Brendan Wallace has a lot on his mind these days. Wallace is a co-founder of Fifth Wall Ventures, a nine-year-old Proptech venture firm that manages $3.2 billion in assets. He’s also a homeowner in LA who continues to fight raging wildfires. Although his place remains intact, many of his friends were not so lucky.
Wallace is becoming accustomed to external forces beyond his control. First, the pandemic has dramatically changed the landscape for many of Fifth Wall’s limited partners, many of whom are in real estate (CBRE, Cushman & Wakefield, Lennar). Unfortunately for many of these same players, office vacancy rates still hover around 20% nationally, and analysts believe that as many companies abandon the idea of a complete return to the office, We don’t expect that number to budge.
Proptech has also taken up Slings and Arrows in recent years. This is for high rises whose fortunes have changed rapidly, such as Wework, which emerged from bankruptcy last June following a failed IPO and major restructuring.
But change usually brings hidden benefits, and Wallace believes the industry is poised for a bounce back. The way he sees it, there is a ballooning opportunity tied to asset resilience – or using technology to help real estate assets withstand damage and disruption. He also sees a huge opportunity to help Fifth Wall’s limited partners more aggressively capture the technology industry’s demand for data centers and the energy needed to fuel them.
We recently spoke with Wallace about some of these trends. We talked about what felt like an apocalypse to many, along with life in LA. You can listen to the full chat here or read excerpts from our conversation.
You are in Los Angeles. How are you?
What happened is tragic. Everyone on our team is safe. We were in Santa Monica and they had to evacuate our office. There’s a lot of reflection on the other side of this because this is a melting pot moment for Los Angeles, and there are big political and economic issues that California has been addressing for a long time. That’s a positive thing, but right now it’s devastating to see part of this beautiful, amazing city being destroyed.
What do you think about what comes next? There’s a lot of cleanup, a lot of rebuilding. It must represent an unexpected opportunity.
I wouldn’t say chance…I don’t think on the other side of this crisis people are going to stop wanting to live in Los Angeles…so I think this is one of the rebuilding and re-building of America. Remain optimistic when it comes to moments of imagination. largest city. And I think we’re excited to be a part of that at the fifth wall. What does some of it look like? i don’t know yet.
A major issue that homeowners and business owners were dealing with (even before the fire) was the flight of insurance providers from the state…
We are one of the most active investors in fintech for the housing industry. Fifth Wall invested in Hippo, a very active home insurance company in California. (Editor’s note: Last summer, Hippo stopped writing new homeowners insurance nationwide.)
That is, a lot of regulations that are very intentional and focused on consumer interests actually have the opposite effect, creating market asymmetries that are exacerbating the very problems we currently have. I am. People taking out insurance were cancelled. So there are two things we’re excited about. There are better consumer solutions that can be developed and we are interested in potentially investing in them. Another thing I would like to see is a streamlining of the amount of bureaucracy required to start an insurance company.
Regulations aside, does the math work? It’s hard to understand how a startup with different regulations can (insure) California when these catastrophic things happen.
It’s very difficult to answer that question without looking at the county-by-county analysis. Some areas may not be insurable, but some areas may not be regulated, so it is also possible that some areas may not be insurable, the latter being what I am focused on mitigating. It’s a thing.
This isn’t just a California problem. It may be worse in California, and homes may be worth more in California, but we have to solve this as a nation.
Do you think wildfires might reshape the way real estate in these high-risk areas is valued? That doesn’t seem to be happening in Miami, for example.
I think they will increase the price for several reasons. Southern California has a lot of new construction that is going to increase the replacement cost of your home. People still want to live in these beautiful parts of the country. Because of this, you will not see the exodus of people.
Increased insurance premiums also lead to lower home affordability, which can put downward pressure (i.e., sellers have to pay more for insurance, so homes cost slightly less ). But the net of it is that this will increase home prices for a lot of Southern California, especially West Los Angeles.
You are an investor in Icon, a 3D printer for modular homes. Do you think there is a potential opportunity in the company? We reported that we had laid off a quarter of our staff this month, just before the fire broke out.
Icons are a really exciting business. The fifth wall is the small investors in the company. Our paper wasn’t so much about wildfire prevention or rebuilding after natural disasters, but how do you build a house faster, cheaper, and with fewer materials? What they’ve built is a way to effectively print a house and, in the process, significantly reduce the waste associated with home construction.
One crazy statistic that most people don’t know is that about 5% of all materials in US landfills is material that went to construction sites and went straight to the landfill. This is a big problem that keeps costs down for consumers, makes it harder for construction companies to operate, and creates a massive carbon footprint. The question, I think, is how can we scale it? Can it be made more cost-effective?
Have you invested in a company that specifically focuses on manufacturing illicit materials?
No, but I think we should and it’s a space that’s getting a lot of attention right now… (going forward) renovations are going to be a big issue. Most of the houses we need to protect have already been built, and they are built with materials that are very difficult to tear. And in real estate technology, a big part of the problem and a big part of the value that can be added to society is retrofitting the assets that we already have, whether they’re buildings or homes or infrastructure assets. .
Of course, in reconstruction you need to be very aware about the materials used and use the best solutions. But the vast majority of Southern California’s at-risk homes already exist today.
Broadly speaking, the PropTech sector has seen fewer deals in recent years. Is it fair to say that overall interest in the industry has cooled?
It’s absolutely chilling. I think we just went through the cold and bitter capital markets of Proptech and still exist. You weren’t looking at a big M&A event. Essentially, none of the focused venture funds, including Fifth Wall, raised capital during that period. There was very little VC inflow into the space.
The other side of that is what you’re looking at now. These are the companies that survived this Darwinian extinction event. Companies that have made the right cost cuts have pivoted their business models, pivoted their marketing, and gone through that repeat capital to emerge on the other side of this stronger, more viable, and more durable. I think Spring is springing up in the PropTech industry, and we’re seeing a lot of positive indicators in the space right now. (Editor’s note: Here, Wallace references the IPO of ServiceTitan, a fifth-wall portfolio company that makes software for contractors and went public in December, and the recent sale of another portfolio company, Diligence. (partial owner, CBRE).
What about this existential threat to the office industry that we’ve been hearing about for years?
Longer term, in line with the office industry (I have a question), we’re seeing explosive growth in categories that weren’t traditionally thought of as real estate. Data centers are absolutely exploding. And some of the things that explosion is forcing the real estate industry to grapple with big questions. Similarly, the AI revolution that everyone is fascinated by is absolutely impossible without a massive scale-up of US data centers, but a massive scale-up of US data centers will lead to the mass production of new energy. Absolutely impossible without.
Continue…
We need racks of servers that can train and do inference all over the world. And you need a lot of them. This is no surprise or secret in real estate capital markets. Data centers have probably been the hottest asset class in the real estate industry for the past two years. But now there’s a related problem that’s emerging…namely, data centers are so energy-intensive that local utilities won’t let you plug their grids into them…
It’s saying to the real estate industry, “If we want to be in the compute data center business, we have to get ourselves into the energy business.”
What does your LP expect you to do? Are you planning to invest in a fusion startup now?
Fusion is obviously really exciting, but there’s a closer issue. You need energy now or next year. Ideally, we don’t want them to be fossil fuel-based, dirty energy sources. So it really connects to renewable energy as we know it, and most obviously to solar power. (So) the bottom line is, yes, we are investing in solutions to accelerate the development of solar with real estate investors, and real estate companies will become energy development companies.