A Look Forward to 2021: De-Carbonization Is King
[Note from the editor: Below is a collection of 2021 predictions and trends sourced from members of the GEM. Originally published privately for members a week ago, but we are sharing them more broadly here. —Drew Meyers]
BY DREW MEYERS
Originally Published: January 7th, 2021
Following an uncertain, turbulent year, even more turbulence is just around the corner. We need to talk about climate change. Facts are facts; science is science. No matter where you stand in the debate about the causes of climate change, it’s coming.
Sure, the United States will rejoin the Paris Climate Agreement on Biden’s watch. That’s good for the future sustainability of real estate—and any other industry, really. But at this point we can only hope to slow the acceleration of the climate crisis—it still looms on the horizon.
To avoid another pandemic, we need to use hard cash to address the effects of climate change. At the recent CREtech global summit, Brendan Wallace from Fifth Wall explained his view that investment should anchor real estate companies’ sustainability and ESG programs. They are putting their money where their mouth is: Fifth Wall recently hired Greg Smithies from BMW iVentures to co-lead the Climate Technology Investment teamand is raising a $200 million climate fund.
Climate funds are now de rigueur across tech. Microsoft is putting $1 billion into a climate fund while Amazon is allocating $2 billion. A sustainable future is coming—shuttled along faster by growing tenant demands and government regulations—with or without real estate asset owners. Aurora Solar’s $50 million Series B and View’s SPAC announcement are just the beginning. The train has left the station: The time to invest is now. The seeds for years upon years of tech to fuel decarbonization will be planted in 2021.
Below is a range of trends of interest and predictions for 2021, sourced from the GEM membership base…
Agent teams consolidating market share will continue to intensify, as it did throughout the pandemic. Everhome Real Estate, now netting north of $200 million in annual sales, is just one example of the formation of “superteams.”
This trend emerged at Side four years ago, and it will continue to play out across the industry until far fewer agents work in teams to represent a much larger share of total transactions. This is great for the consumer, for the public good, and for dedicated experienced full-time real estate agents and teams. It’s terrible for traditional brokerage models that make most of their money from less productive agents that pay much higher fees and facilitate transactions as a group of 1M+ part-time and casual practitioners.
Mortgage rates will fall through at least Q1 2021. Home buyers blessed with fortuitous timing will get rates beginning with a one.
Eventually, rates will climb. They’ll tack on 100 basis points in a month. There will be talk that rising rates will grind housing to a halt. It will only be talk, though—actual home buyers won’t care that mortgage rates are up. They’ll continue to relocate, and first-time buyers will take advantage of the Biden First-Time Buyer Tax Credit in larger-than-expected numbers.
Furthermore, the FHA will reduce both upfront mortgage insurance premiums and monthly insurance premiums for its borrowers, reducing homeownership costs this year.
By Q4, mortgage rates will reach a plateau before slow-sliding into 2022.
2020 further revealed the need to simplify, streamline and digitize antiquated processes such as in-person appraisals, filings, and closings, to meet the needs of today’s home shoppers. In real estate, the shift offline to online is accelerating and the virtual tools consumers have adopted for safety are quickly becoming their expectations for convenience.
As we look at the broader housing market, we believe the trends we saw in 2020 will have a positive and lasting impact in 2021 and beyond. In 2020, home was the headquarters of our lives. We spent the year retooling the meaning of home, work, and life in between. The experience has uncorked new aspirations and hopes of what home can and needs to be.
The shift to remote work will have a lasting and positive impact on real estate. First-time home buyers in major cities are no longer tied to neighborhoods close to the office, and many are searching for homes with more space for a home office or other family needs. This shift is what we call “The Great Reshuffling,” and we believe it will be the defining cultural trend of the decade. Demographics support our expectation of a lasting interest in home-buying as millions of Millennials are entering their prime home-buying years. As people reimagine and reshape the way they work, live and play, they increasingly will be relying on new technology to safely navigate their lives.
The pandemic has paved the way for touchless experiences across the entire real estate sector from virtual staging and listing tools to digital escrow and remote online notarization. Sizeable deals illustrate the flow of capital to support the incredible demand for contactless tools including;
- Compass acquisition of digital closing startup Modus
- Stewart acquisition of NotaryCam
- Video tour software company Realync’s recent $22M raise
- A surge of investor confidence in shares of DocuSign
While the pandemic has been a catalyst for demand, many of these virtual tools have been around for years, some inhibited by regulation. As demand rises at unprecedented levels with continued pandemic restrictions in place, we expect to see more support on a federal level for digital products and services. Online notarization, for example, is currently only available in 23 states–though legislation introduced in March through the SECURE act would open it up to consumers in all states.
Contactless tools will also serve the commercial sector as businesses return to offices at adapted capacities and as developers evaluate alternative space planning.
Governments will continue enacting policies to improve rentals for landlords and tenants. We’ll see more efforts to encourage reporting of on-time rent payments, security deposit alternatives, and perhaps even a rental registry. With technology, rental markets will become more transparent, more efficient, and more fair for everyone.
The single-family homes Built For Rent (BFR) category is experiencing significant growth as both a housing product and an industry.
Over the next several years, single-family residential construction will experience a period of rapid growth, adaption, and innovation impacting the way the industry operates and evolves to deliver both for rent and for sale products. Although BFR makes up small portion of residential construction today, with established industry leaders and emerging players quickly taking strong positions and billions in new capital allocations announced almost monthly, there is an implied need for speed, quality, and performance with a long-term investment horizon which creates a game-changing opportunity for widescale adoption of innovation.
Outside influencers and stakeholders are looking at this through the lens of industry analysis developed by teams at McKinsey & Company and Dodge Data & Analytics. This tipping point for innovation, in what has been a slow-to-digitize space, will not only affect rental product but yield positive spillover effects into the single-family for sale solutions. This opens the door for long-awaited industry advancements in automation, integration of robotics, new building materials, and new partnerships which will significantly disrupt the existing supply chain.
The net result will be both an opportunity and threat for existing players through the evolution of new and more productive business models, partnerships, and capital opportunities. We believe that the BFR industry will be a key element in the improvement of the productivity of the overall housing industry and will be an important driver in the improvement in housing availability and attainability.
What to watch for…
- Single-family homes built new, specifically for rent, at scale and in communities, has come of age. It took a decade to be understood and accepted but that acceptance is now set. Many of the underlying trends, such as suburban migration and the erosion of societal bias towards renting, supporting this segment were accelerated by the pandemic.
- The next stage of industry development will be in the refinement of the business model, including the introduction of more digital tools for customer acquisition, an expansion of factory-built off-site solutions for production, new forms of customer financial relationships, and an evolution in a customer service model that will drive higher value.
- These evolutions will serve to accelerate products and methods that will prove to be superior to those currently used in the for sale industry, these will be translated and adopted by for sale builders – accelerating innovation there as well. Increasingly, companies with this product as their primary offering will be joined by others where both rentals and sales are offered side by side.
- Many of the coming changes will be driven by new entities, Joint Ventures, and partnerships. Supply chains will be reformed and new relationships among existing players will be developed.
The technology used to collect and use consumer data is changing. And major tech companies are battling for the survival of their ad businesses as they know it. Increased focus on privacy and regulation such as GDPR and CCPA have forced changes to third party tracking, which fuels online advertising. For example, Google is eliminating support for third party cookies and Apple will require apps to receive permission from users before collecting their data—Facebook is waging a war against Apple to prevent that change (with 100 million iPhone users in the U.S. alone, the Facebook app would be hugely affected). These changes could fundamentally shift how real estate companies acquire and reach their customers online.
There is a solution: Invest in first-party and big data capabilities. Companies are really going to have to think about how they structure, track, and take action from their owned and operated digital properties and the people who interact with them. This likely means an end to rapidly spinning up new content without an overarching strategy, and the start of reconsidering how to create and measure the best customer experience, as well as how to marry online and offline data. Other industries have focused on this for a decade plus, so it’s about time real estate catches up.
In its quest to upset everything we know, 2020 has offered a possible fix for the affordable housing crisis. Where that housing will be located is the real surprise: in the heart of large cities.
Commuting to the office previously drove workers to live near their workplaces. The ork from anywhere phenomenon (and the success of this global, synchronized experiment for many companies) has driven the epicenter of housing demand outside the urban core.
Housing prices have shot up in the suburbs in response to excess demand for all housing types, but only luxury and class A housing has seen major price declines in cities. Why? Because those who can’t work from home still want housing near their jobs, and 88% of jobs are located in metro areas.
Because of this, affordable urban housing has virtually inexhaustible demand.
Reasons cities will start delivering unprecedented volumes of affordable housing in 2021:
Steep rent declines. Urban rents have dropped—a trend that will continue into late 2021. This increases the affordability of existing multifamily housing stock as work from anywhere proliferates beyond the pandemic (albeit at a slower pace due to the COVID-19 vaccine and an inevitable end to the pandemic).
Modular housing companies are maturing from early stage (Seed and Series A) to growth stage—where the mandate shifts from realizing product market fit to accelerating growth at scale—at the perfect time.
Cities will either throw weight behind promising solutions to the urban affordability crisis or suffer the one-two punch of rapidly declining tax bases coupled with rapidly increasing homelessness. Things can still worsen from here. Smart cities know this, and will act decisively before the problem is beyond their control.
Let the new urban age commence.
Despite the ongoing analysis and data surrounding the flight to rural, small town, and suburban living as a result of the pandemic, we will begin to rethink the positive value of city-living.
Outside of a handful of expensive urban centers (NYC, Seattle, Austin, etc), city planners, architects, investors, and community organizers will find new ways to optimize real estate assets for safe and enjoyable interaction between residents/tenants and spaces. The “15-minute city” (see: Newsletter #147) will become mainstream, and the increased popularity of light densification initiatives will propel a renewed interest in urban spaces for all.
As vaccines are deployed and we reach herd immunity, companies will race to bring human connectedness back–both internally as well as with external customers/partners/stakeholders. Though I suspect the shift back to five-day a week office life will be a multi-year crawl, new tax policies will trigger an explosion of corporate entertainment spend by year’s end. Deducting 50% of meal expenses on federal taxes has been the case since the 1980’s. However, “A proposal championed by the White House and Sen. Tim Scott (R-S.C.) would increase that deduction to 100 percent,” according to The Washington Post.
Restaurants and brands strong enough to survive could see their best margins in decades thanks to increased corporate spending, lower rents, and an expanded outdoor dining footprint.
STOCK PRICES FOR ZILLOW, REDFIN, AND REALOGY TUMBLE BY AT LEAST 20%
Terry Dwyer // Consultant
All three companies have track records going back at least a few years and all three (along with a good part of the market) have benefited tremendously from what Alan Greenspan described in the late 1990’s as “irrational exuberance.” By any rational valuation measure, all three are way overvalued. At some point, common sense will return to the stock market and this will result in some of the air being let out of these three balloons. A year from now, we’ll see at least a 20% decline over present prices.
COMPASS TAKES THE SPAC
Drew Meyers // Founder, Geek Estate
The SPAC proptech flurry is here to stay, and Compass is up next. Despite my initial questions and skepticism (which I’ve heard echoed by many others privately), the company will have no trouble portraying itself in a favorable light to the public markets. How it fares once there, well, that’s a discussion for another time. The brokerage juggernaut, complete with stellar marketing and more money than the brokerage industry has ever seen, will pull the trigger on a strategic SPAC partnership before we ring in 2022.
BUY-SIDE COMMISSION RATES NOTICEABLY TREND DOWNWARD
Terry Dwyer // Consultant
I would predict that the average buy-side commission rate will drop 50% by this time next year, but things don’t move that quickly in the brokerage business. However, by fall of 2022, I predict it will have dropped 50%. The proposed NAR/DOJ settlement will also result in a bunch of buyers’ agents dying on the vine because a 50% drop in the cost of doing business will not accompany a 50% drop in their commission rate. Jeff Corbett explored the implications of the divorcing of commissions for those interested.
EXP ACQUIRES REALOGY
Drew Meyers // Founder, Geek Estate
Rather than raising $400 to pay down debt, why not sell Realogy to eXp, the virtual brokerage growing like a weed? With eXp’s market cap ($4.23B) approaching triple that of Realogy ($1.68B), such a takeover would be a bold and risky move–but one that wouldn’t completely gut the balance sheet. There’s nothing like bringing the largest competing franchise under its umbrella, despite its debt, to kick off the new year.
THE BIDEN ADMINISTRATION WILL ACT ON INFRASTRUCTURE WITH FEDERAL STIMULUS
The knock-on effects will be positive and profound for contech/proptech startups. “Infrastructure” will also include significant increases in spending on 5G rollout, data center construction, and other digital infrastructure.
CONTECH VC WILL CONTINUE TO GROW YOY
From $1.3B in 2020 (up 56% from 2019), let’s call it an even $2B that will flow to contech in 2021. Startups in the labor, remote inspection/robotics, and supply chain sectors will outperform as COVID continues to impact industry productivity and efficiency.
Call it “COVID consolidation” if you want, but a flurry of M&A activity in the AEC sector will be led by large publicly traded players sensing an opportunity to capture increased market share and improve efficiencies. Coupled with COVID, the industry’s persistently tight margins will drive employee-owned and mid-sized public companies in particular to seek sanctuary in the arms of those large buyers.
CONTINUED SPAC ACTIVITY
At least one SPAC will merge into a well-known startup in the contech space.
INCREASED SPENDING ON AR/VR APPLICATIONS FOR BUILT ENVIRONMENT ASSETS
According to the International Data Corporation, 37.4% of all 2020 spending on AR/VR occurred in the consumer market sector, followed by distribution (23.4%) and manufacturing (19.3%), with infrastructure lagging (4.1%). Expect that last figure to increase in 2021 post-pandemic as technology improves, AEC firms continue pivoting to digital, and governments ramp up further stimulus (see my first prediction).
My last—and boldest—prediction. For the sake of the industry, I hope I’m wrong about this one. But Katerra is facing headwinds, competition, and bad press. Only $200M from Softbank prevented this prediction from already coming true in 2020.
We’ll see an acceleration in innovation programs, where solutions are developed in partnership with national production builders acting as strategic investors to mitigate research and development risk in commercializing the next generation of game-changing core building system technologies (such as rheia’s HVAC air distribution system).
In an accelerating and disruptive environment, R&D helps create new value that also helps to differentiate from those who do not invest in R&D. Most industries invest 2-6% of revenues into R&D efforts. Broadly speaking, homebuilding barely invests at all. This “miss” lies at the feet of the boards of those companies as it gives away long-term strategic advantage and enterprise value. Who does or provides R&D to industry players, how the R&D is funded, and then what capital is needed to commercialize these new products, methods, or tools will be one of the great opportunities for those with vision in the next decade.
And, with that, that’s a wrap! Agree or disagree? What are we missing? Leave your thoughts in the comments.
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