2023 will be a year where innovation and growth are on the backburner and survival is paramount for companies in the real estate tech (or proptech) world.
Proptech companies are generally at their best when the real estate market is active. Higher house prices and more transactions mean higher revenues and margins for such companies. In a rapidly cooling market, domineering proptech startups are raising flat or down rounds, doing mergers and acquisitions, and may close in 2023.
Proptech has experienced rapid growth over the past decade. Because entrepreneurs gave consumers and real estate professionals access to an arsenal of new products that fundamentally changed the way they interacted with the built world. Early innovations in this space came from online real estate portals such as Zillow, Trulia and Realtor.com, making data more accessible to home buyers and sellers. Anyone with an internet connection can now see which homes are on the market, which homes are worth, and numerous other data points about every home in the country. All the information that, until now, was only available to professional realtors. The next wave of innovation came from ‘i-buyers’ and ‘power buyers’ such as Opendoor, Flyhomes, Offerpad and Ribbon. These companies have made trading easier than ever. I-buyers buy your home fast for a fixed price. Power Buyers allow consumers to “buy before you sell” or buy a home for all cash. Over the past three years, home prices have accelerated in a world of low interest rates, remote work and fiscal stimulus, and these companies have benefited. Revenue and profit margins grew rapidly and seemed unstoppable.
As we all know now, the music has stopped. This year, inflation has reached levels not seen in his 50 years, and the Federal Reserve has hiked interest rates, making mortgages more expensive and pushing the stock market (and thus the net worth of many Americans) down. has contracted. Many homeowners are now taking advantage of low-price mortgages in his 2020 and 2021 years, and would prefer to sell their existing home at a lower price and take out a new mortgage at a higher interest rate. I want to keep my mortgage. All of this combines to create a real estate market with surprisingly stable home prices but far fewer home deals. According to the National Association of Realtors, resale home sales fell 35% year-on-year to 4.09 million units in November 2022, the lowest level since 2010 (excluding the early months of COVID).
So what does this mean for proptech companies?
In general, businesses with businesses closely tied to home sales could be hit hardest given the decline in transactions. Technology-enabled brokerage firms such as Compass and Redfin will continue to be hit hard, as have iBuyers and Power Buyers. Companies less bound by real estate transaction volumes, like fractional investment platform Arrived and construction management platform Procore, hold up better. Additionally, late-stage private companies that have raised capital at high valuations in 2021 may not be able to sustain those high valuations and raise no capital at all. This group, the late-stage private startups, is the most troubled. Unfortunately, this cohort is likely to see even more significant layoffs, rounddowns and mergers as companies do everything in their power to weather this difficult time.
Early-stage startups have a bright outlook. In general, 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. doing. This reduces costs and increases efficiency. This is important in difficult times.
The biggest question in the proptech world is how long this real estate downturn will last. The short answer is that no one knows. My prediction is that in a year to 18 months the market will start to recover and the companies that survived until then will be lean and ready to grow.
For now, though, I would advise proptech founders to prepare for cold winters.
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