How Urban Tech Startups Will Impact Commercial Real Estate in 2017 and Beyond
Urban tech is a nascent sector that includes startups that sell to architects, design firms, developers, construction companies, CRE, and others. If a startup is facilitating the building of cities or having an impact on the built environment of urban spaces, it falls within the definition of “urban tech.”
The three broad investment markets that fit within urban tech are real estate tech, construction tech, and smart cities tech. These are enormous markets with little penetration from startups; startups in these sectors have an opportunity to provide innovative solutions to persistent problems.
The opportunity in real estate tech
Real estate is the largest asset class in the United States. According to a 2014 report from the Federal Reserve, the value of the real estate assets in the US is $40 trillion. Thousands of companies across the US are devoted to developing or managing real estate. Specifically, in the United States there are approximately:
Despite the impressive number of US real estate firms, less than 10% of the industry has adopted property management tools. This means that startups with great products and high-quality sales teams have an opportunity to become dominant players in real estate tech.
According to data published by CB Insights, the amount of real estate startup financing grew from 221M in 2012 to 2.6B in 2016, which shows that many VC’s have started to notice the large opportunity in real estate tech.
The opportunity in construction tech
More than 700,000 construction companies exist in the United States. The revenue market for the construction industry is expected to grow to $15.5 trillion over the next 10 to 15 years. In short, construction is big business.
That said, many of the companies in the construction industry either employ legacy technologies or don’t use technology at all. According to data collected by the Dreamit UrbanTech insights team, construction firms invest invest less than 1% of annual revenues on research and development.
According to data Dreamit found on AngelList, about 1,500 startups make construction tech products. So, while some companies have sprouted up to provide innovative technology products to construction firms, there’s still a lot of room for upstarts. More VC’s have started to hop on the construction tech trend too. Funding for construction startups has seen consistent growth as data indicate that VC’s have funded at least 10+ construction tech deals for the past 7 quarters.
With increasing investment dollars as well as a large industry badly in need of better tech products, the opportunities for constructions tech startups seem endless.
The opportunity in smart cities
IoT has rapidly become one of the most exciting industries in the world. Reports estimate that IoT companies could generate $10-15T in global GDP over the next 20 years. Many startups in the first IoT wave focused on creating smart devices for consumers and their homes. Companies like Nest, Ring Video Doorbell, and FitBit are all examples of former startups that succeeded by creating IoT products for consumers.
While the consumer IoT market has become more saturated, there are fewer enterprise IoT solutions. Businesses in urban areas and city governments are two examples of segments that have begun to ask for more IoT products in their efforts to create smart cities.
Some startups like Intersection, Zenysis, Valor Water Analytics, and Remix have cropped up to serve the smart cities market. In fact, the data Dreamit found on AngelList showed that founders have started more than 500 smart cities startups. But, there are still many more smart cities companies that founders need to create.
Many mayors across the country have embraced the adoption of technology in their cities. For example, a reporter for TechRepublic reported the thoughts of Pittsburgh Mayor Bill Peduto by writing “Peduto said he thinks smaller municipalities are perfectly positioned to take advantage of the smart city opportunities out there right now, even more so than large, global cities.”
With governments and businesses buying into the integration of smart technologies in urban areas, the time is now to start or grow your own smart cities startup.
More reasons to be excited about “urban tech”
We already laid out the opportunities in construction tech, real estate, and smart cities tech are so intriguing. But, in an effort to pour even more momentum on the urban tech hype train, Dreamit has identified other reasons that show why the industry is exciting.
Each urban tech sector has unique characteristics to rapidly grow over the next 10 years
Experts have argued that real estate tech in in the same place that fintech was 10 years ago. This means that there should be a historic rise in successful real estate startups over the next 5-10 years. In the past, the main products that investors focused on in this sector were SaaS. More recently though, investors have also started to fund IoT and data companies en masse, which should fuel the growth the growth in this market.
Thanks to urbanization, globalization, and infrastructure renewal, growth in construction has been incredibly strong. As the construction industry has grown, so have the revenue opportunities for tech startups operating in it. The early adoption of SaaS workflows by various construction firms has allowed frontier technologies like VR, AR, and drones to be more openly accepted. As well, the increasing complexity of construction projects has created the need for technologies that streamline the development process and coordinate the different stakeholders in it. Companies in construction will increasingly embrace new technologies, and that means there are very exciting prospects for startups in the industry.
Growth in the use of smart cities technologies should skyrocket over the next 10 to 15 years as rapid increases in urban populations create problems for local governments and businesses. Smart cities startups that leverage urban informatics are poised to solve these issues in the coming years. As well, historical smart cities tech activity in SaaS and IoT has set the groundwork for an upcoming ‘data revolution’ in which innovative new companies will improve the city living experience.
As you can see, particular market forces in real estate tech, construction tech, and smart cities tech will fuel speedy growth in each sector over the next decade. If you run or want to start a company in one of these markets, the opportune time is now.
The different urban tech sectors provide a hedge for investors
The different markets that make up urban tech are not only growing quickly; they are also providing a hedge against potential market adoption timing concerns. For example, real estate tech and construction tech are currently seeing heavy adoption while the smart cities market is still in its infancy.
This means that VC’s like Dreamit who bet on construction and real estate tech startups will see those companies find customers more quickly than their smart cities counterparts. As construction tech/real estate tech products have faster adoption in the market, investors will see swifter returns. These fast returns will allow VC’s to make longer-term bets on riskier smart cities startups as that market matures in the next several years.
Putting it all together: The effect of urban tech startups on commercial real estate
The effects of the increasing adoption and value of urban tech startups will have ripples throughout the commercial real estate industry. Let’s briefly look at how the Dreamit team thinks each urban tech sector will decrease costs and increase revenues for key CRE stakeholders.
Real estate tech startups will help property managers acquire and maintain CRE assets more efficiently. They’ll also help managers and developers at CRE firms identify the most valuable opportunities for investment and growth. Certain real estate tech companies like Lane should increase tenant engagement, decrease tenant turnover, and lead to lower vacancy rates. Other innovative real estate solutions in financing and crowdfunding will make it easier for CRE companies to raise the funding they need to acquire or develop new properties.
Construction tech startups will decrease the costs of developing new CRE properties and help CRE companies become more profitable in the process. For example, certain construction tech companies like Proxxi are making worksites safer. As workplace injuries and the workers comp costs associated with them decrease, CRE firms and their construction company partners will make more money and have better reputations. Apps like Workyard and Fieldly that help construction companies find skilled laborers and coordinate work shifts should also lower costs and increase profits for CRE stakeholders.
Smart cities tech startups should help CRE companies decrease costs and utilize more space. For example, smart IoT devices like the Nest Thermostat and Sensibo will help CRE owners lower utility costs. Innovative solar technologies built for urban spaces should also allow CRE developers and managers to decrease utility costs by becoming less reliant on traditional utilities providers. Autonomous vehicles and smart parking apps will decrease the need for parking spaces in cities. Therefore, the owners of buildings that feature parking lots will be able to find more interesting and profitable tenants for their space. Future smart cities innovations will likely provide value to CRE businesses in other exciting ways.
It’s an incredibly lively time for urban tech startups and innovation. The venture capital firm and tech accelerator Dreamit Ventures believes that market dynamics and trends will lead to enormous growth in the urban tech Big 3 (construction, real estate, and smart cities tech) over the next 10 - 15 years. As these sectors expand, commercial real estate companies will stand to benefit in a variety of ways. If you run a CRE business, you should be jumping for joy. After all, the rise of urban tech should boost your bottom line for years to come.