Brendan Wallace has had a lot on his mind lately. Wallace is the founder of Fifth Wall Ventures, a nine-year-old proptech venture firm with $3.2 billion in assets under management. He also has a home in LA, which continues to fight wildfires. While his place remained intact, many of his friends were not so lucky. Wallace became accustomed to external forces beyond his control. First, the pandemic is drastically changing the landscape for many of Fifth Wall’s limited partners, which reads like a who’s who of real estate (CBRE, Cushman & Wakefield, Lennar). Unfortunately for many of the same players, the office vacancy rate is still around 20% nationwide, and analysts do not expect that number to go back down as many companies abandon the idea of going back to the office. Proptech has also taken the slings and arrows in recent years, partly due to high-fliers whose fortunes have turned fast, like WeWork, which emerged from bankruptcy last June after a failed IPO and massive restructuring. However, change usually brings hidden benefits, and Wallace believes the industry is poised to bounce back. As he sees it, there is a ballooning opportunity related to asset resilience – or using technology to help real estate assets withstand damage and disruption. He also sees a big opportunity to help Fifth Wall’s limited partners more aggressively capture the tech industry’s demand for data centers — and the energy they need to fuel them. We chatted with Wallace recently about some of these trends, along with life in LA during what many feel like the apocalypse. You can listen to the full conversation here or read excerpts from our conversation, edited for length. You’re in LA How are you? It’s just tragic what has happened. Everyone on our team is safe. We’re in Santa Monica and they have to evacuate our office. This is a crucible moment for Los Angeles, and there will be many shadows on the other side of this, with the big political and economic questions that California has been grappling with for a long time coming to the fore. It’s positive, but now, it’s just sad to see part of this beautiful and amazing city destroyed. How do you think about what’s to come? There will be a lot of cleaning, a lot of reconstruction. That should represent an unexpected opportunity, as unseemly as you say. I wouldn’t say chance. . .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 of rebuilding and reimagining for one of America’s greatest cities. And I would say that at Fifth Wall it’s a pleasure to be a part of that. What is part of what it looks like? I don’t know yet. The main problem that home and business owners face is [even before the fires] which is the insurance provider’s flight from the country. . . We are one of the most active investors in fintech for the housing industry. Fifth Wall invested in Hippo, which is a very active home insurance company in California. [Editor’s note: Hippo stopped writing new homeowners’ insurance nationwide last summer.]
I mean, a lot of regulation that is very intent and focused on benefiting consumers actually has the opposite effect, and creates market asymmetry that adds to the problem that we have now, which is that many homes are uninsured or people get their insurance canceled. So, we are excited about two things: there are better solutions for consumers that we can develop, and we are very interested in investing. Another thing I would like to do is shorten the amount of bureaucracy required to launch an insurance company. Rules aside, does the math work out? It is difficult to understand how even startups with different regulations work [insure] California at the time of this devastating event made it very difficult for insurance companies to recoup their investments. It’s hard to answer that question without looking at a district-by-district analysis. There may be areas that cannot be insured, but there may be areas that cannot be insured, if there are no rules, and this last one I focus on reducing. This is not just a California problem. It may be more acute in California and home prices may be higher in California, but we have to deal with this as a nation. Do you think wildfires could change the way real estate works in this high-risk area? That doesn’t seem to have happened in, say, Miami. I think it is going to increase prices for several reasons. There will be a lot of new construction in Southern California which will increase the cost of housing replacement. People still want to live in good parts of the country; you will not see an exodus of people just because of this. An increase in insurance premiums will also lead to less affordable housing, and may experience downward pressure. [meaning houses might cost slightly less because sellers have to factor in the high cost of insurance]. However, the net increase will be home prices throughout Southern California and especially in West Los Angeles. You are an investor in ICON, a modular home 3d printer. Do you see potential opportunities for the company? We reported that they laid off a quarter of their staff just this month before the fire. ICON is an exciting business. Fifth Wall is a small investor in the company. Our thesis is not only about fire prevention or rebuilding after natural disasters, but how to build houses faster and cheaper and with fewer materials than today? What we have built is a way of printing houses effectively and in the process, reducing the waste associated with the construction of houses. One crazy statistic that most people don’t know is that about 5% of all materials in US landfills are materials that go to construction sites and then go directly to landfills. It’s a massive problem that drives up costs for consumers, makes it harder to operate construction companies, and has a massive carbon footprint. The question, I think, is: how can you scale? Can you make it cost effective? Have you made an investment in a company that focuses exclusively on making non-flammable materials? No, but we should, and I think this is the place that will receive a lot of attention today. . .[Going forward] retrofitting would be a big deal. Most of the houses we need to protect are built, and built with materials that can be very difficult to remove. So in real estate technology, a lot of problems and a lot of value that can be added to society is by replacing existing assets, whether they are buildings or houses or infrastructure assets. Of course, when rebuilding, we must know about the materials used, and we must use the best solutions. But most of the homes at risk in Southern California already exist. In general, the proptech sector has seen fewer deals in recent years. Is it fair that overall interest in the industry has cooled? It’s really cold. I just lived through – and am still in – the cold, bitter capital market for proptech. You haven’t seen a big M&A event. Virtually no focused venture fund, Fifth Wall included, raised any capital during that period. There are very few VCs coming into the space. The flip side is what you see today – a company that survived this Darwinian extinction event. Companies that make the right cost cuts, that make business models, that make marketing, and that undergo recapitalization emerge on the other side stronger, more viable, and more durable in the long run. I think spring has sprung for the prop tech industry, and you’re seeing a lot of positive indicators 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? Long term [there are questions] about the office industry, but at the same time you see explosive growth in a category that was never considered real estate before. Data centers are really exploding. And some of these explosions force the real estate industry to grapple with big questions. Like, the AI revolution that has everyone so excited couldn’t have happened without large-scale data centers in the US. Continue. . . We need server racks that can run exercises and draw conclusions around the world – and we need a lot of them. This is not a surprise or a secret in the real estate capital market; Data centers have probably been the hottest asset class in the real estate industry for the past two years. But now a related problem has arisen. . . is an energy-intensive data center, the local utility does not allow you to connect the grid. . . That forced the real estate industry to say, ‘We have to be in the energy business ourselves if we want to be in the computing data center business.’ What do you want your LP to be? Would you invest in fusion startups today? Fusion is obviously fun, but we have a closer problem. We need energy now or next year. Ideally, we don’t want dirty energy sources based on fossil fuels. . so that it really leads to the renewal that we know the cost of diligence, [which is] most obvious solar. [So] The bottom line is, yes, we are investing in solutions to accelerate solar development together with real estate investors, and real estate companies will become energy development companies themselves.
