The built environment is responsible for nearly 40% of global carbon emissions, according to to the International Energy Agency. And while some of that comes from the energy and materials needed to build buildings, the lion’s share – nearly 90% on an annual basis – comes from using them. Decarbonising the power grid could be a major contributor to the problem, but often it is easier and more profitable to simply reduce emissions.
That’s where proptech can step in. By reducing CO2 emissions on the operational side, it can save building owners and managers money while improving the experience for occupants. We asked three venture capital firms investing at the intersection of proptech and climate technology how a focus on reducing emissions can reduce a building’s carbon footprint and open up new opportunities for returns.
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However, challenging market conditions mean that returns are anything but assured. But for category leaders, there is the potential for significant upside. “This economic environment will continue to test many companies,” said Jake Fingert, managing partner, and Lionel Foster, investor, at Camber Creek. “Those who survive will have the opportunity to expand their market share.”
And the potential market is huge. Expenditure to get the world’s real estate to net zero will be necessary $1.7 trillion a year between now and 2050, according to McKinsey. “This is the single largest capex supercycle an industry has ever seen,” said Othmane Zrikem, chief data officer of A/O Proptech.
We spoke with:
(Editor’s note: To get a complete picture of this industry, we’re examining proptech from three different angles. This research examines the environmental impact of proptech and what startups are doing to minimize their footprint, and we’ll be sharing a (other publishing about upcoming tech in the space. The first part of this research was about proptech startups solving financial problems.)
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Jake Fingert, managing partner, and Lionel Foster, investor, Camber Creek
There is a lot of overlap between building technology and proptech. What would you say is the difference between the two? Where do they overlap?
We hear people make this distinction between proptech and construction technology all the time. However, we see a lot of overlap between the two categories and think it’s helpful to be deep in both areas. For example, we identify ourselves as a proptech company and co-led the Series B round for Bridgit, which identifies as a construction engineering company.
The built world is vast and hugely affects everyone’s quality of life. Technology that enables us to make better use of these spaces at every stage of a building’s lifespan is relevant and valuable. That is what counts. We could even argue that you need more ideas that span the life cycle of a building, which spans decades.
What is your investment thesis for proptech in 2023? What growth do you expect in the sector?
Our approach has always been to invest in and support the growth of companies that are true category leaders or well on their way there. This economic environment will continue to test many businesses. Those who survive will have the opportunity to expand their market share.
So we expect to see more opportunities to invest in the best companies at prices more closely aligned with current performance and reasonable growth prospects. When transactions slow down, real estate groups focus more on internal operations. Mostly this involves technology, and we expect some companies helping real estate groups to increase margin to have a strong run in the period ahead.
A deeper look at proptech
Commercial real estate has taken a hit during the pandemic. How has that influenced investor interest in climate-friendly proptech?
Many of our portfolio companies that offer sustainability solutions also save customers money and improve operational efficiency. That value proposition is irresistible. It’s just a matter of getting that information in front of the right decision maker.
When you combine that with companies that increasingly want to be at the forefront of sustainability and are encouraged to do so by their stakeholders, we do not expect a slowdown in the adoption of these technologies.
Where do you see the greatest opportunity at the intersection between proptech and climate technology?
About 50% of the CO2 lifecycle emissions of a building arise during the construction phase, so the more we do to extend the useful life of a building, the less carbon is associated with that location. This ties in with the interest of investors and tenants in spaces that offer multiple uses, sometimes simultaneously, sometimes over time.
There will be more activity around retrofits, refurbishment and data-driven location selection that helps people discover non-obvious spaces that can meet their needs. We also spend a lot of time on things like IoT and sensors, where innovations can potentially have a big impact on the climate.
The Inflation Reduction Act provides significant tax credits for energy retrofits. Has that changed the type of startups your company is considering? If so, in what way?
The Inflation Reduction Act is perhaps the most sweeping piece of climate legislation in US history. There are the retrofit incentives, which you mentioned, but experts like those at our portfolio company Arcadia also expect a “solar storm” — a major increase in clean energy production, connectivity of clean energy supply to a more resilient power grid, and development of clean energy assets in low and middle income communities.
We have had many discussions with companies working on sustainable construction and sustainable energy solutions, but we expect even more activity in this area and a wider range of creative solutions.