addition, plenty of traditional real estate organizations use technology that is not tailor-made for them. Real estate organizations are real estate organizations, but they’re also businesses, just like every other business. They have accounts payable, they have HR, they use CRMs, they use cloud storage, they need cyber security, and on and on. This is to say that “technology for real estate” is always interesting to us, but “technology that’s changing how business is done” is also interesting!

Many within the venture ecosystem hold this narrow view. And sometimes our own LPs hold this view as well. And ultimately it tends to limit the amount of value we can add to our partners as we ideate with them. Technology has the potential to improve nearly any business process, not just a “real estate” process. We often encourage our LPs to broaden their aperture when they consider how and where Fifth Wall can be helpful.

TWO: Every real estate org is on a different part of the tech adoption curve

Broadly speaking, I like to say that real estate is still early innings on the tech adoption curve. But if I wanted to get more granular, I’d call myself out for making a broad miscategorization, because the reality isn’t that black and white. In working with our strategic partners, we’ve learned that everyone is at a different point along the curve, and some aspects of an organization can be farther along than others.

There are certain players in real estate that have innovated and adopted best-in-class technologies. Think Lineage. They have a large and impressive data science team that has helped incubate entirely new technology for the cold storage space: computer vision for scanning pallets and automated energy management in a cold warehouse.

What this means, frankly, is that some organizations don’t need our help in recommending the best solution for their problems. Sometimes they can build it themselves, or they already know what they need. But these organizations still appreciate our distribution, helping them see all of the tech that’s available out there, and our capital markets and financial expertise.

For those working with institutional real estate firms, you need to understand your partners and where each of them are on the road to digital transformation. Even within the same asset class, everyone has different capabilities and goals. Taking time to understand each individual organization is key.

THREE: Tech bloat is real, and organizations need help focusing

Tech bloat and platform fatigue are very real problems for real estate firms. As I talked about earlier, the modern real estate company is expected to have an answer to each and every tech trend, no matter how long-lasting or legitimate it is: crypto, blockchain, metaverse, climate, artificial intelligence—and is generative AI the same thing or different? The list goes on, and it’s easy for our partners to roll their eyes at yet another tech trend. As our partners have added new tech platforms and point solutions, there is increased sensitivity to issues around change management and tech stack bloat. No matter how amazing your product is, no property manager (or resident, for that matter) wants to use “an amazing suite of offerings across 9 different apps!” and none of the employees who work at one of our strategic LPs wants to keep track of 11 different tools. There are just too many to keep track of. 

Oftentimes I’ve found our third-party perspective is beneficial to help our partners separate the wheat from the chaff and focus on solving problems with tech solutions that are actually going to support the bottom line. When working with our partners, we try to help them take a step back to take a more holistic view of the tech stack and help think through prioritization and rationalization, think through buy/build/partner decisions, and help shape strategic direction and/or product development pipeline with startups.

FOUR: Innovation is not real estate’s core business, but they do care about technology

Real estate does not historically invest in R&D, and for many reasons I’ve already touched on, real estate is not the fastest industry in adopting technology. Real estate moves even slower than you might think, because the way end user interact with assets evolves slowly, with very few major deviations. Suffice to say “innovation” and “disruption” are not at the core of owner and operators businesses. On a purely organizational level, many firms do not have robust real estate innovation teams (oftentimes it’s a single person) or they might not have a team at all. This lack of focus on innovation slows down technology adoption within real estate companies and requires a lot of patience. 

When we structure partnerships, we try to get as many business units aware and engaged as possible. We’ve found that having a few principal contacts within organizations helps facilitate firmwide interaction, so we can foster an active, two-way dialogue between us and our LPs. Our best partners are constantly asking questions and sharing their pain points with us, so we can better understand how technology can positively impact their bottom line.

However, real estate firms are worried about growth and positioning themselves for the future. They know technology is key, and they know they can’t ignore it. Gone are the days of the best real estate companies being merely a portfolio of assets with the best location, location, location. The modern real estate company is now an operating company. As Fifth Wall’s Co-President and Head of Global Partner Coverage Jeremy Fox notes, this shift happened in the mid-2010s because of underperforming REITs, generalist investors’ interest in real estate, and technology’s increased presence in real estate operations. 

Since starting Fifth Wall in 2016, I’ve witnessed real estate go from being on the defensive to the offensive with technology. It’s great to see this shift towards enthusiasm, and we try to harness that energy to generally create a culture of risk-taking within real estate firms (which is far from their default mode).

FIVE: Real estate’s tech focus can change quickly

However, when creating a culture of risk-taking and techno-enthusiasm within our partner organizations, I’ve noticed their focus can change quickly, because “trends” change quickly, and their investors and boards expect them to have an answer to everything: “What’s your metaverse plan? What about climate? Blockchain? AI?” (Two of these, I’d venture to say, are not like the others.) A few years ago, we heard time and time again from our network that they needed to have a plan for climate. We did not set out to start a climate fund, our first funds were in (mostly) software for the real estate industry, but in our conversations with our LPs we kept hearing about climate time and time again. They wanted our help understanding and navigating this trend, not out of altruism, but out of necessity. As a result, we raised our inaugural $500 million Climate Fund in 2022, and we’ve since closed an additional $340 million into our climate strategy.

Fast-forward to today and real estate’s focus on climate and sustainability from just a few years ago is now coupled with the potential of artificial intelligence. I’ve spoken to more boards in the past year than in any previous year since founding Fifth Wall, because the industry is so abuzz (and confused) about what to do with AI and how AI solutions can improve their businesses. We have done 20+ executive/board presentations in the last couple of months, and we’ve seen that everyone is trying to figure out how AI impacts net operating income (it’s not always clear). In addition, there are so many pilots and potential use cases that ill-disciplined firms are suffering from pilot fatigue.

I was not, on the other hand, jumping on airplanes to meet with our partners about buying real estate in the metaverse. As I hinted at earlier, some trends from real estate’s “hype train” are legitimate, and some are just the flavor of the week (and the cause of tech fatigue). I’ve learned our third-party perspective can be helpful in keeping firms focused on what trends are actually important, and there’s an important lesson here that the industry follows Amara's Law: underestimating technology’s impact in the long-term, and overestimating it in the short term.

SIX: Real estate is an idiosyncratic industry, which hinders technology adoption

Real estate, the largest industry in any developed economy, is not without its quirks. It’s a fragmented industry where even the largest players lack the type of scale and market share seen in other industries. Even the largest owners of hotels (to pick a random asset class) control but a fraction of the overall supply.

Because of this dynamic, in many asset classes, it’s harder to drive tech adoption at scale – the largest players don’t have giant market share and there is usually a long-tail of smaller players and mom & pops. Especially in the early days of real estate technology, firms had an old-school mindset about technology as a competitive advantage that they should stay quiet about and keep close to their chests. But this way of thinking hinders the growth of proptech startups, because if they are acquired by a company, they are limiting their potential, especially in an industry as fragmented as real estate. This is one of the reasons we developed our “consortium” model of venture capital, where we pool together more money than any single real estate owner can put forward and invest that capital into proptech solutions with real-world application.

We’ve learned that our consortium-based approach, gathering the industry’s resources into a single fund, helps to have the industry dictate what the tech solution should look like, helps to ensure commercial success, de-risks adoption, and drives better deals (and thus ROI) via group buying power. Of course, this is just our approach at Fifth Wall, and I’m not here to sell you anything. But this model was born out of an important truth that because the industry is fragmented, our network is more influential than any one real estate firm can be, so we try to foster open-mindedness and collaboration about technology instead of the old-school philosophy of technology as a competitive advantage that one should keep close to its chest.

SEVEN: There’s not a lot of overlap between venture capital, real estate, and technology. Be the liaison.

Members of real estate innovation teams for large players either come from real estate or technology, and their current role is often the first time formally working in a combined capacity between the two. 

In my own observation, there’s even less overlap between real estate and venture capital. Back around 2014, I had just sold a data and analytics startup I founded while getting my MBA, and I was figuring out what to do next. One of the things I was doing was interviewing at venture capital firms. I had no prior experience with venture capital, but I did know real estate: I grew up in a real estate family with a father who could tell you the history of just about any building in New York City. My first jobs were in real estate capital markets. But as I was interviewing at these venture capital firms, I noticed a total lack of familiarity with the real estate industry. People I met were surprised to learn that the real estate industry was, in fact, one of the largest industries in the United States at 13.5% of U.S. GDP (this is true in really any developed economy). This unfamiliarity works both ways: real estate professionals do not tend to have a lot of venture capital experience.

Because of this gap, I’ve found that we can drive real change by acting as a liaison between our strategic network of real estate partners and the technology ecosystem of startups in which we invest. This lesson is true for anyone working with the real estate industry and proptech startups: these disparate places can often speak different languages and have generational gaps. It’s important to understand your audience, depending on who you’re speaking with, and it’s even more valuable to know how to translate between any external industry–be it venture capital, proptech, or some other third thing–and the real estate industry.

EIGHT: “Not sexy” is often the sexiest when it comes to technology

Real estate players want simple solutions to key pain points. That just about sums it up. On a recent advisory call with a large real estate technology player, they told us, “We love the meat and potatoes stuff.” They want capex budgeting, general ledger, ERP…really sticky solutions that solve the meatiest problems. They have not made their money on flashy solutions, but on core solutions that solve fundamental problems. In the same vein, we’ve found that there’s only a little opportunity in trying to “disrupt” or replace status quo systems (Yardi et. all), and it’s impractical to think you’re going to rip and replace their existing PMS. (This is an important lesson for proptech founders who try to enter the industry without any real estate experience. Unlike other industries, there’s really no getting around these incumbents.)

Put differently, the bottom line is king–even more so today than in 2021. Real estate owners want to adopt technology that will bring them ROI in 6 months or less, but a lot of proptech solutions are not built with this end-user in mind. Real estate firms want to be communicated to in terms of ROI and NOI margin improvement—that resonates.

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As I said earlier, I liken our role at Fifth Wall as diplomats between the startups we invest in and our network of 110+ strategic LPs. Whether you are working with institutional real estate companies with regards to technology or for another reason, I hope these lessons into how we at Fifth Wall have effectively partnered with the industry are insightful and applicable to you in some way, shape, or form—whether you’re a proptech founder, a startup employee, or an institutional investor. If you remember one thing, remember this: the best partners speak the language of the real estate industry and are obsessed with forming high-trust, bidirectional relationships that aren’t afraid to bridge the gap between different cultures, industries, and generations. Roll up your sleeves.

—Brendan Wallace