The Coming Boom in Proptech Adoption

As an investor in multifamily real estate and COO of Circa , a proptech startup, I’ve seen the challenges of tech adoption from both sides. And I understand the resistance to change.

For years, apartments generated high and stable free cash flow and enjoyed unlimited access to cheap capital.

Why take the risk of innovating when the status quo is working great?

The answer is clear. Most haven’t.

Look to rent payment methods as one example of how little the apartment rental business has evolved. As recently as 2016, a paper by the Boston Federal Reserve Bank reported that “Most households still pay rent via paper methods, including cash (22 percent), money order (16 percent), and checks (42 percent).”

While online payment has grown since then, you might be shocked by how many residents still pay their largest monthly expense with a paper check. Of course, this check also needs to be collected, processed, and manually entered into an accounting system (which might be paper-based!).

Rent payment is only one example, but it’s emblematic of an industry that hasn’t had to change much. As cash flow margins expanded, you could almost hear the collective response, “If it ain’t broke, don’t fix it.”

However, in 2023, the operating environment is becoming much tougher. There’s a distinct chill in the air. Expect some serious separation between winners and losers. Not everybody will get a medal for showing up.

In many markets and segments, income growth (revenue) is increasingly constrained by affordability, rent control measures, and eviction policies. Renter cost burdens have reached record levels. More than half of America’s 45 million renters are paying more than 50% of their income on rent, leaving little room for price increases.

At the high end of the market, renters have more leverage than ever before. Attractive amenities and customer experience have become a focus for many operators eager to attract the highest quality renters.

In this market, raising rents in line with inflation is increasingly difficult.

Operating expenses face unrelenting and well-documented cost pressures from labor, insurance, and taxes. According to the National Apartment Association’s 2021 survey, these three line items can be up to 2/3rds of an apartment’s total operating costs.

Delinquency, turnover, and evictions cost more than ever and can cost properties multiples of a month’s rent per unit.

On the financing line, there’s a double whammy of higher interest rates and lower leverage available for debt financing.

The implications are clear. For many apartment operators, NOI will remain under significant pressure. And, more of that NOI will be required for debt service with less available for equity investors.

With a limited ability to raise rent (and potential restrictions on fees), differentiated performance will come from improving operating efficiency. Simply working harder using existing systems and processes will not be enough.

Over the next 12-24 months, tech adoption will increasingly become table stakes for those who want to survive. I expect more managers to embrace innovative proptech solutions, not out of choice but out of necessity.

At Circa, we’ve seen a growing desire to test new approaches to old business practices. Our solution improves operating efficiency and on-time payment by applying tech to the rent collection process.

Other innovative companies address other challenges through virtual leasing, resident communication, security deposit replacement, and lease payment guarantee products.

Ample VC funding to the proptech space has spawned loads of products and services that reduce operating costs, optimize cash flow, and reduce risk. According to CRETI, in the three years ending in 2022, the VC industry invested nearly $80B in proptech globally. Regardless of one’s view on valuation, that’s a lot of money and talent focused on solving big problems.

Unsurprisingly, many players have attacked this market; real estate is a massive market and has long been ready for innovation. But without a catalyst, adoption has disappointed. Most solutions were seen as nice-to-haves or potential distractions.

With profitability under pressure, I expect a more enthusiastic embrace of proptech providers and their compelling ROI offerings.

To deepen my connections in this ecosystem, I will attend the Blueprint event September 11-13 in Las Vegas with Circa's CEO and CRO. This marquee event attracts more than 750 startups and investment firms looking to shape the future of real estate.

What could derail this transformation?

A recent LinkedIn post by Remen Okoruwa , CEO of Propify, highlights some challenges that have hindered proptech adoption, including Lack of Appetite for Tech, Property Manager / Owner Disconnect, Challenging Sales Process, and Pay to Play. Remen nails it. At Circa, we regularly face all of these headwinds.

I'll also add limited property manager bandwidth to the list.

The property manager is critical to evaluating and successfully implementing new solutions, yet they're often overwhelmed with other time-sensitive tasks. Still, they're constantly bombarded by proptech sales teams competing for their limited attention.

For this reason, I expect significant consolidation in the proptech world to ease the education process and purchasing decisions. It makes a lot of sense. Lower valuations and less available venture funding should also help incentivize more aggressive partnerships and broader consolidation.

Stay tuned. It’s an exciting time for the proptech industry and for those operators who choose to leverage technology to build their competitive advantage in a challenging market.