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Fifth Wall Taps REITs For New Fund After Proptech 'Extinction Event'

Proptech venture capital investment firm Fifth Wall is raising capital for its latest fund from commercial real estate industry heavyweights as the industry emerges from a tumultuous period. 

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Fifth Wall CEO and Chief Investment Officer Brendan Wallace.

New investors who have committed to the fund include public REITs Public Storage, Federal Realty Investment Trust, Kite Realty Group and Ryman Hospitality Properties, the firm announced Thursday. It is targeting a $500M raise for the Fifth Wall REACT Fund, according to a regulatory filing.

In an interview with Bisnow, Fifth Wall CEO and Chief Investment Officer Brendan Wallace said the firm's relationships in and knowledge of the commercial real estate industry has allowed it to navigate the past few years, which have been littered with startups closing or going bankrupt.

“Proptech is emerging out of a very difficult three years,” Wallace said. “We just lived through an extinction event with proptech and venture capital and startups.”

Venture capital funding for proptech firms and startups began to dry up in late 2022 after the Federal Reserve ticked up interest rates. After $19.8B was raised in the sector in 2022, VC firms spent 42% less on proptech investments in 2023.

During that period, a handful of proptech firms fell by the wayside, including short-term rental operator Zeus Living, tech-driven construction firm Katerra and homebuying startup Reali. Others faced bankruptcy, including apartment proptech startup Veev, smart glass provider View, and most notably, WeWork.

“To be a great investor in proptech, it is not enough to understand technology. You have to understand real estate,” Wallace said. “A lot of venture investors learn that lesson very painfully.” 

Despite an even slower start to VC proptech funding during the first half of 2024 — with proptech companies garnering 14% fewer investment dollars than the same period the year before — the market began to show signs of improvement by the summer. Proptech firms raised more than $15B globally in 2024 as VC firms shifted their emphasis to companies that demonstrated financial discipline and scalability, according to a Center For Real Estate Technology & Innovation report

“That extinction event, while unfortunate, provides opportunity,” Wallace said. “With Fifth Wall, the simple reality is we were able to raise capital where many other funds were not. The fact that Fifth Wall has dry powder … means that we’re well-positioned in this environment.”

Wallace said the crisis in the proptech sector means those companies that remain standing are in a stronger financial position an ripe for further funding.

He pointed to recent success stories from Fifth Wall's past funds. ServiceTitan, one of the firm’s largest investments, went public and garnered a $9B market capitalization. It was the seventh proptech company Fifth Wall ushered to an IPO.

It was also an early investor — and the only venture capital backer, Wallace pointed out — in Industrious, which announced this week that it is being acquired by CBRE at an $800M valuation.

As a backer of Industrious, Wallace said CBRE’s investment and acquisition of the company legitimized the coworking firm’s business model versus WeWork. Unlike the house that Adam Neumann built before it fell into bankruptcy in 2023, which offered flexible short-term leases while also signing long-term lease commitments in high-profile properties worldwide, Industrious instead uses a management model, sharing profits with landlords but keeping its liabilities down. Yardi Systems purchased WeWork out of bankruptcy in April 2024.

Wallace said most of Fifth Wall’s VC peers invested in WeWork because they believed the master lease model would prevail. 

“Industrious was a very contrarian bet back in ‘23,” Wallace said. “I do know we were the only VC invested in the business.” 

Last year Fifth Wall, through its previous $500M fund, invested in such firms as solar design software maker Aurora Solar, construction software company Procore and property service platform Lessen, according to a spokesperson.

Fifth Wall has 110 investors in the fund, including returning investors Hilton Hotels & Resorts, MGM Resorts International, Equity Residential, Starwood Capital, Marriott International, Digital Realty Trust and Hines. It will work to find new opportunities in the recovering proptech sector with a focus on energy, Wallace said. 

Wallace said Fifth Wall sees investment opportunities in the data center sector with technology that addresses the mounting concerns about the facilities’ enormous use of power. With the boom in AI, data centers have proliferated across the county, but owners and operators are also encountering resistance from governments over their drain on energy grids. 

Wallace said he predicts Fifth Wall could invest between 10% and 40% of its capital in proptech companies addressing energy consumption and sustainability concerns with the data center industry.  

“Everyone now understands that this much-lauded AI revolution is absolutely impossible without an energy revolution,” Wallace said. “The real estate industry and energy industry are going to converge. Data center industry will be at the very front, the very vanguard, of building their own energy companies.”