June is Investment Properties and Second Homes Month here at Inman. We’ll explore everything including top investor insights, the latest at Airbnb and Vrbo, and the surprising locales emerging as investor hot spots across the country.
As we wade through the mud of an extremely slow and painful residential property market, we believe it’s important to understand some of the undercurrents that are likely to turn into market-defining waves as the cycle improves. In a more challenging funding environment, property owners and managers will likely need to focus on a number of key factors to increase the odds of creating positive returns on single- and multi-family investments.
The staggering number of companies that received funding from 2017 through early 2020, and then again in 2021 and early 2022, has created an extremely crowded landscape of subscale enterprises, according to data released by The Center for Real Estate Technology & Innovation.
As the institutionalization of single-family, built-to-rent and multifamily continues, larger owners and managers will likely seek fewer, larger technology and service providers in order to maintain quality, efficiency and pricing leverage as part of their investment strategy. Here we’ll look at the data, efficiency improvements and solutions for these issues.
The power of data
The sheer amount of data generated from transacting, renovating, owning, operating and disposing of residential properties is staggering and, potentially, an extremely valuable part of the value equation for investors.
From a conversation with Dwellsy founder and CEO Jonas Bordo, it’s apparent the current usability of this data, however, is relatively poor compared to other industries, such as consumer and healthcare; this will need to change, and when it does, the friction for owners and managers will decline.
Creating and maintaining datasets that help investors make truly informed decisions about what properties to acquire, whether one-by-one or at scale, is one of the more valuable opportunities in the residential market.
Scaled, comparable data available for investors to use in bespoke ways will, in our view, create greater liquidity in the asset class and more nuanced and durable investment strategies. Examples of this data include information about the property condition and location, neighborhood, interior finishings (appliances, fixtures), real-time value, rent conditions and supply/demand projections.
Unlocking efficiency for value creation
To date, the applicability of technology and field services offerings across property types has been spotty at best and detrimental at worst. The focus on market density, the power of technology to drive productivity for services, and the opportunity to reduce the friction between users and owners/managers will, in our view, drive the adoption of best practices across the sector, not just within narrow sleeves of property types.
One of the more intriguing but admittedly complex opportunities is to deploy property management technology and services best practices from the single-family (or scattered lot) environment to the multi-family market.
One of the more glaring examples is the service quality disconnect between scheduling on-site repairs for rental homes (through a self-service portal) versus tracking down the lone building engineer in an apartment building, potentially waiting days instead of hours for confirmation and the repair.
The opportunity to create a shared service environment where field technicians, leasing agents, self-service capabilities and on-site personnel are managed more efficiently could have significant positive impacts on multi-family asset class returns. The technology and cultural hurdles are significant, but we view the potential for value creation for companies that get it right to be very strong.
The shift toward integrated solutions
There are many examples of industries (healthcare and eCommerce being two) that have gone through periods where the institutionalization or professionalization of ownership has driven consolidation in the related network of technology and service providers. The current market structure in residential real estate (including multi-family) is in the early stages of this institutionalization, and we are already seeing signs of the knock-on effects amongst technology and service providers who realize breadth and scale are going to be table stakes for future market share.
There is growing recognition that separate software solutions to address underwriting, transacting, accounting and reporting are creating unnecessary complexities, expenses and integration issues.
This, in turn, increases the odds of sub-par returns for investors and their limited partners (LPs), an untenable solution, especially with a structurally higher interest rate environment. As AppFolio referenced with several customer examples on its Q1 2024 earnings report and their investor day in 2023, their product expansion efforts across property types, creation of bi-directional data structures and feeds, and enhanced self-service functions are paying dividends, with revenue growing 38 percent in both 2023 and the first quarter of 2024.
Investor appetite remains strong
Investor appetite to fund significant cash burns is de minimis or will likely come with a complete recapitalization of the shareholder base.
On the other hand, investor appetite is strong for backing transformative combinations that accelerate a technology or tech-enabled services strategy while generating significant operating synergies.
Interestingly, we’re seeing an increase in interest in these situations from funds that historically would look like traditional private equity but are pivoting to be able to invest both debt and equity in companies that are still early on their path to scaled profits.
Looking ahead
As we navigate the complexities of the residential property market, investors, property owners and managers will need to understand technology adoption and service integration, which, in turn, will unlock operational efficiencies and value creation.
The proliferation of data in this area presents an opportunity for investors to refine their decision-making and craft more sophisticated investment strategies. The market is witnessing a shift towards consolidation, favoring players with extensive reach and capabilities.
Looking to the second half of 2024, we expect activity for both minority capital raises and M&A to increase markedly from 2023’s doldrums. We are seeing increased interest from investors, but company profitability and valuation pressures remain top of mind. Focusing on key growth strategies, driving operational efficiency and capturing market share are, in our view, attractive theses for investors in the current environment.
Brandon Dobell is a managing director and a leader within BGL’s Services vertical. Connect with Dobell on Linkedin.
