2023 will be a year where innovation and growth are forced to take a back seat and survival becomes paramount for companies in the real estate technology – or proptech – world.
By and large, proptech companies do best when the real estate market is hot – rising home values and more transactions mean higher revenue and higher margins for such companies. Now that the market is rapidly cooling, we’ll see once high-flying proptech startups raising flat or down rounds, engaging in mergers and acquisitions and potentially closing their doors in 2023.
Proptech has boomed in the last decade, as entrepreneurs have given consumers and real estate professionals access to an arsenal of new products that fundamentally changed how we interact with the built world. The early innovation in the space came from online property portals like Zillow, Trulia and Realtor.com that made data more accessible to the homebuyer or seller. Any person with an internet connection could now see what homes were on the market, what homes were worth and a multitude of other data points about any home in the country – all information that was previously only available to professional real estate agents. The next wave of innovation came from companies like Opendoor, Flyhomes, Offerpad and Ribbon – the “i-buyers” and “power buyers.” These companies made it easier than ever to transact. I-buyers buy your home quickly for a fixed price; power buyers allow consumers to “buy before you sell” or to make an all-cash offer on a home. In the last three years, home prices have accelerated in a world of low interest rates, remote work and fiscal stimulus–and these companies benefited. Revenues and margins grew quickly, and they seemed unstoppable.
Now, as we all know, the music has stopped. This year, inflation reached levels not seen in 50 years, driving the Federal Reserve to hike interest rates, which made mortgages more expensive and deflated the stock market (and therefore the net worth of many Americans). Now, many homeowners are sitting on inexpensive mortgages taken out in 2020 and 2021 and would prefer to hold onto their existing home and mortgage, rather than sell for a lower price and have to take out a new mortgage with a higher rate. All of this has combined to produce a real estate market with surprisingly resilient home prices but much fewer home transactions. According to the National Association of Realtors, existing home sales dropped to 4.09 million units in November 2022, down 35% year over year, reaching the lowest rate (excluding the early months of COVID) since 2010.
So what does this mean for proptech companies?
Generally, companies whose businesses are closely tied to home sales are likely to be hit hardest, given the declines we’re seeing in transactions. Tech-enabled brokerages like Compass and Redfin will continue to be hit extremely hard, as will iBuyers and Power Buyers. Companies less tied to real estate transaction volume, like fractional investing platform Arrived or construction management platform Procore, will hold up better. Additionally, late-stage private companies that raised money at high valuations in 2021 will be unable to maintain those lofty valuations and may not be able to raise any capital at all. This group, late-stage private startups, is in the most trouble. Unfortunately, we’re likely to see more significant layoffs, down rounds and mergers for this cohort, as companies do anything to survive this difficult period.
Early-stage startups have brighter prospects. Generally they are small enough that they can continue to grow even in a declining market, especially if they can offer cost savings to other players in the industry. For example, Permitflow offers permitting automation software to general contractors and homebuilders, which decreases cost and increases efficiency, which are key in a difficult time.
The biggest question in the proptech world is how long will this real estate chill last. The short answer is that no one knows. My prediction is that after a year to 18 months, we’ll start to see the market pick back up, and the companies that survive until then will be lean and ready to grow.
For now, though, I’d advise proptech founders to brace for a cold winter.
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