How Big is PropTech?

I get asked fairly often how I define PropTech and I’ll admit it’s a fair question. 

People seem to have meaningfully different explanations and definitions, so I thought I would offer mine. 

Let’s start by bifurcating the market:

The first step for me is separating commercial from residential. I do this because the end-user of any software (or hardware) is very different for each category. Your average home buyer or realtor is a MUCH different consumer of technology than a commercial real estate executive, broker, leasing agent, manager, etc. They have different budgets, buying timelines, approval processes, etc. 

So I think of the residential real estate tech market as following a B2C trajectory and the CRE market is more B2B (more on that in a moment).

I also break out the CRE market by property type:

I do this because, well, everyone else does this. 

Since CRE is one of the oldest and most “nichified” businesses in the world, there aren’t many people who are experts in multiple property types. Most developers, leasing teams, brokers, asset managers, and support staff are only able to transact on one type of property. 

Actually, most are forced to focus on a single city. I’ll meet the best industrial broker in Chicago and the best retail developer in Phoenix and the best apartment manager in Baltimore, etc. That’s how people succeed in CRE. They specialize in a property type and generally in a city/region. None of those three people will be able to articulate any of the nuances of the jobs of the other two. 

**The exception may be the finance pros. The equity and debt execs are usually adept at underwriting multiple property types but now most of the finance teams have niches and geographic focuses.**

 So, if you break out the broader RE market, it looks like this:

And one nuance before we move on to market-sizing, CRE isn’t exactly B2B. Not usually.

 It’s actually B2B2C. (For anyone unfamiliar with VC acronyms, B2B is “Business to Business,” tech you sell to a business. B2C is “Business to Consumer,” tech you sell to consumers.)

B2B2C just means you have to sell to the landlord (a business) before she gives you access to her tenant (a consumer). Even if your technology is eventually used by the tenant, you still need to get the landlord to buy off on including your offering with whatever she allows the tenant to do in her apartment/office/retail center/etc. 

That’s important here because few teams are well equipped to sell into (and optimize user experience for) both markets. 

On to market size . . .

HousingWire estimates that the U.S. housing market had a total value of $33.3 Trillion in 2018. 

For those of you new to PropTech, that’s “Trillion.” With a “T.”

Using NAREIT’s numbers for the commercial guys:

That’s about $15 Trillion without reliable numbers on the education and land markets. (If you have those numbers, shoot them my way and I’ll update this.)

And those numbers ignore all of the adjacent markets to “pure” real estate. 

Think about this —

If buildings consume 60% of the world’s energy and 40% of the world’s water, how do you have an energy or water strategy without including PropTech?

How do you have a smart city strategy without smart buildings?

Isn’t agriculture and forestry just “horizontal” real estate with all the same title and easement and security and water issues of traditional real estate?

Isn’t a big infrastructure project just a big construction project? How to you build a massive road, bridge, tunnel, etc without construction technology?

How do you have a logistics strategy without including retail locations and warehouses?

Oh, you are going to build VTOL taxis? Cool. Where are you going to park them? Where are you building those helipads? Probably on a building, right? I’m betting the owner of that building (and their attorney) is going to have a few questions about that. Yep, mobility and transportation goes through PropTech.

Getting the picture?

PropTech either directly or indirectly, touches a MASSIVE portion of the economy. 

If the owner of a property has to allow you to use it, your tech goes through PropTech.

Those markets add another $7T to the market size. For a total market size of $22.2T.

The overall math looks like this: If you add the CRE market to the residential market and then add these adjacent markets, you get a total market value of roughly $55.5T. 

And that’s just the U.S. market. We haven’t even contemplated the global markets. 

Savills estimated a global real estate market value of $281 Trillion.

The punchline is that, in the U.S. alone, PropTech markets are somewhere between 2x and 3x the U.S. annual GDP. 

Now, I hope it goes without saying that there is some nuance here. 

There is a material difference between the total addressable market for real estate and the addressable market for any given startup. You may start with tenant experience in office properties and then work your way into apartments. You may start with heat-mapping in office lobbies and then evolve into shopper tracking in retail. And on and on. Addressable markets are nuanced and evolving. 

And these numbers are probably off. 

But I’m not really looking for precision. 

If U.S. housing is only $25 Trillion, is it a small market? Not worth our time?

These numbers are just to illustrate that amount of opportunity here with orders of magnitude. 

The thrust is that property is one of the largest (and very well might be THE largest) market on the planet.

So, regardless of what the exact market numbers are, these industries are some of the largest on the planet. 

And the reason I harp on this is because of a common narrative I continue to hear on Sand Hill Rd and in conversations with traditional VC firms.

It goes something like, “we like Proptech, we just aren’t sure it’s worth a full-time person.” Or they end up throwing some junior principal at PropTech and she ends up running into this bewildering buzzsaw of an industry that is almost too large to comprehend and certainly too insular to be deeply penetrated with a VC business card. 

It doesn’t work that way. 

It’s too big and these people are too busy making money in this historic economic boom to pay attention to your VC firm they have never heard of. 

That’s actually the bigger point here.

Anyone can Google the numbers above and figure out this is a huge market. Most VCs already have. What outsiders continue to VASTLY underestimate is how insular it is. 

They think they can show up with some capital and a “future of work” thesis and go and dominate the office technology market. 

Not gonna happen. 

You have to have deep and meaningful connections at multiple nodes in the office value chain. You need developers, REITs, GCs, architects, leasing agents, investment sales brokers, attorneys, and a slew of other stakeholders in the space to truly understand the nuances and first principles of occupying office space in the 2020s.

And that’s just office. Numerically, that’s 4.5% of those market numbers I mentioned above. You’ve done all that digging and networking and thesis-refining to cover about 1/20th of the property market. Congrats, I guess?

I hope you can see why I think PropTech not only is a massive market currently, but can also lead to some other organic investment niches over time. 

Can you see how you would start with exploring PropTech theses and that would gradually lead you into Retail Tech, AgTech, Logistics Tech, ESG/SRI Tech, and on and on?

If an owner of property has to approve it, it’s coming through PropTech.

Period. 

So my question to these VCs that have been slow to allocate resources to PropTech is —

“If PropTech is a small niche, what is a large niche?”