Almost exactly two years ago, we spoke with Brendan Wallace, co-founder of the real estate technology-focused venture capital firm. Fifth Wall, about a trip from which he had just returned. His visit was to Singapore, where he described scenes of masks and social distancing and explained that out of an abundance of caution, he planned to stay at his home in Venice, California, for 14 days before returning to the office.
Of course, Wallace didn’t know he wouldn’t be back in the office for a long time. However, the company, founded in 2016, has more than survived a pandemic that has shut down much of the world. It seems to be thriving, including closing last week on a $159 million European-focused venture fund raising its total assets under management to $3 billion. It helps to have over 90 limited strategic partners who are desperate to take a look around the corner, including Cushman & Wakefield, Koch Real Estate Investments, British Land and CBRE.
To learn how Wallace got through this and what technologies the Fifth Wall LPs are most interested in adopting right now (and whether they want to land in the metaverse), we caught up with Wallace late last week in a comprehensive chat. Excerpts from that conversation follow, edited by extension. You can hear our longest conversation on here.
TC: The last time we spoke, you were holed up at your house in Los Angeles. You were the first person I met to do this.
BW: The way we were talking about COVID back then seems so absurd. I was offering the vision I had of being in Singapore, and you said, ‘Oh, this is so interesting.’ And it was just this precursor of what was to come.
Of course, people are still reluctant to go back to the office. Is it a concern for your investors – that employers are struggling to get people to come to work?
Some large employers have talked about reducing their physical real estate footprint. . .. What I have not clearly seen is consistent and uniform guidance from employers on whether there is a date when they expect people to return to the office. I also think it’s changed the expectation of what it means to be in an office, and I think it’s probably changed forever.
On that front, which technology has become a good option versus a necessity if you think the changes we’ve seen are permanent?
Real estate is such a fascinating industry. It is one of the few industries that has never had R&D. It’s really only been in the last four or five years that it’s become quite innovative, and it just so happens that during this age of enlightenment, we’ve had a macro shock that has changed a lot of things, and in particular, changed the way people think about physical space.
It changed thinking about the security of physical space, the need to be in certain physical spaces and the demand for different spaces. So a lot of things have hit real estate in a very short period of time and I think the result of that is that homeowners are looking at how they can really distinguish space. They are asking themselves: how can we make it more technological? How do we make our space “omni channel”? How do we make the space inclusive of all the technological progress our employees have enjoyed over the last 10 years? The good thing is that the technology is there, so it has created this voracious demand from large institutional owners for real estate technology to solve parts of it.
I recently spoke with a microbial genomics company called Phylagen, which uses sensors and swabs to determine whether or not someone with COVID has been in a space for a certain period of time. It seems that air quality is at the top of the must-haves list.
I don’t think most companies, when they signed a lease in 2019, were asking a lot about indoor air quality or filtration, and now they are. Monitoring this, reporting this, tracking this has become pretty standard.
Also, it’s just knowing who’s in your building. Most buildings don’t really know who’s inside, and there are more reasons now to know this information and make buildings, assets and physical spaces more sensory aware of how they’re being used, including public health reasons. [tied to] contact tracking. So I think spaces are going to get more technology and “smart” in the same way that our devices and TVs and other little things are now smart things. Buildings are just made up of a bunch of little things that are going to become smart, from turnstiles to elevators, doors and even tables and chairs that make the tenant and owner more aware of how people are using the space functionally.
With interest rates rising and loans to pay, aren’t these homeowners under financial pressure? Likewise, is there a lot of consolidation going on?
not as much as you think [though] we’re not out yet [the pandemic entirely]. So we don’t really know what the other side of it is like. We don’t know the steady state of how humans will consume space differently. You’ve also had historically low interest rates and high levels of collaboration between tenants and their homeowners on how to handle this. So we probably haven’t seen the full effect of what COVID will reap.
Last week, New York Mayor Eric Adams expressed concern, saying that when employees don’t return to work, they don’t eat lunch at a nearby restaurant, shop at local stores or take their clothes to the laundry. . I’m wondering what challenges and opportunities this creates for an outfit like yours.
Retail has been a challenging sector of the real estate industry for the past decade. E-commerce as a percentage of total US commerce is still relatively small. It’s still less than 20%, [but] there is a lot of change that is yet to come. So local stores, local laundromats and how these small local businesses will be affected by many of these large spaces of tech-enabled logistics and service companies and on-demand delivery companies is [still in play]. I think because of Covid, we jumped from one to three innings, but we still have a lot of turns to play.
You are also focused on climate technology as it pertains to real estate. What are some of the most interesting technologies you’ve seen in the last six to 12 months on the weather technology front?
I’ll give you two examples. A company [whose proposition] it’s simple is Sealed. Most homes in the US do not have heat pumps or adequate insulation, and from an energy saving perspective this can have a very profound impact. Because people just don’t know the real metrics behind the savings – like, actually, how much money they save – Sealed has built a direct-to-consumer business where you can install heat pumps and the proper insulation for homes based on where you live. are located. It’s combining consumer education with a consumer business and also a finance business, and I think that’s really exciting.
On the more advanced side of technology, we invested in a company called turntside which makes very efficient small electric motors. You wouldn’t necessarily think of a building as having a lot of engines in it, but if you think about it, you have to move a lot of things around a building: water, air, people. These engines are 30% more efficient than your traditional engine. It matters because buildings account for 40% of the country’s electricity consumption, which is impressive because real estate accounts for just 13% of US GDP. So real estate is this huge and disproportionate energy consumer, and most of the hardware inside our buildings is inefficient, and with these very efficient motors that you can install in your HVAC system, you can get very simple savings with exactly same infrastructure.
You have a lot of proptech bets and a growing number of weather tech bets. What do you think about investing in the next frontier, the so-called metaverse?
I think we’re excited about this in the sense that there’s a lot of real innovation that can happen in the metaverse, and a lot of that is real estate related. I don’t think we saw anything super exciting.
Our focus has been very much on real-world technology – technology for physical spaces, real space. These are real atoms, right? So most of our innovation is focused there. That’s where it started. So we’re excited about the metaverse like everyone else. It’s seductive. It’s new. It’s cool. But I wouldn’t say we’re fully inclined to invest in it just yet, because there are many more pressing and, we think, more interesting real-world problems that we still have to solve.