Brendan Wallace’s ambition is beginning to seem almost limitless. The LA-based venture firm that Wallace and co-founder Brad Greiwe launched less than seven years ago already has $3.2 billion in assets under management. But that company Fifth wall, who claims there are huge financial returns at the intersection of real estate and technology, is not worried about digesting that capital. Its hard-hit investors — including CBRE, Starwood and Arbor Realty Trust — don’t seem concerned either.
Never mind that last month Fifth Wall closed the largest-ever venture fund targeting real estate tech startups with $866 million in capital, or whether it is a Fund of $500 million earlier in 2022, which aims to decarbonise the real estate sector. Never mind that, on top of these two efforts, Fifth Wall also expanded to Europe last February with an office in London and a €140 million fund. (It also has a large office in New York, an office in Singapore and a presence in Madrid.) As for office buildings in particular having been shaken by a combination of layoffs, work-from-home policies and higher interest rates, Wallace says he sees it as a consider chance.
In fact, Wallace already sees many more opportunities that he wants to pursue, including in Asia, but also around infrastructure, including buying and building “utility-scale solar and microgrids and wind farms” that Fifth Wall plans to invest in and to which they will finance.
It’s a lot to take on, especially for a now 80-strong outfit whose biggest exits today include home-flipping outfit OpenDoor, real estate insurance company Hippo Insurance and SmartRent, which sells smart home technology to apartment building owners and developers. No one has been spared by public market share holders; yet, talking to Wallace and the picture he paints of the world, it’s easy to see why investors keep throwing money at his team.
We spoke to him earlier today in a long-edited chat.
TC: Why is it that your many real estate investing partners are investing so much capital with you when it’s such a challenging time for real estate, especially office buildings?
BW: It’s the same statement we’re based on, which is you have the two largest industries in the US, which is real estate, which is 13% of US GDP, and technology, and they’re colliding and it represents a huge explosion of economic where the [as] we’ve seen in this kind of super cycle of proptech companies growing up. Now this extra layer around climate technology has been discovered. The biggest opportunity in climate technology is actually the built environment. Real estate accounts for 40% of carbon emissions, yet the climate technology venture capital ecosystem has historically spent only about 6% of climate VC dollars on technology for the real estate sector.
How do you pinpoint which vehicle — your flagship proptech fund or your climate fund — is funding a particular startup?
How we define proptech is technology that can be used by the real estate or hospitality industry, so it must be technology that can be immediately used by them – which can be many different things. It could be leasing, asset management software, fintech, mortgages, operating systems, keyless entry – but it doesn’t necessarily have the effect of decarbonising the real estate industry. It may be a derivative benefit, but it’s not the core focus. The core focus is just you have an industry that’s been so slow and late to adopt technology that’s now starting to do that, and as it does, it’s creating all this value. We’ve already floated six portfolio companies and we’re a six-year-old company.
[As just one example], do you know how many multi-family homes today have a smart device in them? One percent of all multifamily homes in the United States have a single smart device – every smart device: a light switch, shade, access control. There is a huge transition going on right now, where every thing in a building is going to be smart. And we’re at the beginning of that now.
However, I believe the opportunities in climate technology are many times that, simply because the costs involved in decarbonising the real estate industry are so enormous. The cost of decarbonising the US commercial real estate sector is estimated at $18 trillion. That’s just the US commercial real estate industry. To put that in perspective the US GDP is about $22 trillion to $23 trillion and we need to decarbonise the real estate industry over the next 20 years so one way to think about that is we’re about a year from the US needs to spend GDP in the next 20 years just by decarbonizing our physical assets.
Where are the main spending areas you focus on?
I will give you a very concrete example, which is literally concrete. If concrete were a country, it would be the world’s second largest CO2 emitter after the US and China. No less than 7.5% of global CO2 emissions come from making concrete. It is the second most used material on planet Earth after water. So you have this raw material that feeds into all our infrastructure — all our cities, all the homes we live in, all the buildings we do business in — and that generates 7.5% of global carbon emissions. And so the race is now on to identify an opportunity to make carbon neutral or carbon negative cement. We actually invested in a company called Sulfur alongside Bill Gates and Jeff Bezos because they also see this opportunity that this is one of the major spending categories where that $18 trillion needed to decarbonize real estate is going. Then you can go further down [list]from glass, steel, cross-laminated wood – just any materials used in building construction.
More directly, and this is more of a space repurposing question, but what do you think will happen to underused office space in this country over the next 18 to 24 months? It’s particularly extreme in San Francisco, I realize, given the population of tech workers who haven’t returned to the office.
I wouldn’t draw too many conclusions from San Francisco alone. I think San Francisco has probably been the hardest hit city. I don’t think San Francisco is the canary in the coal mine for the rest of the American office industry. But having said that I think we’re at a point now where the pendulum has obviously swung very far in the direction of hybrid work and companies reducing their physical footprint but you’re already starting to see these things being circular and cyclical . and that some employees actually want to go back to the office, while CEOs say, “It’s hard to mentor and build a culture and drive the kind of operational efficiencies we once had in an office in a completely remote environment.” So I feel like we’re probably two to three years away from another pendulum swing towards companies entrenched in a physical office. I think we’re at an artificial low in sentiment and office demand.