Real Estate TechnologyBrendan Wallace, Co-founder and Managing Partner at Fifth Wall, joined us on the podcast to discuss how new technology will be disrupting the real estate industry..


Brendan was Co-founder & CEO of Identified, a data & analytics company focused on workforce optimization that raised $33 million of venture capital and was acquired by Workday (WDAY) in 2014. Brendan co-founded Cabify, the largest ridesharing service in Latin America. Brendan has been an active angel investor and manages one of the largest syndicates on AngelList, having led over 60 angel investments including Bonobos, Dollar Shave Club, Lyft, SpaceX, Clutter, Philz Coffee and Zenefits.

Brendan started his career at Goldman Sachs in investment banking in the real estate, hospitality, and gaming group where he worked on $22 billion in M&A Advisory work. Brendan also worked at Goldman Sachs’ CMBS and structured finance group where he worked on over $10 billion in commercial real estate debt originations and securitizations. He then worked at The Blackstone Group in real estate private equity where he worked on the $26 billion acquisition of Hilton Hotels and the $39 billion buyout of Equity Office Properties, the 3rd largest leveraged buyout in history.

Brendan is from New York, NY, and graduated from Princeton University where he received his BA in political science and economics. Brendan received his MBA from the Stanford Graduate School of Business.

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Transcript

RealCrowd – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial rules to investing, please consult your advisors.

Tyler Stewart – Hey, listeners, Tyler here. Before we start today’s episode I wanted to quickly remind you to head to RealCrowdUniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That’s RealCrowdUniveristy.com. Thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – Tyler, I’m doing pretty well, excited about our show today. This is a topic that’s obviously very near and dear to our hearts.

Tyler Stewart – Absolutely.

Adam Hooper – What a great guest we had on today.

Tyler Stewart – Yeah, we had Brendan Wallace, Co-Founder and Managing Partner of Fifth Wall.

Adam Hooper – They got a really cool background. Brendan came from the real estate industry, turned entrepreneur, turned real estate venture investor. Saw a big gap in how venture was looking at real estate as an asset class to invest in the real estate tech companies brought his experience from there, and they built a really interesting model with Fifth Wall. The composition of their limited partner base being real estate companies, awesome strategy.

Tyler Stewart – Some of the biggest companies in the U.S.

Adam Hooper – A lot of really good real estate names in there, and what they do and we’ll talk about in the episode is we won’t give it away here in the intro, but you have to listen how they …

Tyler Stewart – No spoilers here.

Adam Hooper – How they structure their deal flow, and the things that they’re looking for out there, so a lot of really good conversations. We talked about how just kind of macro how real estate is changing, how technology is going to change, how we interact with real estate. Some interesting conversations. I like the bike rentals, scooters those are everywhere. A lot of listeners will probably see those popping up in their market, so we talked about those a little bit, and just the change of behavior that this technology is having on how we interact with the built environment.

Tyler Stewart – It was a fun conversation. Real estate kind of missed out on the dot-com boom, and now real estate is catching up, so is was a fun conversation seeing where real estate is really going to adopt the new technologies.

Adam Hooper – That’s enough of us talking. As always, though, we do appreciate your comments, and reviews on iTunes, Google Play, SoundCloud, wherever you might listen to us, also, on Spotify now.

Tyler Stewart – Yeah, big time.

Adam Hooper – How might they find us on Spotify, Tyler?

Tyler Stewart – If you go to Spotify search RealCrowd podcast, and we’ll pop up.

Adam Hooper – There we go, we appreciate reviews. Send us emails to podcast@realcrowd.com. With that let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit RealCrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper – Well, Brendan, thanks for joining us from beautiful Southern California today. I hope you’re having a good Friday.

Brendan Wallace – Yeah, thank you for having me on. I’m thrilled to be here.

Adam Hooper – Let’s take a step back. You’ve got an interesting background going from traditional real estate space, then entrepreneurship and now real estate investor. Why don’t you take us a little bit through your journey, and kind of what got you to where you are today with Fifth Wall.

Brendan Wallace – I started my career in real estate, so right after college right after Princeton I worked at Goldman Sachs doing real estate investment banking that was back in 2004 during the kind of fun times. Then I went from real estate investment banking at Goldman to mortgage trading, and CMBS structuring at Goldman, which, again, was probably even more wild. Then I went to real estate private equity at Blackstone so it was kind of ’05, ’06, ’07, and then in ’08 the world looked very different than it did in kind of the five years prior.

Adam Hooper – It did.

Brendan Wallace – It was probably the greatest financial collapse of probably and I hope our lifetimes, and it seemed like a good time to get out of the real estate industry. I had applied to business school at Stanford, and I ended up going to business school there. Being at Stanford and being surrounded by technology, and innovation and kind of the venture capital ecosystem I personally caught the tech bug, and in between my first and second year of business school I launched a data and analytics company with a classmate. I had never worked in tech before so it was kind of a big career shift. The company started to do very well. We basically built technology that helped large recruiters target job candidates, typically, kind of blue collar, and semi-skilled job candidates using social media data and social media advertising tools. We raised about 35 million, and then a big public company, Workday, acquired us, and we kind of became recruiting technology. It had this kind of interesting background of having worked in traditional real estate finance, and real estate capital markets, but then also having worked as an entrepreneur, and I was actively angel investing. That’s where I started to see this gap in the venture capital markets where there really wasn’t a lot of people in the space with the background that I had where you actually knew the real estate industry, you had real estate relationships, you had some domain expertise, but yet you could also interact with entrepreneurs, and understand the venture ecosystem.

Tyler Stewart – Why do you think there was a gap there with VCs?

Brendan Wallace – There’s two reasons for it. One is sociologically there’s just not a lot of people that have that hybrid skillset, meaning the real estate industry, and people that work in the real estate industry rarely go into venture capital and technology, and vice versa, so I think there’s just a small overlap between those two pools of talent. My co-founder and I, Brad, were just lucky early in our careers to have had a foot in both industries. Another reason is that real estate technology, or kind of more broadly built world technology where we invest has a unique risk profile amongst venture capital meaning because real estate as an industry has under invested in technology for really decades what constitutes innovation is frequently very simple and lightweight meaning it’s not very complicated at a technical level.

Adam Hooper – Not a lot of G-tech stuff, yeah.

Brendan Wallace – Oftentimes, literally, like we do what you do on a spreadsheet or in paper ledgers, and we do it digitally that is like wholesale innovation in the real estate world, and because of that the tech risk is very low, so you don’t oftentimes face many of the questions that venture capitalists are used to facing which is like can you build it? Does it work? Is it better than the status quo? Does it have positive ROI? Pretty much most ideas in real estate tech are really good ideas. They’re better than the status quo and they can be built, but where all the risk hinges is around distribution meaning if you can’t get CBRE, or you can’t get clients to adopt and deploy your technology it’s very unlikely you’re going to be successful because it’s very hard to sell into the long tail of the market.

Adam Hooper – I would add to that coming from the real estate world myself, and now in the technology space there’s just a very different mindset, different mentality. The real estate mind is a very rational, very calculated numbers based kind of mindset in venture that was one of the biggest transitions when we started RealCrowd was going from a very rational underwriting mind from the real estate space to a much less rational evaluation metrics, and kind of vision that you have to have in the venture space, so there’s just a very different fundamental mindset. Real estate is very much of if it ain’t broke don’t break it, which is the antithesis of what you need in the kind of traditional venture space.

Brendan Wallace – Absolutely, real estate it’s a hard asset that are defensible and understandable, and you can walk through them and touch them and feel them. Startups are young, dynamic, typically cashflow negative, IP driven investments. They’re about as far as you can get from one another and that’s why there is this gap, but it’s also because of that there’s this dynamic where these large contracts, these kind of kingmakers, so to speak, are so influential in determining outcomes that’s there’s a huge dependency on what these large corporates do in the real estate space. Those are relationships that venture capital investors typically don’t have. There’s not a lot of connectivity between the generalists VC world and the real estate world those aren’t two universes that are talking frequently. What Fifth Wall saw the opportunity to do was could we actually be that connected layer where we connect the largest owners and operators of real estate in the U.S. and globally with the companies that are very applicable to them, and could be highly strategic to them, and that was where the idea first started.

Adam Hooper – That kind of gets to we want to touch on the LP base of this fund is largely made up of real estate industry players.

Brendan Wallace – The way we approach that in solving that problem was why don’t we raise capital from the largest owner operators of real estate in the U.S. We systematically broke the real estate universe up into its major food groups the major asset classes, and we targeted usually the largest, or one of the largest players in each one of those subsectors. This was in early 2016, so you can imagine it was kind of an odd conversation to walk into a REIT and say, “Hey, I want you to invest in a venture capital fund.” That was a very, very foreign concept so there was some friction when we first started, but we got CBRE the largest commercial brokerage to come in, then Prologis the largest industrial REIT, then Lennar the largest U.S. home builder, and Equity Residential the largest multi-family owner, then Hines, then Macerich, and then Host Hotels all invested. We were able to cover in kind of the first 110 million that we raised most of the major asset classes in real estate, and we had a strategic partner that we could interact with, and advise and really help be their eyes and ears on the ground looking at the innovation economy. That was kind of how we initially fundraised.

Adam Hooper – In traditional venture, oftentimes, companies will have their own corporate venture arm not a lot of that exists in real estate so are you kind of filling that void for some of the more traditional corporate venture arms for these firms are they looking at this as a way to access potential new technologies that are going to integrate with their existing operations?

Brendan Wallace – To some extent we do function almost like outsourced corporate venture for some of our strategic LPs, but I would say there’s a key distinction there which is a lot of corporate venture capital has a very specific mindset which is how do we advantage our firm exclusively which can often be to the detriment of the companies they’re partnering with.

Adam Hooper – Right.

Brendan Wallace – Oftentimes, a corporate venture investment will come with restrictions on working with their competitors, or specific kind of anti-commercial terms that are designed, understandably, to give that corporate investor an advantage in the market place. That’s not the kind of investing that we pursue, and we’ve actually been very deliberate in not being exclusive with our strategic LPs because what we saw was that the very best technologies first of all won’t agree to such terms, so, naturally, there’s adverse selection in kind of pushing for those terms, but number two and more importantly, there’s opportunities for collaboration across large strategics that are hard to realize when you have this anti commercial mindset. Really, what we’re trying to do is convene almost like a consortium of the largest owner operators across many different asset classes, sometimes, in the same asset class that enabled them to share ideas, share technology, share insight, share best practices and collaborate. A big part of what we’ve tried to build is this consortium and almost network approach in our strategic LP base.

Adam Hooper – Then how strategic in practice is that LP base, how much are you facilitating business between portfolio companies and these LPs?

Brendan Wallace – That was a great question because it’s kind of the core of I think what makes us different from a lot of the sector focused funds out there. A lot of sector focused funds really aren’t very strategic. They’re kind of funds that have strategic investors, and they pursue investments, and then kind of throw things at their corporates, and say, “Hey, look at this, look at this, here’s an opportunity for you.” We took a slightly different approach, and we said if we’re going to be trusted advisors to these Fortune 500 companies we need to really, really intimately understand their needs and their pain points before we even make an investment. We almost have to build a McKinsey-like consulting business internal the Fifth Wall which is the front-lines of how we engage with these corporates because working with corporates is complex. They have complex pain points. They have multiple stakeholders. They’re sometimes bureaucratic, and you need to understand that kind of broadly, but also specifically in terms of each anchor LP that you’re working with, so that’s the first part of our business, which is almost like an advisory business where we advise them on what are their pain points, what are the technology solutions that could solve them, and then kind of facilitating those introductions that’s kind of part one of what we do. Part two is once we know about a meaningful strategic partnership that’s imminent that’s about to take place we will oftentimes invest in that business, which, obviously, gives us a huge edge from an investment perspective because we’re able to underwrite

Brendan Wallace – certain growth in that business.

Adam Hooper – Right, you got that built in.

Brendan Wallace – And we’re able to heavily influence it. Yeah, they’re very complimentary meaning that the advisory component of what we do is highly synergistic, and supportive of the investment side of what we do, and vice versa.

Adam Hooper – I didn’t know that, so you do have almost a dedicated advisory service within Fifth Wall separate from the investment arm or how integrated are those?

Brendan Wallace – Yeah, it’s actually a team of six people probably growing to my guess is 10 to 15, and it’s what makes us really unique. It’s very resource and time kind of intensive to engage a corporate, and it’s a very specific skillset so we’ve brought on a senior leader out of McKinsey who runs that business for us, and they’re really the front-lines of that interaction with our corporates. That’s why from our perspective the partnerships that we’ve gone into have been so successful is that we weren’t just throwing things at our corporates. We were really listening to them, and then taking almost what you could call a top-down approach to venture investing. The most extreme example of that is we literally ran an RFP process in selecting a partnership between Industrious co-working company in Hines. We engaged very intimately with Hines, understood what they were looking for in a co-working partner, evaluated many different co-working companies, and then signed a massive deal between Industrious and Hines, and that’s obviously very, very exciting, but it requires us to really have Hines best interest as a corporation at heart, and find the perfect match for them amongst the startup community and the venture world.

Adam Hooper – Does that eventually evolve into entrepreneur in residence style kind of incubating some of these needs internal, and spinning them out or is that too conflicted internally?

Brendan Wallace – We’ve done that once. We did that for a company where we couldn’t find a great solution in the market to a pain point that was very acute from many of our strategic LPs. We incubated with an EIR here, a company called Honest Networks, which is building, I think, a really innovative approach to what is traditionally thought of as an ISP, but frankly building it differently, building it in a landmark centric way, and building it in a modern way and more cost-efficient way than how ISPs were built previously, so that was an EIR that was here for nine months, worked very closely with a multiple of our anchor LPs across the multi-family sector, and has actually just launched this business. It’s an incredibly exciting business.

Adam Hooper – That’s great. As a real estate guy myself, it’s awesome to see that there is some pushes behind this innovation to kind of, again, break this. Real estate is a very new technology averse industry at its core, so it’s great to see you guys pushing that, and trying to think more strategically about how to find those needs and then actually have the conviction to see them through to a product. That’s just great for the industry as a whole in technology as option across our space.

Brendan Wallace – We’ve been delighted to see just how much focus has come on real estate tech. There’s now it feels like a spotlight on it because this is an industry which is one of the lowest spenders on IP amongst all major U.S. industries. It’s almost like for the first time 14% of the U.S. economy is now focused on something, the other 86% have been focused on for the last couple decades. You’re almost feeling this like slingshot effect where there’s so much innovation happening in the real estate world so quickly that you’re almost leapfrogging kind of gen one, gen two solutions like you think about VTS, for example, which is another one of our investments, and kind of the leasing asset management space. There was no technology like that that was on mainframes ever, and then kind of first generation cloud. It’s almost like large real estate owners went from doing this in spreadsheets and Excel and over email to a cloud enabled, mobile enabled, data-driven solution, so the ROIs are just off the charts, and that’s profound to see, but it really requires that you pick the right winner in a given space because there’s so much opportunity, and things can happen so quickly right now in real estate tech.

Adam Hooper – Let’s talk a little bit about what you guys are seeing on the funding side, now deploying that capital. There’s as you said there’s been a huge influx of capital trying to chase real estate tech it’s definitely one of the hotter sectors right now within the overall venture space. What are you guys seeing in terms of funding trends is it continuing to accelerate? How long does this acceleration have? Are we reaching capacity? What are your thoughts around that?

Brendan Wallace – It’s continuing to accelerate for two reasons. One is it’s obviously a hot sector in venture. There is a handful of funds that I think are specifically focused on it, but generalist funds also are particularly focused on it as well. They see the opportunity, they see the growth, and it’s kind of an obvious bullseye for them to focus their time and attention. On the other hand you’re also seeing the growth of more midstage real estate technology companies like the VTSes, like the Opendoors of the world that are raising very, very substantial routes, so you’re just naturally seeing the need for more capital. What hasn’t changed, and what we haven’t seen at least is there’s still not a lot of connectivity between the large real estate owner operators, and these early stage companies. It’s very challenging to have a conversation with a corporate owner operator at nine a.m. and then jump on the phone with an entrepreneur at 10 a.m. It’s a very different language that you’re speaking, and being able to juggle that is hard. While you’ve seen corporates launch their own venture funds, just looking at the portfolios, and kind of seeing how entrepreneurs have reacted to it I think that’s not really the solution that will resonate in the market place. The important thing is really serving almost with like a translator or a diplomat, and helping a young company learn how they should interface with a large real estate strategic and that’s what we’ve…

Adam Hooper – Well, I was going to say what do you think is the gap there? Why is there that gap between corporates, and smaller startups? I mean, my suspicion would be that there’s, I guess it’s not easy to switch off of if you’re a major corporate you own thousands of units, apartment units, or millions of square feet of office or industrial, that’s a big commitment to switch off of a legacy system to something new, so if you’ve got a a newer venture that’s maybe not proven that there is maybe a bit of a roll to dice as to what the future of that startup is that’s a big lift to try to get somebody off of some of these legacy systems. Is that part of the reason, or do you think there’s another reason there’s that gap between corporates, and embracing kind of younger technologies?

Brendan Wallace – That’s definitely one of the reasons. Another factor is just the size of the investments are small. When you’re talking about buying a building, and then investing in a Series A these are just materially different quantums of money and yet it’s almost as if the time and attention required to execute a venture investment if that’s not something you’re accustomed to doing is a multiple of buying a building where you can move 20X the amount of capital. Owners are trying to figure that out. Sometimes, there’s dedicated people internally that do it. Sometimes, they’re kind of doing it ad hoc, and that’s why we’ve had success in kind of attracting large corporates to our first and our second fund is that we’ve been able to go to them and say, “Look, we’re here to support you. You do what you do best. You buy and you operate and you sell buildings that is what your core competency is, and we function almost like an adjunct to that where we’re focused on the venture opportunities that can be strategic for you, but we put your interests first. We advise you almost like a consultative engagement with you to just make you better, and we’ll handle the logistics of investing in the company, sitting on boards, tracking them, evaluating competitors, running RFPs, doing that heavy lifting that frankly is just foreign to a large real estate owner.”

Tyler Stewart – What’s the conversation look like with the corporate when you find a technology solution that you believe is a perfect fit how do you get the corporate on board with adopting that technology?

Brendan Wallace – It starts with mapping it to one of their clear pain points, so one of the first things we do when we engage a large corporate LP in the real estate sector is we do a mapping exercise of what you’re really looking to solve, what’s important to you and then unpacking that. Oftentimes, it starts with just a jumble of kind of open ideas all of which are kind of inefficiencies, or problems in their business, but then when you dig into them you have to really press on what does success look like? How would you measure success? Who are the stakeholders? How reasonable is it to either change from nothing, or change from a legacy software to a new solution? When you do that exercise, and you kind of go deep into those pain points you, oftentimes, spot the clear obvious opportunities, and, sometimes, it’s in energy efficiency or access control, or construction management. It varies by strategic, but we try to look for those really obvious ROI opportunities where there is a clear need, a clear pain point, very little kind of legacy incumbent infrastructure so very little friction around adoption, and it would be very clear to demonstrate the success of something. Then we kind of evaluate the companies that could meet that pain point in a space. Oftentimes, it will start with a pilot or multiple pilots across them to just evaluate the technologies. I’d say after three to four months of that process it becomes very clear who the frontrunner is, so the bulk of the deals that we have done have involved that kind of upfront work

Brendan Wallace – in identifying a pain point, and mapping a particular company that we’ve invested in back to that.

Adam Hooper – Then for sourcing companies to fund that then comes purely through this more of a concerted outbound effort, or I’m sure you guys are getting bombarded by a whole bunch of real estate tech companies what does the deal sourcing side look like for you guys?

Brendan Wallace – It kind of comes from three channels I would say. The first channel is actually from our strategic LPs themselves. Large corporates in the real estate space are getting a lot of inbound interest from startups that want to work with them, and they in turn share that with us, so we see a lot from them. I’d say separately, we have a well-known brand now in the kind of “Built World” venture capital space, so we just organically see a lot of inbound deal flow. I would say the third, and increasingly important channel for us is now venture investors, so generalist venture investors that have seen the success of our partnerships, and seen how quickly our portfolio companies have grown when they’re looking at a company that could be relevant for us, and they’re about to lead a Series A or a Series B they almost always now share it with us and say, “Hey, what would CBRE think of this, or what would Lenar think of this, or what would Prologis think of this?” We get a lot of what we call horizontal deal flow where we become aware of financing rounds for companies that could be very strategic for anchor LPs, so we triangulate from those three channels. We have something close to like 4,000 something in our CRM, and we just have a lot to kind of review, and then map back to what could be a great partner for our corporates.

Adam Hooper – Now let’s switch into a little bit how are these technologies going to be impacting, again, with the mindset of our listeners here on the podcast as investors in real estate let’s maybe talk about some of the implications that these technologies have. First question would be what are some of the bigger themes that you guys are looking at right now in terms of just broad categories of what you guys are looking at with technologies impacting this space?

Brendan Wallace – One space we continue to be really excited by, and probably less of a technology more so than a concept or a theme is just flexible office space. Today flex office space is about 1% of the U.S. office market. I’d say most estimates show it’s growing to somewhere between 10 and 20% so you’re going to see dramatic growth of kind of what is broadly categorized as coworking. We’ve invested at Convene, we’ve invested in Industrious, but we think this is a theme that’s here to stay, and it’s frankly broader than just coworking as a concept. It’s around how do you actually build a customer centric mentality as opposed to a tenant mentality in interacting with tenants. How do you really build a differentiated offering when you’re trying to attract tenants, and that touches on many different spaces. It touches on access control. It touches on tenant services. It touches on design, and landlords are just broadly focused on how do we build a differentiated offering versus just leasing in the same five and 10-year lease structure letting the tenant build out the space for them. How do we build a more full service offering to them? That’s the theme that we’re keenly, keenly focused on, and will continue to be on our second fund. Another big theme is the collision of blockchains and real estate capital markets. This is kind of an obvious one in terms of the opportunity because real estate capital markets are the largest capital markets on earth. The U.S. equities and debt market,

Brendan Wallace – so we’re talking about the biggest capital market on earth that’s clearly one of the least efficient, and blockchain which is this elegant, kind of ledger based solution which is fully distributed and trustless that enables people to freely transact in things in a more transparent way. What we see is that there is a lot of missing infrastructure that would allow for the fractionalization and tokenization of real estate interests to trade kind of on a blockchain. Where we’re investing somatically right now in in companies like Harbor that we invested in which is almost building a regulatory protocol that will allow for the fully compliant trading of real estate securities as tokens, so effectively doing what the REIT structure did, and making as seamless the process of trading in a real estate security as a token as seamless as trading a REIT on E*TRADE, but that missing infrastructure is where we’re keenly focused right now could be another big category what we’re focused on.

Adam Hooper – Blockchain is something we’ve definitely been paying attention to, and I’ve talked with Josh quite a bit at Harbor about kind of where they’re thinking. There are so many applications in the real estate space that the fundamental application of a blockchain technology can just totally revolutionize. The thing you’ve heard everyone talked about is title, but you look at things like lease administration, security tokens, can blockchains own assets, fund admin, tax audit, K-1 … There’s a ton of opportunity in our space for blockchains. That’s one that we’re very excited about as well, and I’m curious to see where that all continues.

Brendan Wallace – Yeah, I think it’s going to be an increasingly hot space just in kind of blockchain and crypto investing real estate is going to become increasingly front and center because the opportunity is so big and so obvious because real estate capital markets are just a great place to look to add efficiency right now.

Adam Hooper – Then, do you see impacts for investors? Keeping on this theme here because it’s one that we are so keenly interested in talking about securitizing or digitizing, tokenizing real assets… As investors out there looking at this space what do you think that the biggest impact is there, and also do you have an idea on timeline before that’s adopted and people can start investing in some of these tokenized real assets?

Brendan Wallace – That’s a great question that I don’t know the answer to on timelines.

Adam Hooper – Darn, I was hoping to get an answer from you.

Brendan Wallace – It’s not 10 years and it’s not next year. Let me say it differently. It could be next year, but at scale it will be years. An interesting question is what kind of assets are kind of the best and most obvious places to look for tokenization? One of the themes and thesis that we’ve been crystallizing is it almost seems like the more basic and the more simple, and the more elegant the asset itself, and, therefore, the less operating leverage it requires the easier it is to tokenize. Meaning a net lease asset because you’re dealing with a single credit, you don’t really have any expenses. It’s really just kind of a bond for the certain credit seems like a far more obvious place to look for tokenization, for example, a theme park or a hotel that has a tremendous amount of operating leverage, and, therefore, huge dependency on the operator itself. The less important the operator, and the less operationally intensive the real estate in some ways the more interesting the opportunity for tokenization because you don’t have to underwrite operations, but also because if you look across the U.S. a lot of real estate is single tenant. That leases a big asset class, and it’s by and large pretty illiquid, your opportunities as an owner to gain liquidity are sell or finance. It’s very hard to do a partial sale, and no one really wants to do that, but if instead you could float just like an IPO a portion of your equity interest in that asset that’s really compelling because it creates a whole new avenue to liquidity

Brendan Wallace – that just literally didn’t exist before, and can be far more frictionless because selling an asset is painful and expensive. Brokers are expensive and it’s a long arduous process that you’re undertaking. We’ve been thinking a lot about this, which asset classes are the most likely for tokenization in the near term? My conclusion is that it’s the less operationally intensive asset classes.

Adam Hooper – Agreed, and at the risk of turning this into a blockchain podcast we should probably take that one offline because I’m sure there’s days of conversations to be had around that. How about I know autonomous vehicles, and all the innovation that’s going on there is another big one that you guys have been watching. Have you guys made any investments in that space, or what’s your thesis around that, and its impact on our real estate industry?

Brendan Wallace – We haven’t done anything in autonomous vehicles per se. It’s obvious that autonomy in cars is going to have a dramatic impact on real estate simply because the automobile itself had a dramatic impact on U.S. real estate meaning you fly in on a plane over any city, and you look down looking at kind of the freeway arteries, and the amount of parking lots, and you can just quickly see the impact of non autonomous vehicles. It is kind of constrained and conditioned why assets are located where they are, why they’re worth what they are, what they look like their form factors, so the automobile and the constraints of the automobile in large part dictate a lot of our urban infrastructure. A space that we’ve become particularly is short-haul transportation going to chains, and how will that impact real estate, so we recently invested in a company called Lime which operates bike, e-bike and scooter sharing, here on the west side of LA these scooters, and bikes and e-bikes are becoming ubiquitous.

Adam Hooper – They’re everywhere.

Brendan Wallace – They’re everywhere and that ubiquity is interesting because it’s changing behavior in a way that, for example, docked bike sharing never did because it just wasn’t convenient enough for the consumer. You walk outside our door here in Venice, and people are buzzing by on Lime bikes and Lime scooters. What’s interesting is now real estate owners are starting to see this for tenants, for residents of multi-family buildings, for tenants in office buildings, and for potential shoppers at malls. We’ve actually been signing a lot of distribution deals for Lime to become a bike, scooter and e-bike sharing partner to become an amenity for tenants at real asset assets, or office parks, or college campuses. It’s been really exciting to see the interest in how much this is changing just foot traffic, and the nature of, frankly, walking outside a real estate asset.

Adam Hooper – We didn’t necessarily need segways. We just needed a different way to utilize bikes and scooters.

Brendan Wallace – That’s exactly it. It was something so simple and frankly so profound. People are just here at ground zero before you’re seeing this trend take off. There is a fundamental shift in consumer behavior. People are riding around on scooters, and they’re not walking. It’s not a fad it’s a real change, and it has impact on automobile ownership, and parking utilization, and the requirements around parking density. It’s something that owners really should have a point of view on. What we’ve been able to do is Lime is a company that’s very focused on partnerships with real estate landlords, and with cities and municipalities is how can you kind of conceptualize bike and scooter sharing as a piece of infrastructure, as a piece or urban infrastructure, and how can it complement reducing the load on our roads, and reducing emissions from cars. It is going to have this urban behavior, and it’s really exciting to kind of be at the front-lines of that as an investor, and, obviously, living here in West LA.

Adam Hooper – It doesn’t need a full shift of infrastructure either. It can utilize existing pedestrian and street scapes. It doesn’t require a massive capital improvement to just the urban landscape to be effective too. Problems with other approaches to that is it requires such a behavioral shift and capital shift from infrastructure that these apparently don’t.

Brendan Wallace – When you look at parking lots the fact that these scooters and bikes can operate on what is overbuilt infrastructure for them, all these paved roads and parking lots is what’s so interesting. It’s a dramatically lower load, and kind of less intensive use around traveling around. There’s this interesting picture that I saw where there’s a lot of pictures of all these abandoned bikes in China, kind of graveyards of all these bike share companies, and it’s seen as kind of an indictment of this whole category, and it was funny that someone put that picture up against just a gigantic airport parking lot, and it was like, “Wow, look at all these pictures of these abandoned dockless vehicles.”

Adam Hooper – Right.

Brendan Wallace – You think about the fact that you’re likely getting in a 2,000 pound piece of metal to drive two to three miles it’s kind of absurd, right? From both an environmental perspective, from a congestion perspective, and from a wear and tear on infrastructure, so these are some of the things we like to think a lot about, and try to find those points of connectivity between solutions like Lime and real estate owners to try partnerships with them.

Adam Hooper – Before we get to the next part about who’s going to be the winner or loser in some of these cases are there any early next-gen type things that you guys are looking at that are maybe very innocent right now, but you see coming up on the horizon?

Brendan Wallace – Quite a lot. I’ll go through one which is going to be a theme for our fund, too, which is the drones ecosystem. Drones are increasingly important to real estate, and not just in the use cases that are obvious today. There are drone companies that can do construction monitoring, they can take aerial photography, and monitor the progress of construction sites, they can provide security, but I actually think that drones, and kind of aerial delivery, so you don’t have to deliver everything terrestrially you can actually deliver it aerially which I know sounds like an out there idea it starts to actually change the form factor of buildings because roofs are not kind of a high value piece of real estate in most assets today. They’re kind of just put up there to store a water cooler, or an HVAC unit and keep the rain out, but if instead they become points of entry for packages, or perhaps some day even for people the value of air rights and kind of aerial right of way becomes increasingly important, so in some ways the idea of real estate is something you access terrestrially might actually change. It won’t change next year or even in five years, but you’re taking a long dated time horizon. It is something you have to think about as an owner, so we are looking broadly at kind of the drones ecosystem, and where are the opportunities to invest today in companies that we think can be transformative and strategic for real estate owners to have a point of view on. How are drones going to impact your assets today?

Adam Hooper – So much of these technologies they move so quickly and the regulations aren’t necessarily there to keep up with that. Even with the scooters and bikes, I know San Francisco was having a big issue about all these scooter companies coming in. How do you see the regulatory side of the world especially in blockchain, encrypto and securities, and all that, how do you see the regulatory environment either hampering or kind of helping select who may be the winner in some of these spaces? How big of an impact do you guys watch on the regulatory side?

Brendan Wallace – We watch really closely on the regulatory side. A lot of the companies that we’ve invested in have real regulatory risk. Taking the scooters and bike sharing as an example, the way that many cities reacted to the rapid growth of Uber and Lyft, and kind of ridesharing as a category provokes in a lot of cases outrage from consumers because this was a product, and this was a solution they wanted, and they did not like the fact that local governments were supporting what is a local monopoly which is a taxi union in a lot of cases. In some ways you’ve seen a progression from that, and in seeing how a lot of municipalities have embraced companies like Lime as kind of a provider that consumers want, although, they will regulate it, but they actually want to make it available is a real shift from where we were five years ago. Taking that to tokenization and the blockchain, the FTC and pretty much any governing body around securities and financial markets is right now scrambling to form a point of view on what to do. What is clear is that real estate assets are securities by definition there’s no equivocating on that. Unlike, for example, ether or bitcoin it’s a security, and, therefore, it’s governed and treated differently in the eyes of the law and the eyes of the government, and regulatory bodies. It’s a space where I do think the decisions the regulators make in the next 12 to 24 months will dramatically impact the timeline of what you asked me previously which is when are we going to be able to tokenize,

Brendan Wallace – and trade real estate securities on a blockchain? The answer if it happened overnight so if kind of the FTC performed a point of view that was favorable to solutions like Harbor the demand is there this could happen tomorrow. The major impediment is really when are the regulators going to kind of make up their minds. I’ll contrast that to you asked me about autonomous vehicles. In the case of autonomous vehicles you also have big regulatory questions around that, but you also still have some technical challenges, and some technical development that needs to happen, and also some price point changes. Today, it’s pretty expensive to get an autonomously driving Tesla, and it really can’t drive autonomously everywhere, so in addition to regulatory hurdles there’s also technical, and price point, and commercialization hurdles as well so it kind of depends on the category, but regulators are taking a more tech forward, and kind of less combative view of innovation, and I think that’s exciting to see.

Adam Hooper – Trying to support it but within frameworks. There are some things, especially, again, I guess we keep going back to blockchain. There are new conversations that you could have with some of this technology that regulations that were formed specifically on the security side back 80 years ago technology exists today to have such a different conversation that was available 85 years ago that it’s going to be interesting to see how they keep up with that. Are they willing to kind of encourage this innovation within the existing framework, or are they going to be able to have the forethought to kind of get outside of that framework, and kind of push some of those boundaries, and how that’s going to play out it will be interesting to watch and see which route that takes.

Brendan Wallace – Absolutely. We’re seeing encouraging signs about governments both local and federal, and state regulators and federal regulators being more open-minded and that’s a positive sign for technology and innovation, but there is still a lot of room left to grow, and left to see more progress there.

Adam Hooper – Thinking back again with the mind of a real estate investor on this conversation who are the winners, who are the losers in terms of asset classes, or is this a general improvement on the real estate industry as a whole as it comes from an investor mind looking at the space, or how do you see that playing out?

Brendan Wallace – I take a very optimistic view of it. There may be some asset classes where they might be particularly challenged. I’ll walk through a couple like airport parking. It’s probably a particularly challenged asset class as a function of ridesharing, and a number of the trends like autonomous vehicles that we’ve talked about. Is hard to see much of a future there for it, but perhaps I’m thinking too narrowly, or take, for example, self storage. I don’t know if you’re familiar with a company Clutter, but it’s kind of on demand self storage where they show up at your house, they pack up your items for you, and they’re able to store them in an industrial warehouse far outside the city. It’s a very simple and elegant solution for the consumer, a lot more convenient than going to a self storage facility, but it’s also more cost efficient, so it’s just better all around for consumers. It’s hard to see what is the competitive response of traditional self storage over any reasonable timeframe, but those are maybe the obvious examples of kind of clear threats. More broadly, to kind of the major asset costs of real estate what you’ll naturally see is the owner operators who are most forward looking, who are most innovative and who think very collaboratively around which technology should I be adopting that will make me a best operator as quality experience to my asset users whether they be tenants or hotel guests or shoppers that are thinking in a very proactive way around that they are going to emerge from their peers.

Brendan Wallace – They will just simply be able to acquire more assets because they’ll be able to underwrite them more aggressively because they have those operational chops, so there’s this shift where real estate is an industry which is typically thought of as a capital markets driven industry where the best in the industry are those who buy and sell the best. While that’s still true and that will be true for quite some time the shift is happening where it’s no longer about just buying and selling better than your peers it’s also about operating better than your peers, and operating better than your peers is now increasingly driven by technology and innovation, and how forward looking as an organization can you be, and which technologies you got that will make you differentiated from your peer set. You will see the best in class operators become even bigger than they are today, and technology will have a big hand in shape.

Adam Hooper – We’re seeing, too, as the current generation of leadership ages out, and we get more younger more entrepreneurial leaders in some of these positions with these legacy real estate companies there’s just a much more openness to technology. That will be a very big kick of adoption in our space as these new technologies come with people just being in a leadership position that are more comfortable with growing up with technology.

Brendan Wallace – That’s exactly right. The younger generation is coming into leadership executive roles at many of these real estate companies, and they just tolerate things being done in just a wildly inefficient and oftentimes analog way. The idea that you can’t get a lease, or execute a lease on your phone it doesn’t make sense. It might make more sense to someone that didn’t grow up with a mobile phone, but it certainly will make no sense to someone that grew up with a mobile phone. As that generational shift happens you’ll see that accelerate, and that mindset it will drive innovation even more than we’ve seen today in the real estate industry.

Adam Hooper – Not to bring a pessimistic tone into this, but what are some things that you guys are concerned about, or what might be out there on the horizon that would maybe slow the pace of some of this adoption?

Brendan Wallace – If you saw a major attraction in venture capital markets that would just have a categorical shift on all early stage companies I think it’s hard to say that we see that coming. We’re definitely in a period right now, which is quite frothy around valuations, but the truth is growth in the technology industry has never happened like it’s happening now. It’s oftentimes hard to look at historical precedent when you’re dealing with growths like we’re dealing with today. Companies like Lime are doubling every two weeks, and they have been for like the last nine months, so it’s just hard to know how to measure that company in light of traditional valuation models, but I say that’s something that does concern me. We’re, obviously, concerned about real estate capital markets as well. Interest rates have been rising, but there’s also a lot of capital out there. A lot of owner operators are looking to build themselves as we were discussing before best in class operators in some part through technology and innovation. Part of why they have that focus is the experience of the great recession, and living through that that you actually might need to hold assets longer than you’re anticipating if capital markets turn against you. If that happens you better be a great operator because you need to operate that asset, you can’t just flip out of it into a rising market. Cecause of that owners are thinking more proactively around tech and that’s a good thing because I think it will enable many to weather a capital market storm

Brendan Wallace – far better than they would have been able to.

Adam Hooper – What’s next on the horizon for you guys? You’ve mentioned fund two here a couple of times what’s the next year or two look like for Fifth Wall?

Brendan Wallace – We’re actively investing. We unfortunately can’t talk about our fund two, but we have kind of I’d say new opportunities in front of us. I’d say we have a handful of themes that we’re particularly focused on some of which we’ve discussed today, and we’re going to continue investing against those themes. We’re going to bring on more strategic partners to work with on the real estate side strategic partners that are both in the same asset classes of those we’re currently working in as well as new asset classes that we can expand our mandate, and kind of expand our aperture of where we can invest. We’re going to continue to trying to just get better as an organization in driving innovation, and collaboration amongst our strategic LPs, and trying to kind of guide this particular category of the venture world forward. We want to have a hand in shaping that, and be a big part of the conversation. We have a lot I’d say on the horizon, and we’re just excited looking forward.

Adam Hooper – This is great conversation. Again, as a real estate guy turned tech guy it’s awesome to see you guys out there trying to push the envelope, and help with adoption of tech in our industry. It’s definitely in need of a lot of innovation, so the more we can do to push that it’s a good thing for the industry on the whole.

Brendan Wallace – Yeah, thank you, I really enjoyed the conversation, and thank you so much for having me on.

Adam Hooper – Absolutely.

Brendan Wallace – I really enjoyed it.

Adam Hooper – Perfect, well, if there’s anything that investors, or listeners out there have questions, comments, we’ll put contact information in the description. As always send us a note to podcast@realcrowd.com and with that we’ll catch you on the next one.

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