Brendan Wallace’s ambition begins to seem almost limitless. The Los Angeles-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 signature fifth wall, who argues that there are massive financial returns at the intersection of real estate and technology, isn’t worried about digesting that capital. High-impact investors, CBRE, Starwood and Arbor Realty Trust among them, don’t seem worried either.
Never mind that last month, Fifth Wall shut down the largest venture fund in history focused on real estate tech startups with $866 million in capital, or that closed a $500 million fund in early 2022 that aims to decarbonise the real estate industry. Never mind that in addition to these two efforts, Fifth Wall further expanded into Europe last February with an office in London and a €140 million bottom. (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 hit by a combination of layoffs, work-from-home policies and higher interest rates, Wallace says he sees it as an opportunity.
In addition, Wallace already sees many more opportunities he wants to take advantage of, including in Asia, as well as around infrastructure, including buying and building “utility-scale wind and solar farms and microgrids” that Fifth Wall plans to invest in. and to whom it will provide funding.
It’s a lot to take on, particularly for a now 80-person team whose biggest outlets today include home remodeling outfit OpenDoor, property insurance company Hippo Insurance and SmartRent, which sells smart home technology to homeowners and apartment building developers. None have been spared from public market shareholders; still, speaking with 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 chat that has been edited by his extension.
TC: How come so many of your real estate investment 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 that we founded on, which is that you have the two largest industries in the US, which is real estate, which accounts for 13% of US GDP, and technology, and are colliding and represents a great explosion of economic value [as] we have seen in this type of super cycle of proptech companies that has grown. Now this additional layer has been uncovered around climate technology. The biggest opportunity in climate technology is actually the built environment. Real estate accounts for 40% of CO2 emissions, and yet the climate VC VC ecosystem has historically only put about 6% of climate VC dollars into technology for the industry of real estate.
How do you designate which vehicle, your flagship proptech fund or your climate fund, finances a particular startup?
How we define proptech is technology that the construction industry or hospitality real estate can use, so it needs to be technology that they can use right out of the box, which can be a lot of different things. It might 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 may be a spin-off, but it’s not the core focus. The core focus is simply that you have this industry that has been so slow and late in adopting technology that it’s now starting to do so, and as it does so, it’s creating all of this value. We have already taken six portfolio companies public and we are 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 multifamily units in the United States have a single smart device, any smart device: a light switch, shades, access control. There is a massive transition taking place right now, where everything inside a building will become smart. And we’re at the dawn of that right now.
However, I do believe that the opportunity in climate technology is a multiple of that simply because the cost required to decarbonise the real estate industry is so great. The cost of decarbonizing the US commercial real estate industry is estimated at $18 trillion. That’s just the US commercial real estate industry. To put that in perspective, US GDP is $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 we have than to spend about a year of US GDP over the next 20 just decarbonizing our physical assets.
Where are the main spending areas you focus on?
I’ll give you a 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 US and China. 7.5% of global CO2 emissions come from the manufacture of concrete. It is the most used material on planet Earth after water. So you have this raw material that is an input for all of our infrastructure, all of our cities, all of the homes that we live in, all of the buildings where we do business, and that generates 7.5% of global CO2 emissions. And so the race is on right now to identify an opportunity to make cement carbon neutral or carbon negative. In fact, we invested in a company called Sulfur along with Bill Gates and Jeff Bezos because they also see this opportunity that this is one of the main spending categories where the $18 trillion required to decarbonize real estate will go. then you can go below [list]glass, steel, laminated wood, all the materials used in the construction of buildings.
More immediately, and this is more of a space reuse question, but what do you think will happen to underutilized 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 many conclusions from San Francisco alone. I think San Francisco has probably been the most affected 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 work and companies are reducing their physical footprint, but you’re already starting to see that these things are circular and cyclical. and that some employees really 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 that we once had in an office in a completely remote environment.” So my feeling is that we’re probably two or three years away from another pendulum swinging towards businesses that are down to a physical office. I think we are at an artificially low low in sentiment and demand for public office.
