Brendan Wallace has a lot on his mind lately. Wallace is the co-founder of Fifth wall companiesa nine-year-old proptech venture firm with $3.2 billion in assets under management. He also owns a home in Los Angeles, which continue to combat devastating forest fires. While his place remains intact, many of his friends have not been so lucky.
Wallace is getting used to outside forces beyond his control. First, the pandemic dramatically altered the landscape for many of Fifth Wall’s limited partners, which reads like a who’s who of real estate (CBRE, Cushman & Wakefield, Lennar). Unfortunately for many of those same players, office vacancy rates still sit at about 20% nationwide, and analysts don’t expect that figure to change as many companies abandon the idea of a full return to business. office.
Proptech has also taken its slings and arrows in recent years, in part due to high-profile companies whose fortunes quickly changed, such as WeWork, which emerged from bankruptcy last June after a failed initial public offering and a massive restructuring. .
However, change usually comes with hidden benefits and Wallace believes the industry is poised to bounce back. In his view, there are growing opportunities linked to asset resilience, or the use of technology to help real estate assets resist damage and disruption. He also sees a big opportunity to help Fifth Wall’s limited partners more aggressively tap into the tech industry’s demand for data centers and the energy needed to power them.
We spoke with Wallace recently about some of those trends, along with life in Los Angeles during what seemed to many like the apocalypse. You can hear that full chat here or read on for excerpts from our conversation, lightly edited for length.
You’re in Los Angeles. How are you?
It is simply tragic what has happened. Everyone on our team is safe. We are in Santa Monica and they had to evacuate our office. This is a pivotal moment for Los Angeles, and there will be a lot of reflection on the other side of this, with the big political and economic questions that California has long been grappling with coming to the fore. That’s a positive thing, but right now it’s just devastating to see parts of this beautiful, incredible city destroyed.
How are you thinking about what comes next? There will be a lot of cleaning, a lot of rebuilding. That must represent unexpected opportunities, however unseemly.
I wouldn’t say opportunities. . I don’t think that on the other side of this crisis people will stop wanting to live in Los Angeles. . .So I remain optimistic that this will be a time of rebuilding and reimagining one of America’s greatest cities. And I would say at Fifth Wall we’re excited to be a part of that. What’s it like to be part of that? I don’t know yet.
A major problem faced by home and business owners is [even before the fires] is the flight of insurance providers from the state. . .
We are one of the most active investors in fintech for the residential industry. Fifth Wall inverted in Hippowhich is a home insurance company that was very active in California. [Editor’s note: Hippo stopped writing new homeowners’ insurance nationwide last summer.]
I mean, a lot of the regulation that was very well-intentioned and focused on benefiting consumers has actually had the opposite effect, and is creating asymmetries in the market that are exacerbating the same problems that we have now, which is many households without insurance or people whose insurance is cancelled. So what we’re excited about are two things: There are better solutions for consumers that could be developed and we’re interested in potentially investing in them. The other thing I would like to see is a rationalization of the amount of bureaucracy required to launch insurance companies.
Regulations aside, does the math work? It is difficult to understand how startups with different regulations can [insure] California when these devastating things happen that make it very difficult for insurers to recover their investments.
It’s very difficult to answer that question without looking at a county-by-county analysis. Some areas may not be insurable, but it is also possible that some areas may not be insurable that would otherwise be insurable. wanted to be unregulated, and the latter is what I am focusing on mitigating.
This is not just a California problem. It could be more severe in California and home values could be higher in California, but we have to figure this out as a nation.
Do you think the wildfires could change the way real estate is valued in these high-risk areas? That doesn’t seem to have happened in, say, Miami.
I think it will increase prices for several reasons. There will be a lot of new construction in Southern California that will increase the replacement cost of homes. People will still want to live in these beautiful parts of the country; You’re not going to see an exodus of people simply because of this.
Rising insurance premiums are also going to lead to lower housing affordability, and that could have downward pressure. [meaning houses might cost slightly less because sellers have to factor in the high cost of insurance]. However, the truth is that this will greatly increase home prices throughout Southern California and especially in West Los Angeles.
You are an investor in ICON, a 3D printer of modular houses. Do you see a potential opportunity for that company? We reported that it laid off a quarter of its staff just this month before the fires broke out.
ICON is a truly exciting business. Fifth Wall is a small investor in that company. Our thesis was not so much about preventing forest fires or rebuilding after a natural disaster, but rather about how houses are built faster, cheaper and with fewer materials than today. What they have built is a way to efficiently print a house and, in the process, greatly reduce the waste associated with home construction.
One of the crazy statistics that most people don’t know is that about 5% of all material in US landfills is material that went to a construction site and then went directly to a landfill. It’s a huge problem that increases consumer costs, makes it harder for construction companies to operate, and has a huge carbon footprint. I think the question is: how can you expand that? Can you make that profitable?
Have you invested in companies that specifically focus on manufacturing non-flammable materials?
No, but we should, and I think it’s a space that’s going to get a lot of attention right now. . .[Going forward] Modernization will be the big problem. Most of the houses we need to protect are already built and with materials that can be very difficult to tear off. And so in real estate technology, most of the problem and most of the value that can be added to society is modernizing the assets that we already have, whether they are buildings, houses or infrastructure assets.
Of course, in reconstruction we must be very aware of the materials used and use the best solutions. But the vast majority of at-risk housing in Southern California already exists today.
Generally speaking, the proptech sector has seen fewer deals in recent years. Is it fair to say that general interest in the industry has cooled?
It has cooled completely. I think we just experienced – and are still in – cold and bitter capital markets for proptech. You hadn’t seen any big M&A events. Basically, none of the focused venture funds, including Fifth Wall, raised capital during that period. There were very few venture capital inflows into the space.
The other side of the coin is what we are seeing now: companies that survived this Darwinian extinction event. The companies that made the right cost cuts, that pivoted their business model, that pivoted their marketing, and that underwent recapitalizations are emerging on the other side of this stronger, more viable, and longer lasting in the future. long term. I think spring has sprung for the prop tech industry and there are a lot of positive indicators being seen for 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, Industrious, to its partial owner, CBRE.]
What’s up with this existential threat to the office industry that we’ve been hearing about for years?
Long term [there are questions] on the office industry, but we are also seeing explosive growth in categories that have never before been considered real estate. Data centers are absolutely exploding. And some of them believe that explosion is forcing the real estate industry to confront big questions. For example, the AI revolution that has everyone captivated is not at all possible without a massive expansion of data centers in the US. However, a massive expansion of data centers in the US is not not at all possible without massive production of new energy.
Continue . . .
We need racks of servers that can perform training and inference around the world, and we need a lot of them. This is neither a surprise nor a secret in the real estate capital markets; Data centers have probably been the most popular asset class in the real estate industry for the past two years. But now an associated problem is arising. . . The fact is that the data center consumes so much energy that the local utility company will not allow you to plug into that network. . .
This is forcing the real estate industry to say, “We have to be in the energy business if we want to be in the computing data center business.”
What do your LPs expect you to do? Are you going to invest in new merger companies now?
Obviously, the merger is really exciting, but we have a shorter-term problem. We need the energy now or next year. Ideally, we don’t want them to be fossil fuel-based dirty energy sources. . so that really leads to renewables that we know are profitable, [which is] more obviously solar. [So] The bottom line is that yes, we are investing in solutions to accelerate solar energy development together with our real estate investors, and real estate companies will become energy development companies themselves.