Fifth Wall, focused on real estate tech and managing $3.2B, looks to eat up even more of its market
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 firm, Fifth Wall, which argues there are massive financial returns at the intersection of real estate and tech, isn't worried about digesting that capital. Its heavy-hitting investors -- CBRE, Starwood and Arbor Realty Trust among them -- don't seem concerned, either.
Never mind that just last month, Fifth Wall closed the largest-ever venture fund focused on real estate tech startups with $866 million in capital, or that it closed a $500 million fund earlier in 2022 that aims to decarbonize the property industry. Never mind that on top of these two efforts, Fifth Wall also expanded into Europe last February with a London office and a €140 million fund. (It also has a large New York office, 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 considers it an opportunity.
Never mind because Wallace already sees many more opportunities he wants to pursue, including in Asia, as well as around infrastructure, such as the buying and building of "utility-scale solar and micro grids and wind farms" that Fifth Wall wants to both invest in and help finance with debt.
It's a lot to take on, particularly for a now 80-person outfit whose biggest exits today include the home-flipping outfit OpenDoor, the property insurance company Hippo Insurance, and SmartRent, which sells smart home technology to apartment building owners and developers.
None have been spared by public market shareholders. Still, talking to Wallace and the picture he paints of the world, it's easy to see why investors keep throwing money at his team to invest on their behalf.
We spoke with him earlier today in a chat that has been edited for length.
TC: How 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, particularly office buildings?
BW: It's the same thesis we were founded on, which is you have the two largest industries in the U.S., which is real estate, which is 13% of U.S. GDP, and tech, and they're colliding, and it represents a huge explosion of economic value [as] we've seen in this kind of super cycle of proptech companies that has grown up.
Now this additional layer has been unearthed around climate tech. The biggest opportunity in climate tech is actually the built environment. Real estate accounts for 40% of CO2 emissions, and yet the venture climate tech venture capital ecosystem only has historically put about 6% of climate VC dollars toward tech for the real estate industry.
How do you designate which vehicle -- your flagship proptech fund or your climate fund -- funds a particular startup?
How we define proptech is tech that is usable by the real estate construction or hospitality industry, so it needs to be tech that's immediately usable by them -- which can be a lot of different things. It can be leasing, asset management software, fintech, mortgages, operating systems, keyless entry -- but it doesn't necessarily have the effect of decarbonizing the real estate industry. It can be a derivative benefit, but it's not the core focus. The core focus is simply that you have this industry that has been so slow and late to adopt technology that's now starting to do so, and as it does, it's creating all this value. We've already had six portfolio companies go public and we're a six-year-old firm.
[As just one example], do you know how many multifamily units today have a smart device inside them? One percent of all multifamily units in the United States have a single smart device -- any smart device: a light switch, shade, access control. There is a massive transition going on right now, where every single thing inside a building is going to become smart. And we're at the dawn of that right now.
I do believe, though, that the opportunity in climate tech is a multiple of that simply because the cost required to decarbonize the real estate industry is so vast. The cost to decarbonize the U.S. commercial real estate industry is estimated to be $18 trillion. That is just the U.S. commercial real estate industry. To put that in perspective, the U.S. GDP is like $22 trillion to $23 trillion, and we have to decarbonize the real estate industry over the next 20 years, so one way to think about that is that we have to roughly spend one year of U.S. GDP over the next 20 just on decarbonizing our physical assets.
Where are the major spending areas on which you're focused?
I'll give you one very concrete example, which is literally concrete. If concrete were a country, it would be the third largest CO2 emitter on planet Earth after the U.S. and China. Fully 7.5% of global CO2 emissions come from making concrete. It's the most used material on planet Earth after water. So you have this raw material that's an input for all of our infrastructure -- all of our cities, all the homes we inhabit, all the buildings where we do business -- and that is generating 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 spend categories where that $18 trillion that's required to decarbonize real estate is going to go. Then you can go further down [list], from glass, steel, cross-laminated timber -- just all of the materials that are used in making buildings.
More immediately, and this is more a question about repurposing space, but what do you think becomes of underused office space in this country over the next 18 to 24 months? It's particularly extreme in San Francisco, I realize, given its population of tech workers who haven't returned to the office.
I wouldn't draw too much of a conclusion 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 U.S. office industry. But with that said, I think we're now in a moment where the pendulum has swung obviously very far in the direction of hybrid work and companies downsizing their physical footprints, 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 are saying, 'It's hard to mentor and build culture and drive the kind of operational efficiencies we once had in an office in an entirely remote environment.' So my sense is that we're probably two to three years out from another pendulum swing back toward companies retrenching themselves in a physical office. I think we're in an artificially low ebb in sentiment and demand for office.
How are you helping your LPs to get through this ebb?
The major change in the last two years has been the focus of the real estate industry on decarbonizing. It is a seismic shift in the industry. Owners are looking for anything and everything that can reduce the operational and embodied carbon footprint of a building. So this is, of course, smart building technology and industrial IoT, battery storage on premise and EV charging and micro grids, where every owner is effectively looking to turn their asset into a miniaturized power plant. It's the electrification of the physical infrastructure of buildings themselves. But then right alongside that, it's renewable energies, it's battery technologies, it's materials technology, it's construction workflow and process efficiency technology, it's modular construction. The demand for tech that can reduce the carbon footprint of buildings -- is it's like night and day versus when we spoke last.