Brendan Wallace’s ambition is starting to seem almost limitless. The Los Angeles-based venture capital firm that Wallace and co-founder Brad Greiwe launched less than seven years ago already has $3.2 billion in assets under management. But this company, Fifth Wall, which argues that there are massive financial returns at the intersection of real estate and technology, isn’t worried about digesting that capital. Hard-hitting investors — CBRE, Starwood and Arbor Realty Trust among them — don’t seem worried either.
It doesn’t matter that last month Fifth Wall shut down the largest venture capital fund ever focused on real estate tech startups with $866 million in capital, or it shut down a $500 million fund. earlier in 2022 which aims to decarbonize the real estate sector. Never mind that in addition to these two efforts, Fifth Wall also expanded to Europe last February with an office in London and a fund of 140 million euros. (It’s also a large office in New York, an office in Singapore, and a presence in Madrid.) As for the fact that office buildings in particular have been shocked by a combination of layoffs, work-from-home policies and higher interest rates, Wallace says he sees this as an opportunity.
It doesn’t matter, because Wallace already sees many other opportunities that he wants to pursue as well, including in Asia, as well as in infrastructure, such as buying and building “solar and micro-grids and parks.” utility-scale wind farms” that Fifth Wall wants to develop. both invest and help finance the debt.
There’s a lot to take on, especially for an 80-person company whose biggest releases today include house flipping company OpenDoor, property insurance company Hippo Insurance and SmartRent, which sells home technology. smart to owners and developers of apartment buildings.
None were spared by public market shareholders. Yet, talking to Wallace and the picture he paints of the world, it’s easy to see why investors continue to give money to his team to invest on their behalf.
We spoke with him earlier today in a chat that was edited at length.
TC: How come your many real estate investment partners are investing so much capital with you when times are so difficult for real estate, especially office buildings?
BW: It’s the same thesis that we were founded on, which is that you have the two biggest industries in the United States, which is real estate, which is 13% of US GDP, and technology, and they collide, and this represents a huge explosion in economic value [as] we’ve seen in this kind of super cycle of proptech companies growing.
Now that extra layer has been uncovered around climate technology. The biggest opportunity for climate technology is actually the built environment. Real estate accounts for 40% of CO2 emissions, yet the climate tech venture capital ecosystem has historically only spent about 6% of climate VC dollars on technology for the real estate sector.
How do you designate which vehicle – your flagship proptech fund or your climate fund – finances a particular startup?
The way we define proptech is technology usable by the building construction or hospitality industry, so it must be technology immediately usable by them – which could be a lot of different things. It could be leasing, asset management software, fintech, mortgages, operating systems, keyless entry, but it doesn’t necessarily have the effect of decarbonizing the real estate sector. It may be a derivative benefit, but it is not the main purpose. The main focus is just that you have this industry that was so slow and late in adopting the technology that is now starting to do so, and as it does, it creates all of this value. We’ve already had six holding companies that have gone public and we’re a six-year-old company.
[As just one example], do you know how many multi-family units today have a smart device inside? One percent of all multi-family units in the United States have a single smart device – any smart device: a light switch, a blind, an access control. There’s a massive transition going on right now, where everything inside a building is going to get smart. And we’re on the cusp of that right now.
I believe, however, that the climate tech opportunity is a multiple of that simply because the cost needed to decarbonize the real estate sector is so vast. The cost of decarbonizing the US commercial real estate sector is estimated at $18 trillion. This is just the US commercial real estate industry. To put that into perspective, US GDP is in the range of $22 trillion to $23 trillion, and we need to decarbonize the real estate sector over the next 20 years. GDP over the next 20 years solely on the decarbonization of our physical assets.
What are the main spending areas you are focusing on?
I will give you a very concrete example, which is literally concrete. If concrete were a country, it would be the third CO2 emitter on planet Earth after the United States and China. 7.5% of global CO2 emissions come from the manufacture of concrete. It is the most widely used material on planet Earth after water. So you have this raw material which is an input for all our infrastructures – all our cities, all the houses we live in, all the buildings where we do business – and which generates 7.5% of global co2 emissions. And so the race is on right now to identify an opportunity to make carbon-neutral or carbon-negative cement. We actually invested in a company called Brimstone alongside Bill Gates and Jeff Bezos because they also see this opportunity that this is one of the major spending categories where the $18 trillion needed to real estate decarbonization are going to go. Then you can go lower [list]glass, steel, cross-laminated timber – all materials used in the manufacture of buildings.
More immediately, and it’s more a question of reallocating space, but what do you think will happen to the underutilized office space in this country over the next 18 to 24 months? It’s especially extreme in San Francisco, I realize, given its population of techies who haven’t returned to the office.
I wouldn’t draw too many conclusions from San Francisco alone. I think San Francisco was probably the hardest hit city. I don’t think San Francisco is the canary in the coal mine for the rest of the US office industry. But having said that, I think we’re now at a point where the pendulum has obviously swung very far in the direction of hybrid working and companies reducing their physical footprint, but you’re already starting to see that these things are circular and cyclical and that some employees actually want to go back to the office, while CEOs say, “It’s hard to nurture and grow a culture and drive the kind of operational efficiencies that we once had in an office in an all-remote environment.” So, I feel like we’re probably two or three years away from another pendulum swing back towards businesses retreating to a physical office. I think we are in an artificially low ebb in sentiment and demand for positions.
How do you help your LPs through this ebb?
The major shift in the past two years has been the real estate industry’s focus on decarbonization. It’s a seismic shift in the industry. Owners are looking for anything that can reduce a building’s operational and intrinsic carbon footprint. So it’s, of course, smart building technology and industrial IoT, onsite battery storage, electric vehicle charging and microgrids, where every owner is effectively looking to transform their asset into a miniaturized power plant. It is the electrification of the physical infrastructure of the buildings themselves. But right next to that is renewable energy, it’s battery technology, it’s material technology, it’s construction workflow and process efficiency technology, it’s the modular construction. The demand for technology that can reduce the carbon footprint of buildings – it’s like night and day compared to the last time we spoke.