Meet The Challengers: VC-Funded Office Leasing Startups Take On Traditional Brokerages
Venture capitalists and angel investors are pouring millions into a new generation of office leasing platforms that could give major brokerages a run for their money.
Startups like SquareFoot, TenantBase and Truss, which aim to simplify and expedite the online office leasing process for small and midsize firms, have raised millions in early stage funding this year. Industry experts say these firms can arrange and profit from smaller deals that brokers at larger firms typically dismiss.
"All of these listing services are really brokerage firms,” VTS co-founder and CEO Nick Romito said. "The outlier is they’re competing with the larger firms. What will be interesting to [see] play out is how large firms react to it."
Six-year-old virtual brokerage SquareFoot raised $7M in Series A funding earlier this year in a round led by Rosecliff Ventures. The New York office listing platform combines proprietary technology with a team of brokers to bring the office leasing process online.
“Because of how our business is set up, we’re able to work smaller deals with a level of service that doesn't make sense for a traditional firm,” SquareFoot co-founder and CEO Jonathan Wasserstrum said. “There’s a deal we were just working on for 5K SF and a person from one of the big, reputable firms was also working it. We won that deal because we were able to provide a level of service they weren’t.”
SquareFoot offers a range of services that allow users to search for listings, book tours, share documents with relevant parties involved in a deal, discuss lease negotiations and sign and transact deals virtually. The company also has nearly 40 brokers on hand to assist clients in the process.
It plans to use the $7M capital injection to accelerate its expansion throughout New York and to add new markets.
“SquareFoot in some ways goes even further in that they’ve got a process flow, a deal and transaction funnel that is highly automated that allows them to perform transactions that others may not be able to perform profitably,” MetaProp co-founder and principal Aaron Block said. “Some of the larger firms wouldn't touch those [smaller] transactions with a 10-foot pole.”
Though these startups have nowhere near the reach and market share players like CBRE, JLL, Newmark Knight Frank, Cushman & Wakefield and Marcus & Millichap possess, the quick and seamless experience these online brokerages provide occupiers can give them an edge.
“Tenants expect the experience to be faster, more seamless and they want to be able to search for what they want, when they want it and how they want it,” CRETech.com founder and CEO Michael Beckerman said. “The crop of startups that are capitalizing on this trend are some of the smartest companies to emerge in CRE tech in the last seven to eight years.”
These startups are raising millions in funding from VC firms and early stage investors looking to get in on the next wave of tech disruptors in the commercial real estate space. PropTech investment continues to explode, with investors pouring a whopping $12.6B into real estate tech companies in 2017 — up sizably from the $4.2B injected into CRE tech in 2016, according to MetaProp’s midyear Global PropTech Confidence Index.
Santa Monica-based TenantBase closed on a $10.7M venture funding round in June to help expand its engineering and brokerage team. The company, founded in 2014, provides listings for properties in some California cities along with Atlanta, Dallas and Nashville.
Truss, an office listing platform specifically for employers looking to lease no more than 10K SF, closed on a Series A funding round last August in which it raised nearly $8M. The company is powered by artificial intelligence and uses Matterport’s 3D-tech to offer virtual tours and property walk-throughs.
“Part of the reason we’re seeing a lot of venture capital in the space is we realize this is an industry that is changing, ripe for disruption and there are a lot of tools coming onto the market that are having a real impact on the brokerage community,” Camber Creek General Partner Jake Fingert said. Fingert joined Camber Creek, a real estate venture capital firm based in Rockville, Maryland, after serving three years under the Obama administration as a White House senior policy adviser and as senior adviser to the General Services Administration administrator.
Left In The Dust — An Old Model In A Digital Age
With the tight labor market averaging 203,000 new jobs a month and an unemployment rate of 3.9% — a 17-year low according to the U.S. Bureau of Labor Statistics — demand for office space in the U.S. remains robust. National office occupancy and rent growth were stable in the second quarter of this year, with vacancies inching up 10 basis points to 14.9% due to increased supply levels, JLL reports.
To keep pace with heightened demand from occupiers in search of more flexible office leases, commercial brokerages are building tech infrastructures to support their underlying businesses and give customers a seamless user experience.
This was not the case a decade ago, when companies seeking available office space were faced with a grueling, fragmented process that was largely dependent on the knowledge of brokers and access to data providers like CoStar.
“From our point of view … the commercial real estate model in the industry is perfectly suited to a world that no longer exists today," LiquidSpace founder and CEO Mark Gilbreath said. "While it once seemed reasonable to sign a 10-year lease and wait six-to-12 months to move in, and while it once seemed reasonable to move employees within a cube farm and live with the burden of underutilized space, that’s no longer the case."
Today's employers want to be able to research available listings and connect with landlords on their own time at the click of a button. Speed, efficiency and agility are the names of the game, Gilbreath said. LiquidSpace is a flex office platform that helps companies discover, compare and transact deals online.
“In many cases companies are transacting through our platform without any help needed,” Gilbreath said. “In a market like New York City, the typical lease negotiation cycle time is four to 12 months. That simply doesn’t work in this age of companies moving rapidly. We’ve repeatedly worked with companies that have the need right now and want to be in their new office in a week or a month."
To keep pace with client demands and the changing times, both emerging and established commercial brokerages are taking a cue from their residential peers in terms of tech adoption. Listings platforms like Zillow, Compass and RedFin have long been accessible for homebuyers on the hunt for new digs. The commercial space, known for its sluggish tech adoption, is finally catching up, Vander Capital Partners CEO Roberto Charvel said.
Vander Capital is a San Francisco-based angel investor that has funded real estate companies like Starcity.
“I think a lot of the interest from venture capitalists is they have been able to see what happened in the residential market and now they want to jump on the next trend,” Charvel said. "I feel like office is the next trend within commercial real estate."
Adapt Or Die
Noting the rapidly evolving office environment and demand for more flexibility, major brokerages have aggressively started to ramp up their tech infrastructure and investment efforts to remain competitive.
Leaders in the space are expanding their services to include tech advisory components for clients — like Newmark Knight Frank’s new Global Knowledge and Innovation Center in New York — and tech accelerator programs. Some are even taking it a step further by launching their own solutions to help clients oversee assets and manage tenants, such as the launch of JLL’s PropTech solutions arm JLL Spark, and CBRE’s workplace experience platform CBRE 360.
As for their adoption of office leasing tech to help simplify the search process for tenants, Fingert said the industry is likely to see more partnerships between emerging leasing platforms and the more established brokerages down the road.
Such was the case with flex office space provider LiquidSpace and Colliers International.
Colliers partnered with LiquidSpace to leverage its technology for its Colliers Atlanta network and clients.
“I think the smart brokerages are realizing that they need to innovate and they’re realizing that the opportunity to innovate [by] either buying or partnering with these new technology companies can help them remain competitive,” Fingert added.
This could potentially provide two benefits. One, it could help enhance big brokerages’ online office listing capabilities so they can attract more clients, and two, it could potentially increase brand recognition for these smaller players and help them expand their services nationally.
Artificial intelligence-powered office leasing platform Truss, on the other hand, plans to continue expanding through its national rollout.
“Scale is an important factor there, and right now we're currently expanding through our own platform, rather than through others',” Truss co-founder Tom Smith said. “We're constantly adding more markets, more square footage and more options beyond office space including retail and industrial space.”