What’s in store for real estate tech in the second half of 2021? We sat down with Jane Santini, Investment Banking Director at DC Advisory, to take stock of the real estate technology landscape, discuss the trends shaping investments today, and explore what the future holds for the rest of 2021 and beyond.
A COVID-Fueled Backdrop
Digital transformation and forced adoption brought on by the pandemic has shaped investor appetite today, driving market activity to record highs.
Jane was quick to point out, “Despite M&A activity coming to a halt when the pandemic hit last year as investors did liquidity checks across their portfolios, velocity picked up in the second half of 2020 and it became a record year for software M&A both in terms of deal value and number of transactions.”
The world was forced to adopt technology that bridged quarantine-fueled gaps in work, play, and human interaction, and it drove corresponding demand for M&A. Technologies that excelled despite headwinds from the pandemic are now on the radar for investors—and premiums are being placed on them.
We’ve already seen transactions representing a 50% uptick in deal value in 2021 over previous record years, marking significant COVID tailwinds for software M&A continuing into 2021.
A healthy mix of strong capital, digital disruption and forced adoption from COVID is driving heightened activity in public markets with SPAC transactions and IPOs, PE and strategic acquirers. The pandemic-pivot has a lot of companies reconsidering their growth strategies and core offerings as well—Constellation bought Top Producer from Move.com, Zillow acquired ShowingTime, Black Knight acquired Optimal Blue, CoStar entered the residential space with the acquisitions of Homesnap and Homes.com, Blend entered the title space with the acquisition of Title365, and the list goes on.
The COVID-fueled acceleration and, for many, reshuffling are shaping the M&A landscape today.
Trends Shaping the Current M&A Landscape
The Evolution of the Single-Family Ecosystem
Investors want technology that allows them to monetize consumers A-to-Z and become a one-stop-shop, helping buyers find a home, earn commissions, and tap into cuts on mortgage, title and escrow. Jane pointed out two underlying trends:
- Vertical integration of the homebuying process: Vertical integration is about owning the entire consumer journey, full-cycle. From getting a buyer in the door, setting up with an agent, facilitating and selling the mortgage, title and escrow. Vertical integration is about monetize the customer multiple times as they move through the homebuying journey, driving companies to buy multiple aspects of the transaction, including post-sale technologies that engage consumers to the point of re-sale.
- Reaching up the funnel: Companies are reaching up the funnel to target homebuyers before they ever hit a listing portal. They want access to renters who are going to be the next wave of homebuyers to get them into their ecosystem before they ever visit a portal, allowing them to own the entire consumer experience, literally lead to close.
Growing the Consolidated Multifamily Space
The maturity of the multifamily space means significant consolidation with a lot of entrenched players. That comes with roadblocks to growth, both organic and strategic. Jane identified three trends she’s seeing in the multifamily space:
- More international deals: As the limitations of consolidation and, subsequent domestic market share, are reached, international deals are heating up.
- Multifamily players entering the single-family property management arena: Single-family is heavily fragmented, both in terms of volume of point solutions and providers, paving the way for multifamily incumbents to acquire property management companies with high unit counts.
- Increasing overlap between PropTech and FinTech: traditional prop management companies start to incorporate and become payment services.
Commercial – “What do we need to do to get people back in the office?”
Workforces have become increasingly dispersed and landlords are forced to explore flexible lease options to attract and retain tenants, creating demand for technology that gets people back into the office.
Jane added, “Companies are adopting hub and spoke workplace models, hiring talent where the talent is and offering more flexible work arrangements for home offices.”
M&A and capital raising in the commercial space has continued to be robust and active and two major trends Jane sees driving commercial activity reflect that:
- Technology that improves safety: Technology like touchless entry and occupancy tracking help facilitate safe working environments and are getting investor attention as the world transitions back to in-person environments.
- Seamless workplace experiences: Technology that that integrates with point solutions and enables tenants to access all the vendors needed for seamless workplace experience: security, visitor management, communications, access to amenities, etc.
Between PE, strategic acquirers, franchises becoming tech buyers, companies going public and the excess capital they have, there is a lot more diversity in buyer pools and increased M&A velocity will continue through 2021 and beyond.
More M&A activity to fill gaps in ecosystem: A 360-degree view of the entire consumer lifecycle is central to a lot of M&A activity today and we’ll continue to see companies invest in software and services that streamline the transaction. We’re likely to see more tuck in acquisitions to bridge gaps in existing platforms as well.
More strategic acquisitions by existing players in the marketplace: Strategic acquirers and PE are driving a lot of M&A activity right now, building out portfolios focused on real estate technology, as we saw in Q1 of this year. Increased activity is driving interest from an even broader set of PE firms and untraditional players, creating a subsequent snowball effect.
Jane called out, “PE firms are entering the real estate space, whether single family, multifamily, commercial or SaaS, and they want to be a part of the deal flow.”
Climate Technology: From energy management that enables commercial buildings to be carbon neutral and reduce energy usage in multifamily, climate tech is on the forefront of an evolving landscape.
“Technology that helps companies go green and minimize carbon footprint will win big in the future—Climate tech is ripe for investment,” Jane predicts.
Attracting Investors in 2021
The breadth of investors and buyers is creating opportunities for everyone and attracting investors depends on what both the investor and seller are trying to accomplish. Are you trying to raise capital to put on the balance sheet and continue to grow? Are you looking to retire and sell completely? Does the buyer purchase and hold companies forever? Do they build portfolios to consolidate and sell? Are there synergies the buyer can capitalize on and cross sell to an existing customer base? There are many different types of transactions, so motivations, goals, and outcomes vary substantially.
There are some universal criteria to consider that affect attractiveness to investors:
- Is the business scalable? Can it scale without scaling expenses?
- How unique is the company or solution?
- Are there barriers to entry that the company has overcome?
- Does the business have healthy or stable growth rates?
To learn more about attracting investors, the transaction process and preparing your business to sell, check out our 12-Step Guide to Selling Your Software Company.
If you would like to discuss your goals and potential fits, we are happy to connect and be available as a resource.
President and Managing Partner
Constellation Real Estate Group