Real estate companies are pivotal to energy development amid booming data center demand
Brendan Wallace has had a lot on his mind lately. Wallace is the co-founder of Fifth wall projectsa nine-year-old proptech venture company with $3.2 billion in assets under management. He is also a homeowner in Los Angeles It continues To fight raging forest fires. While his place remains intact, many of his friends are not so lucky.
Wallace was accustomed to external forces beyond his control. First, the pandemic has dramatically changed the landscape for many of Fifth Wall’s limited partners, which read like the Who’s Who of Real Estate (Cbre, Cushman & Wakefield, Lennar). Unfortunately for many of these same players, office vacancy rates still stand at roughly 20% nationwide, and analysts don’t expect that number to budge as many companies give up on the idea of a full return to the office.
Proptech has also taken its racks and arrows in recent years, in part due to high-profile fires whose fortunes have quickly turned around, such as WeWork, which emerged from bankruptcy last June after a failed IPO and massive restructuring.
However, the change offers hidden benefits, and Wallace believes the industry is poised to bounce back. As he sees it, there are amplified opportunities associated with asset resilience — or the use of technology to help real estate assets withstand damage and disruption. He also sees a big opportunity to help Fifth Wall’s limited partners capture the tech industry’s demand for data centers — and the power required to supply them.
We spoke with Wallace recently about some of these trends, along with life in Los Angeles during what felt to many like the end of the world. You can listen in on that Full chat here Or read on for excerpts of our conversation, lightly edited for length.
You’re in Los Angeles, how are you?
It’s just tragic what happened. Everyone on our team is safe. We are 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 questions that California has been grappling with for so long at the forefront. This is a positive thing, but now, it is bloodcurdling to see parts of this amazingly beautiful city destroyed.
How do you think about what comes next? There will be a lot of cleaning, and a lot of rebuilding. That must represent unexpected opportunities, like this saying.
I won’t say chances. . 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 moment to rebuild and reimagine one of America’s great cities. I would say that we at The Fifth Wall are excited to be a part of that. What’s it like to be a part of that? i don’t know yet.
A major issue that homeowners and business owners have been dealing with [even before the fires] It is the journey of insurance providers from the state. . .
We are one of the most active investors in Fintech for the residential industry. Invest in the fifth wall hippopotamusa home insurance company that has been very active in California. [Editor’s note: Hippo stopped writing new homeowners’ insurance nationwide last summer.]
I mean, a lot of the regulation that was well-intentioned and focused on benefiting consumers has actually had the opposite effect, and it creates an asymmetry in the market that adds to the problems that we have now, which is a lot of homes that are uninsured or people getting their insurance canceled. . So what we’re excited about is two things: There are better consumer solutions that can be developed, and we’re interested in investing in them. Another thing I would like to see is streamlining the amount of bureaucracy required to launch insurance companies.
Regulations aside, does the math work? It is difficult to understand how startups with different regulations can [insure] California is when these devastating things happen that make it very difficult for insurance companies to recover their investments.
It is very difficult to answer this question without looking at the county analysis. It is possible that some areas are not viable, but it is also possible that some areas are otherwise inviable He was Be unregulated, the latter is what I focused on mitigating.
This isn’t just a problem in California. It may be more severe in California and home values may be higher in California, but we have to solve this as a nation.
Do you think wildfires might reshape the way properties are valued in these high-risk areas? This does not appear to have happened in Miami.
I think it will increase prices for several reasons. There will be a lot of new construction in Southern California which will raise the replacement cost of homes. People still want to live in these beautiful parts of the country; You won’t see people walking out simply because of this.
An increase in insurance premiums will also lead to less affordability of homes, and could have downward pressure [meaning houses might cost slightly less because sellers have to factor in the high cost of insurance]. The net, though, is that this will increase home prices throughout Southern California and especially in West Los Angeles.
You’re an investor in Icon, a 3D printer for modular homes. Do you see a potential opportunity for that company? Inform us They laid off a quarter of their staff just this month before the fires broke out.
Icon is a truly exciting work. The fifth wall is a small investor in that company. Our thesis wasn’t about wildfire prevention or post-natural rebuilding but about, how can you build homes faster, cheaper and with fewer materials than you do today? What they’ve built is a way to efficiently print a house and in the process, dramatically reduce the waste associated with building a house.
One of the crazy statistics that most people don’t know is that about 5% of all material in American landfills is material that went to a construction site and then went straight to a landfill. It’s a huge problem that drives up costs for the consumer, makes it difficult for construction companies to operate, and has a huge carbon footprint. The question, I think, is: How do you scale that? Can you make this cost effective?
Have you invested in companies that focus specifically on making non-rebound materials?
No, but we should, and I think it’s a space that’s going to get a lot of attention right now. . .[Going forward] Retrofitting will be the big problem. Most of the homes we need to protect are already designed with materials that can be very difficult to dispose of. And so in proptech, the bulk of the problem and the amount of value that you can add to the community is retrofitting assets that we already have, whether those are buildings or homes or infrastructure assets.
Of course, in rebuilding, we must be very conscious about the materials used, and we must use the best solutions. But the vast majority of homes at risk in Southern California already exist today.
Overall, the Proptech sector has seen fewer deals in recent years. Is it fair to say that public interest in the industry has cooled?
It has cooled completely. I think we’ve just lived through – and are still in – the cold, watered-down capital markets for Proptech. Didn’t see any major M&A events. Essentially, none of the focused venture funds, including Fifth Wall, earned any capital during that period. There have been very few VC flows into the space.
The flip side of that is what you see now – companies that survived this Darwinian extinction event. Companies that have made the right cost cuts, that have galvanized their business model, that have galvanized their marketing, and that have gone through capitalization processes emerge on the other side of this stronger, more viable and more durable over the long term. I think Spring has caught on in the Prop Tech industry, and you’re seeing a lot of positive signs for the space right now. [Editor’s note: Here, Wallace references the IPO of ServiceTitan, a Fifth Wall portfolio company that makes software for contractors and went public in December, and the recent sale of another portfolio company, Industrious, to its partial owner, CBRE.]
What about this existential threat to the office industry that we’ve been hearing about for years?
In the long term [there are questions] About the office industry, but along with that you’re seeing explosive growth in categories that were never thought of as real estate before. Data centers are absolutely exploding. Some of that explosion is forcing the real estate industry to grapple with big questions. Like, the AI revolution that has fascinated everyone is not possible at all without the massive scale of data centers in the United States. However, the massive scale of data centers in the United States is not possible at all without the massive production of new energy.
I continue. . .
We need racks of servers that can do training and 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 over the past couple of years have probably been the hottest asset class in the real estate industry. But now there is a problem related to the back. . . And it’s such a power-intensive data center, the local utility won’t let you connect to that network. . .
This forces the real estate industry to say, “We have to be in the energy business ourselves if we want to be in the compute data center business.”
What does LPS expect you to do? Would you invest in fusion startups now?
Obviously, fusion is really exciting, but we have a near-term problem. We need the energy now or next year. Ideally, we don’t want those to be dirty, dirty power sources. . So that really leads to renewables that we know are viable, [which is] The most visible solar. [So] The bottom line is, yes, we are investing in solutions to accelerate solar development alongside our real estate investors, and real estate companies will become energy developers themselves.
