It’s no secret that startups are risky business, but the real estate industry has a tradition of holding the door open for new tech. Expert Georg Chmiel weighs in on how this means big opportunities for burgeoning companies looking to make an impact.
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If you are a broker, agent or supplier to the real estate industry, this article will attempt to answer two critical questions that directly affect you.
First, Why are there so many software and technology companies seeking to work with agents? Corollaries to this question are others such as, Why are Keller Williams and Compass staking their futures on technology?
The second question we will seek to answer here is this: Why is real estate the ideal sector to launch a technology business? Isn’t it already overflowing with such companies?
Show me the money
The first and primary explanation for the seeming abundance of real estate technology companies (called “proptechs”) is that property is the world’s largest economic sector. Proptechs have chosen the real estate sector because that’s where the money is. The sums are enormous.
U.S. homes were worth $36.2 trillion in January 2021 and gained about $2.5 trillion in value during the prior year. A trillion here, a trillion there, and before you know it, you’re talking about real money.
Now, let’s put aside residential real estate’s total value for a moment. Instead, let’s look at transaction volume. Some 5.64 million existing homes sold last year. That is more than in any other year since 2006. It is also a lot more than anyone had expected going into the year.
You can multiply the number of home sales by the average home price of $383,000 to get a rough estimate of the value of all homes sold in 2020. It works out to approximately $2.2 trillion.
Every agent knows that, where there is a transaction, there is a potential commission. Using the above numbers and a conservative estimated commission rate of 3 percent, we can guess that agents took home at least $66 billion in commissions last year. So, American homes are worth $36.2 trillion and agent commissions probably reached $66 billion last year.
With these two pieces of data, we already see why the real estate sector looks like a rich opportunity to many technology startups. That also explains why companies like Zillow or realtor.com are worth billions of dollars. Together, the two companies earn $507 million per quarter in fees paid by real estate agents. That kind of revenue translates into a pretty significant valuation.
Ripe for disruption
Now that we know why there are so many technology companies in the real estate industry, let’s focus on the second question. I believe that anyone launching a tech startup today should focus on real estate rather than any other economic sector, but why? If you were a would-be company founder, you might worry that Zillow, Matterport and the other existing, successful proptech companies represent an insurmountable obstacle to your new business.
In reality, the opposite is true. The real estate industry is both fragmented and ripe for innovation. How can this be? Well, for one thing, the market is so large and geographically diverse that it is very difficult for any single company to dominate. Virtual and 3D tours are a good example.
At least a dozen companies offer these services. Matterport may be the best-funded, but it is a long way from running the table. Instead of one dominant company, you find a profusion of different brands and offerings that serve different market segments or parts of the country.
Another reason there is still so much opportunity for new proptech companies is that much of the real estate industry has been in no hurry to innovate. Good real estate agents, for example, are still making decent money with the most basic of tools, perhaps just a mobile phone and an Instagram account.
A third reason there is still so much opportunity for new proptechs is that during the past two decades of disruption, real estate was well down on the list of target industries. Tech startups targeted industries where margins were larger, even if the market size was not as great. Real estate largely passed under the radar, but this state of affairs will not last forever.
Believe it or not, there are fewer than 1,000 proptech companies in the entire country, according to the PropTech Global Trends Barometer. This relatively small number leaves the field wide open for innovators. The real estate industry is ready for change. Why shouldn’t you be the one to bring it?
How to decide where to focus
Because real estate is multifaceted and immense, there is a surplus of opportunity for the clever entrepreneur. To help you decide where to focus your attention, it can help to divide the world of proptech into these four conceptual categories:
- Investing: enabling investors to evaluate opportunities more effectively
- Building: facilitating construction management
- Managing: tools for real estate agents, buyers and renters, or property managers
- Living: facility management or home IoT solutions such as security or energy management
Yes, there are some excellent proptech businesses already operating in each of these categories, but much territory remains open for you to claim a stake. In fact, real estate search, just one subsegment of the “Managing” category mentioned above, accounts for 56 percent of all global proptech investment since 2000. That means property listings portals and similar businesses are soaking up almost all the money.
With so much attention focused on a single sub-sector of proptech, there is a tremendous need for investment and innovation across nearly every other area. Choose where to focus based on your capabilities, technology and knowledge. And remember, if you succeed in the U.S., the opportunity to later expand internationally is massive.
The U.S. accounts for only about one-quarter of worldwide real estate asset value. If you eventually expand overseas, your international business could grow to three times the size of your American operation. The opportunities in proptech are practically endless. I encourage you to pursue them.
Georg Chmiel is chairman of Juwai IQI.