The Proptech Revolution that Never Happened (But Could)
I formally entered the real estate industry in 2011 at the micro-apartment startup LifeEdited, but evidence of my interest can be seen a couple years earlier when I was featured on the cover of the New York Times’ Real Estate section as part of a story about bachelors taking on unconventional housing situations in the wake of the 2008 mortgage crisis. While the mortgage crisis may have influenced me, that influence wasn’t conscious. I lived in my rundown Brooklyn Heights townhouse because it was funky and interesting, because it was in an awesome location, and — above all — because it was cheap. The low cost allowed me to live the way I wanted and do work I was passionate about, which seemed like an easy exchange for having to work to pay rent, often doing stuff I didn’t care about. In the story, I explained that my previous life in a conventional rental apartment reflected “an idea of how I should be in my early 30s…a mode of living that one is supposed to inhabit.” But living in my dilapidated, cheap townhouse, while occasionally uncomfortable and unglamorous, reflected a “higher premium on living a rich life, rich with experience.”
While aphorisms like “choosing experiences, health, and happiness over stuff” are commonplace today, this was 15 years ago — a time when many still clung to ideas of success inseparable from the acquisition of degrees, jobs, homes, spouses, kids, cars, and lots and lots of stuff. I declared in global media that I was committed to being happy, first and foremost, and that I saw my happiness stemming from living an experience-packed life I loved, not from an obligation-driven existence in a home packed with stuff.
I wasn’t describing a new type of housing. I was describing a new way of living.
My pursuit of happiness found a professional complement at LifeEdited, where we attempted to bring housing to market that correlated with the happiness over stuff philosophy. This meant homes that were smaller and easier to maintain than conventional ones, that were centrally located and near one’s community, and that were affordable.
LifeEdited got a lot of media attention for our minimalist philosophizing and tricked-out prototype homes (including mine), but we never brought to market the awesome, efficient, affordable micro-apartments we promised — the consequence of a Playa-preoccupied CEO and a doggedly change-averse real estate industry.
The LifeEdited team, me included, were more or less techies with little real estate experience. But the real estate market collapse and resulting recession seemed like an ideal time for a nimble team of techies to disrupt how real estate was designed, built, and operated. We quickly learned our tech credentials and founder’s relatively meager tech money (relative to real estate money) were no match for the architectural, regulatory, and financing inertia of the real estate industry.
One of the biggest problems was the bank bailout. Instead of confronting the real estate industry’s failings — using too much debt to build too many poorly designed, built, and planned homes for people with too little money — the bank bailout rewarded them. Wealthy developers and investors scooped up scores of foreclosed homes at deep discounts and put them back on the market as ATM-like rentals. This windfall from a collapse gave little motivation to invest in new asset types like micro-apartments, new construction methods like modular, or new operating models like coliving, even when those things were much better product-market fits for present and future conditions than status quo offerings. Poorly designed, built, and planned real estate was delivering great returns, albeit with gobs of federal support. Why mess with a bad thing?
Proptech’s Rise and Fall
I left LifeEdited in mid-2016 to consult, working mainly with real estate startups and developers with practical plans for bringing their products to market. Among others, my clients included modular construction startups and developers, transforming furniture companies, and corporate innovation arms doing deep dives on the future of housing.
Not long after I started consulting, I attended the first MIPIM PropTech Summit. This was probably the first time I heard the term proptech, which stands for property technology. I was excited. After five years as an under-appreciated, under-funded first mover, the venture-backed cavalry had arrived. The real estate industry seemed poised for a revolution — one that promised an era when real estate was held to the same level of design, manufacturing, and operational sophistication as the tech sector.
For all of my excitement at the summit, with the exception of a handful of coliving, coworking, and modular and prefab startups, few proptech startups were product or property focused, i.e. designing, building, and operating new types of real estate assets for the novel ways people live and for the novel conditions confronting real estate markets. Most proptech startups were building software to improve financing, sales, project management, and operational efficiency for conventional real estate assets with conventional users/tenants. In other words, they were focused on improving real estate processes, not products. The process efficiencies were designed to squeeze as much money out of real estate as possible, often with the homes scooped up during the recession. These efficiencies could be realized without changing how that real estate was designed, planned, built, and used.
[NB: For simplicity’s sake, I’ll refer to the two types of proptech startups as property and software startups instead of product and process startups. I’m also lumping real estate operators with builders in the property category, since the former category usually has to alter properties for their models to work.]
From 2016–2019, proptech funding flowed freely, but again, primarily to software startups. Even in these early days, many property startups like LifeEdited, modular startup Kasita, Acre Homes, and others were failing. I wrote about why this was in Promodo a couple years ago:
While many of the initial real estate product innovation startups tanked, process innovation startups thrived. OpenDoor, Zillow, Zumper, and others brought appropriate levels of process efficiency to the real estate industry, removing many of the arcane, analog ways assets were traditionally transacted. These startups delivered improved returns without costly design, regulatory, or financing changes. As these platforms became more established, real estate product design moved even further away from innovation and towards standardized commodity value. The speed with which these platforms can provide deal flow is why every U.S. city and greenfield lot is being blanketed with single-family housing tracts, five-over-twos, and other as-of-right, asset-grade real estate.
These first failures were followed by many, many more in the coming years: Katerra, Social Construct, Veev, Knotel, Spacious, Ollie, Starcity, Zeus Living, and of course WeWork.
In response to these property startup failures, most VCs turned their attention exclusively to proptech software startups, which promised scalability at the speed of the internet. Property startups, on the other hand, basically didn’t scale financially, since every product delivered required more building materials, fabrication equipment, labor, permits, employees, etc. These expenses prevented any potential for hockey stick growth, so most VCs lost interest in investing in property startups altogether.
Ironically, one of the few exceptions to the above was WeWork. Yes, WeWork’s asset-light approach promised scalability akin to software, but WeWork was definitely a property startup that designed, built out, and operated actual real estate assets. And to its credit, WeWork did build for 21st century lifestyles — ones where the lines between professional and personal lives became blurry (full disclosure: I loved the ill-fated WeLive). Sadly, WeWork did all these things on top of a pile of carelessly-issued venture debt, overstated market demand, and founder malfeasance.
But it wasn’t just product/property startups that failed. In time, many software startups folded or proved underperformers as well. The problem was that software-based process-efficiency gains were being negated by investor demands on returns. The obsession to squeeze every cent from properties left little money on the table for startups whose revenue depended on transaction commissions or savings on small efficiency gains, even when those gains were spread across big projects and portfolios.
There was a later spike in proptech investing in 2020 and 2021, when VCs converted hastily-issued stimulus funds into hastily-made venture investments. Proptech founder David Eisenberg said this to Bisnow about this late-stage proptech investing, “It was a frenzy, you know. You had a zero-interest-rate environment, which was causing people to go further out on the risk curve.” But the dearth of successes from both pre-and-post lockdown investments, coupled with rising interest rates in early 2022 sent proptech investing off a cliff, where it remains today.
Then there were the countless startups focused on optimizing for a moribund asset class, i.e. offices. The lockdown brought into relief what unhappy, unhealthy, unproductive places most offices are, and no one except office landlords wants to go back to them. As if the situation couldn’t get worse, vacancy is bound to increase as AI eviscerates the white collar jobs offices were made for.
Even though they were meant to bring real estate into the 21st century, most proptech startups and their products were built around 20th-century market assumptions: of rigid asset classes, of workers continuing to sacrifice their lives, families, and passions for a paycheck, of stressful, polluting commutes to suburban office parks and downtown office highrises, of unironically wearing keycard lanyards, of lunches at TGI Fridays or Pret a Manger, of access to unlimited debt and natural resources, of stable climates and stationary coastlines.
The constants are changing. Runaway debt and inflation, an ever-increasing cost of living, demographic and geographic shifts, cryto, AI, failing public health, depleted natural resources, and climate change already has — and will continue to — upend how and where humans live. The venture world should have been investing in proptech startups and founders intrepid enough to meet these forces head on. Instead, most proptech investments have gone to startups and founders throwing superficial tech layers on anachronistic real estate supporting anachronistic lifestyles and bygone market conditions.
Why I Care
My interest in proptech startups and investing is borne of frustration trying to raise for a couple property-based startups I developed — ones with world class ideas and talent, ones that meet the market conditions of today and as far into tomorrow as I can see.
I’ve spent the last few years explaining to VCs why things like climate adaptation, market-rate affordability, and supporting human connection and health are important — and potentially lucrative — things to invest in, even when these things may require as many designers and carpenters as coders to carry out. For my efforts, most VCs told me, “this is a great idea, but we’re only investing in software [or web3, AI, etc.].”
Perhaps my pitches and interminable trail of treatises for alternative approaches are futile. Like many, I blame my dad for my failures. A serial tech entrepreneur turned climate tech investor and activist, my dad led me to believe I could positively impact people and the planet through technology, rigorous reasoning, and the courage to say “this can be done better.” If he were still here, I’d probably scold him for making me such a hopeless idealist, then I’d seek his counsel on how realize my ambitions.
If you’re an investor or real estate stakeholder who shares my futile idealism, I’d love to chat. Perhaps, together we can start the real estate revolution that should have started years ago.
