Brendan Wallace has a lot on his mind lately. Wallace is the co-founder of Fifth Wall Ventures, a nine-year-old proptech venture firm with $3.2 billion in assets under management. He is also a homeowner in Los Angeles who continues to battle raging wildfires. While his place remains intact, many of his friends were not so lucky.
Wallace is getting used to external forces beyond his control. First, the pandemic has dramatically changed 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 these same players, office vacancy rates are still at around 20% nationwide, and analysts don’t expect that number to budge as many companies abandon the idea of a full return to the office .
PropTech has also gotten its slings and arrows in recent years, partly due to high-flyers whose fortunes have risen fast, such as Wework, which emerged from bankruptcy last June following a failed IPO and a massive restructuring .
Change typically has hidden benefits, however, and Wallace believes the industry is ready for a rebound. As he sees it, there are ballooning opportunities related to asset resilience or using technology to help real estate assets withstand damage and disruption. He also sees a huge opportunity to help Fifth Wall’s limited partners more aggressively capture the tech industry’s demand for data centers and the energy required to power them.
We recently spoke with Wallace about some of these trends, along with life in Los Angeles during what has felt to so many like the apocalypse. You can listen to that full chat here or read for excerpts of our conversation, edited slightly for length.
You’re in Los Angeles, how are you?
It’s just tragic what happened. Everyone on our team is safe. We’re in Santa Monica and they had to evacuate our office. This is a crucible moment for Los Angeles, and there will be a lot of reflection on the other side of this, with the big political and economic issues that California has been dealing with for a long time. That’s a good thing, but right now it’s just devastating to see parts of this beautiful and amazing city destroyed.
How are you thinking about what comes next? There will be a lot of cleaning, a lot of reconstruction. This must represent unexpected opportunities, however little in the way of inconvenience.
I wouldn’t say opportunity. . . 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 for one of America’s greatest cities. And I would say, at the fifth wall, we’re thrilled to be a part of it. What does some of this look like? I don’t know yet.
A big problem that homeowners and business owners were dealing with (even before the fires) is the flight of insurance providers out of state. . .
We are one of the most active FinTech investors for the residential industry. Fifth Wall invested in Hippo, which is a very active home insurance company 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 market asymmetries that are exacerbating the problems that we have now, which is a lot of uninsured homes o People have their insurance 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’d like to see is a streamlining of the amount of bureaucracy needed to launch insurance companies.
Regulations aside, does the math work? It’s hard 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 this question without looking at a county-by-county analysis. It is possible that some areas are uninsurable, but it is also possible that some areas are otherwise uninsurable I wanted be unregulated and the latter is what I focus on mitigating.
This isn’t just a problem in California. It may be more acute in California and home values may be higher in California, but we have to fix it as a nation.
Do you think the fires could reshape how properties are valued in these high-risk areas? This doesn’t appear to have happened in, say, Miami.
I think it will increase prices for a few reasons. There will be a lot of new construction in Southern California which will increase the replacement cost for homes. People will still want to live in these beautiful parts of the country; You won’t see an exodus of people simply because of this.
Rising insurance premiums will also lead to lower affordability of homes and this could have downward pressure (meaning homes could cost slightly less because sellers have to factor in the high cost of insurance). The net, however, is that this will increase many home prices throughout Southern California and especially in West Los Angeles.
You are an investor in icon, a 3D printer of modular homes. Do you see a potential opportunity for that company? We reported that he laid off a quarter of his staff just this month before the fires broke out.
Icon is a really exciting deal. The fifth wall is a small investor in that company. Our thesis wasn’t so much around fire prevention or post-natural disaster reconstruction but around, how do you build houses faster and cheaper and with fewer materials than you do today? What they have built is a way to effectively print a house and in the process, massively reduce the waste associated with building the house.
One of the crazy statistics that most people don’t know is that about 5% of all the material in US landfills is material that went to a construction site and then went straight to a landfill. It’s a huge problem that increases costs for the consumer, makes it harder to run construction companies and has a huge carbon footprint. The question, I think, is: How can you scale it? Can you make it cheap?
Have you made investments in companies that are specifically focused on creating 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. . . (Moving forward) Retrofitting will be the big deal. Most of the homes we need to protect are already built and are constructed of materials that can be very difficult to tear. And so in real estate technology, most of the problem and most of the value you can add to society is fixing assets that we already have, whether they’re buildings or homes or infrastructure assets.
Of course, in reconstruction, we should be very aware of the materials used and we should use the best solutions. But the vast majority of at-risk homes in Southern California already exist today.
Overall, the proptech sector has seen fewer deals in recent years. Is it fair to say that overall interest in the sector has cooled?
It has absolutely cooled down. I think we just experienced – and still have – cold and bitter capital markets for PropTech. You hadn’t seen big M&A events. Basically none of the focused venture funds, including Fifth Wall, raised capital during that period. There have been very few VC inflows into the space.
The flip side is what you’re seeing now: companies that survived this Darwinian extinction event. Companies that have made the right cost cuts, that have pivoted their business model, that have pivoted their marketing and that have gone through recapitalizations are emerging on the other side of this stronger, more viable and more durable in the long term . I think spring has sprung for the prop tech industry, and you’re seeing a lot of positive indicators for the space right now. (Editor’s note: Here, Wallace is referring to the IPO of Servicetitan, a fifth mural portfolio company that makes software for contractors and went public in December, and the recent sale of another portfolio company, Indusrious, to its partial owner, CBRE.)
What about this existential threat to the office sector that we’ve been hearing about for years?
Long term (there are questions) about the office industry, but along with that you’re seeing explosive growth in categories that were never ever thought of as real estate before. Data centers are absolutely exploding. And some of those that explosion is forcing the real estate industry to face big questions. For example, the AI revolution that has everyone fascinated is absolutely not possible without a massive scaling of data centers in the United States, but a massive scaling of data centers in the United States is absolutely not possible without a massive production of new energy.
Go ahead . . .
We need racks of servers that can train and do inference all over the world – and we need a lot of them. This is no surprise or secret in the real estate capital markets; Data centers have probably been the hottest asset class in real estate over the last couple of years. But now there is an associated problem that is emerging. . . Which is that the data center is so energy intensive, the local utility won’t allow you to connect that network. . .
This is forcing real estate to say, “We have to be in the energy business ourselves if we want to be in the computational data center business.”
What do your LPs expect? Will you invest in Fusion startups now?
The merger is obviously really exciting, but we have a more short-term problem. We need the energy now or next year. Ideally, we don’t want those to be fossil fuel-based dirty energy sources. . So that really leads to the renewable energy that we know is good, (which is) the most obviously solar. (So) the bottom line is, yes, we are investing in solutions to accelerate solar development together with our real estate investors and real estate companies will become the same as energy development companies.
