The built environment is responsible for nearly 40% of carbon emissions worldwide, according to the International Energy Agency. And while a portion of that is from the energy and materials required to construct buildings, the lion’s share — nearly 90% on an annual basis — comes from their use. Decarbonizing the grid could go a long way to address that, but oftentimes it’s easier, and more profitable, to simply reduce emissions.
That’s where proptech can step in. By cutting carbon emissions on the operations side, it can save building owners and managers money while also enhancing the experience for occupants. We asked three venture capital firms investing at the intersection of proptech and climate tech about how a focus on reducing emissions can trim a building’s carbon footprint, and offer new opportunities for returns.
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Challenging market conditions, though, mean that returns are anything but assured. But for category leaders, there’s potential for significant upside. “This economic environment will continue to test a lot of companies,” said Jake Fingert, managing partner, and Lionel Foster, investor, at Camber Creek. “Those that survive will have an opportunity to expand market share.”
And the potential market is enormous. Spending on getting the world’s real estate to net zero will require $1.7 trillion every year between now and 2050, according to McKinsey. “This is the single largest capex supercycle any industry has ever seen,” said Othmane Zrikem, chief data officer of A/O Proptech.
We spoke with:
(Editor’s note: To build a complete picture of this sector, we’re examining proptech from three different angles. This survey examines the environmental impact of proptech and what startups are doing to minimize their footprint, and we’ll soon publish another covering upcoming tech in the space. The first part of this survey covered proptech startups solving financial problems.)
Jake Fingert, managing partner, and Lionel Foster, investor, Camber Creek
There’s a lot of overlap between construction tech and proptech. What would you say is the difference between the two? Where do they overlap?
We hear people make this distinction between proptech and construction tech all the time. However, we see a lot of overlap between the two categories, and think it is beneficial to be deep in both areas. For example, we self-identify as a proptech company and co-led the Series B round for Bridgit, which identifies as a construction tech company.
The built world is massive and hugely consequential to everyone’s quality of life. Technology that improves how much we can utilize and enjoy these spaces at any stage of a building’s lifespan is relevant and valuable. That’s what matters. In fact, we would argue you need more ideas that stretch across a building’s life cycle, which lasts decades.
What is your investment thesis for proptech in 2023? What sort of growth are you expecting in the sector?
Our approach has always been to invest in and support the growth of companies that are true category leaders or well on their way there. This economic environment will continue to test a lot of companies. Those that survive will have an opportunity to expand market share.
So we expect to see more opportunities to invest in the best companies at prices that are more closely tied to current performance and reasonable growth prospects. Also, when transactions slow down, real estate groups tend to focus more on internal operations. This usually involves technology, and we expect some companies that are helping real estate groups drive margin to have a strong run in the coming period.
A deeper look at proptech
Commercial real estate has taken a hit during the pandemic. How has that affected investor interest in climate-friendly proptech?
Many of our portfolio companies offering sustainability solutions also save customers money and improve operational efficiency. That value proposition is irresistible. It’s just a matter of getting that information in front of the right decision maker.
When you combine that with companies who increasingly want to lead on sustainability and are being encouraged to do so by their stakeholders, we don’t expect to see a slowdown in the rate of adoption of these technologies.
In the intersection between proptech and climate tech, where do you see the biggest opportunity?
Approximately 50% of the CO2 emissions from a building’s life cycle are created during the construction phase, so the more we do to lengthen the useful life of a building, the less carbon associated with that site. This dovetails with investor and tenant interest in spaces that can accommodate multiple uses, sometimes simultaneously, sometimes over time.
There will be increased activity around retrofits, renovation, and data-driven site selection that helps people discover non-obvious spaces that can meet their needs. We are also spending significant time in areas like IoT and sensors, where innovations can have a potentially big impact on the climate.
The Inflation Reduction Act offers significant tax credits for energy retrofits. Has that changed the type of startups your firm considers? If it has, in what way?
The Inflation Reduction Act is arguably the most consequential piece of climate legislation in U.S. history. There are the incentives for retrofits, which you mentioned, but experts like those at our portfolio company Arcadia also anticipate a “solar rush” — a big uptick in clean energy production, connectivity of clean energy supply to a more resilient electrical grid, and development of clean energy assets in low- and moderate-income communities.
We have had many conversations with companies working on sustainable building and renewable energy solutions, but we expect to see even more activity in this space and a broader range of creative solutions.