The Coming PropTech M&A Tsunami

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As the second half of the year approaches, a race is taking place behind closed doors at the commercial real estate companies. The winners of this race will shape the future of real estate.

Our industry is going through a radical transformation. Real estate has long been able to rest on its laurels by remaining faithful to traditional modes of operation. But as we emerge from the pandemic, things have changed. Simply acquiring and providing space to tenants is no longer enough, we need to ensure the space is sustainable, healthy, engaging and inviting. To do this, we need to leverage data to make better decisions about which properties to invest in, rent out or sell – essentially the best way to use portfolios.

This is PropTech’s time to shine. As a result, almost every business is adopting a solution that monitors indoor air quality. Many employers are rolling out office booking apps to help employees navigate hybrid working. Businesses are under additional pressure to maximize the ROI of physical space by enticing employees and customers to come into the office. And investors are looking for innovative ways to leverage real estate portfolios to minimize risk as traditional markets face uncertainty.

In 2021, we’ve seen several high-profile PropTech companies go public, including smart lock startup Latch and building technology provider Procore. Venture capital funding has also accelerated, with $4 billion in funding in the first quarter of 2022 alone. Smart glass maker View has gone public through a special purpose acquisition company (SPAC) of $1.6 billion. The number of real estate startups has grown 300% over the past decade, from just 2,000 to nearly 8,000 today.

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Currently, the recent tech sell-off in the stock market is trickling down to venture capital, with startup valuations reduced and investors becoming more cautious. Reports predict that venture capital funding is set to slow sharply and IPOs could dry up altogether. Now, many of these startups are gearing up for acquisition as venture capital funding slows, and fortunately for them, many traditional real estate players, especially innovative players with healthy cash balances, are looking to make investments and strategic acquisitions.

Major consolidation deals are already underway, including JLL’s $300 million acquisition of Building Engines, VTS’ $200 million acquisition of office tenant experience platform Lane Technologies, Fortive’s acquisition of facilities maintenance SaaS company ServiceChannel for $1.2 billion and the merger of two from private equity firm Thomas Bravo. investments in integrated workplace management systems (IWMS), iOFFICE and SpaceIQ.

Consolidation will accelerate as customers seek complete solutions, many early-stage companies offer features or products that need to be bundled into a larger platform. It’s also increasingly difficult and expensive for start-ups to reach and sell to larger customers. As venture capital funding dries up, startups will increasingly look to sell to strategic partners who can help them accelerate their product roadmap and effectively scale their go-to-market engine. Consolidation will happen in CRE as it has happened in all other verticals where the initial burst of innovation is followed by multiple waves of acquisitions as industries mature.

Over the next five years, we’re likely to see the M&A race focus on three specific areas of real estate: smart buildings, smart workplaces, and data-driven investing.

Real estate companies should expect to see a slew of mandates around reducing emissions and the carbon footprint of buildings. Consumer and employee demand for companies to accelerate their sustainability efforts will also fuel the adoption of technologies focused on solving this problem. This will lead to smarter buildings that can optimize energy consumption and automate equipment maintenance requests to maximize efficiency.

Now that hybrid work is standard, companies should also equip offices for seamless access and digital collaboration between onsite and remote employees. The office is evolving from a place where individual work is done to a place where collaboration and networking happen, and where employees come together to be energized and inspired. This is driving even greater demand for smart building technologies, which provide companies with insight into space usage patterns so they can design offices to meet the changing needs of their workforce.

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Beyond the innovation of actual physical spaces, commercial real estate investment is an area ripe for technological transformation. Investors are always striving to maximize return on investment, and increasingly, real estate investors are using data to inform decision-making. For example, in the past, in-person appraisers had to visit commercial properties to determine their value before an investor purchased. Today, investors can access vast repositories of data on various assets to quickly determine which ones are worth an in-person visit.

Despite the recent tech downturn, it’s an exciting time to be in PropTech. Today’s founders still have plenty of room to innovate and create breakthrough technologies that could revolutionize the use of space. As mergers and acquisitions heat up, it’s time for PropTech companies to consider a few things. Are you a consolidator or consolidator? Is the fastest path to achieving your vision alone or with a strategic partner? Forward-looking companies are all involved in digitizing the property lifecycle, from building to buying, selling and renting, all the way to the tenant experience. Getting these companies adopted will take a massive effort, the kind that will likely be led by a few powerful tech companies, not hundreds of startups. It all boils down to a race for consolidation where the winners will be rewarded with massive growth and the losers will fade into obscurity.


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