Money Pouring Into Climate Proptech As Real Estate Is Pushed Toward Sustainability
Venture capital firms this year have begun raising hundreds of millions of dollars that they plan to deploy into proptech startups aimed at taking on climate change by making buildings more sustainable.
The surge of investment, taking place across the U.S., Canada and Europe, comes as experts see multiple coinciding forces that will push developers and landlords to adopt green building technologies in the coming years.
Government action, from local building regulations to President Joe Biden's push to spend hundreds of billions on sustainable buildings, is expected to force rapid adoption of climate proptech solutions. But the movement isn't just coming from the government — shareholders, lenders and tenants have been escalating pressure on landlords to make their buildings become more climate-friendly.
"If we're going to hit any of the dates out there like 2030 or 2050 to be carbon neutral, you need to be investing between $2 and $5 trillion every year in retrofitting buildings with climate tech stuff," said Fifth Wall Ventures partner Greg Smithies, who leads the firm's new climate proptech fund. "This might be the largest venture capital opportunity in history."
Over the last two months, at least three new proptech-focused venture capital funds have launched with plans to raise hundreds of millions of dollars to deploy into the sector.
Also in February, London-based venture firm 2150 launched a fund focused on sustainable building startups for which it expects to raise €200M, or roughly $237M, to invest in companies across the world, including the U.S. Another London-based VC firm, A/O Proptech, in February 2020 announced the launch of a €250M fund targeted at European and U.S. real estate tech startups tackling climate change.
In March, Toronto-based Greensoil Proptech Ventures announced the launch of a $100M fund focused on investing in technologies that make the real estate industry more sustainable, and it plans to make a majority of its investments in the U.S.
These new funds, focusing specifically on green proptech companies, are part of a multibillion-dollar trend of major investors pouring money into the larger climate tech space. Investment in climate tech reached new highs in 2020 for both capital raised and deal volume, according to AngelList.
Bill Gates' Breakthrough Energy Ventures in January announced it had raised $1B for its second round of investments in green tech startups. Amazon announced in June it was dedicating $2B toward a fund to support the development of sustainable technologies.
"When you see people from the mainstream moving into this space, it's a pretty good sign," said Shadow Ventures founder KP Reddy, whose proptech-focused firm launched a climate tech accelerator last month with five startups involved. "It signals that this is probably a big thing."
With buildings and construction generating nearly 40% of global carbon emissions, according to the United Nations, experts say that technologies that help reduce the real estate industry's carbon footprint are going to be a major focus of all green investment funds. This is creating billions of dollars in funding opportunities for proptech startups that can prove they have solutions to tackle this problem.
The types of startups investors are focusing on range from short-term proven solutions that are ready to scale across the industry, such as systems that track building energy usage, to long-term technologies that could revolutionize construction by changing the way we produce concrete, steel and materials that aren't yet commonly used.
Why Funds Are Raising This Money Now
Climate tech startups have been proliferating for several years, but a confluence of events over the last year has led investors to foresee an acceleration of the real estate industry adopting these technologies.
These events range from government action, including local regulation and federal spending, to market-based drivers such as capital sources and tenants demanding more sustainable buildings.
Biden's election, paired with a narrowly Democratic Senate, has led to a major shift in U.S. policy on climate change, with the nation rejoining the Paris Climate Accords and the president taking aggressive steps to fund sustainable infrastructure. Biden last week proposed a $2 trillion infrastructure plan that includes hundreds of billions of dollars to upgrade housing, schools, hospitals and federal buildings.
The plan still must pass through Congress, and even if it passes, it may be significantly altered. But Smithies said he thinks the building-related spending is the most likely to remain in the bill because it creates the most jobs and has bipartisan support.
Smithies said he thinks this proposed federal spending on infrastructure would be a "massive accelerator," for climate proptech adoption. While Fifth Wall had been planning its climate fund before the November election, Smithies said it has raised the funding target by 50% in response to the new administration's actions.
"What happened with Biden and the Senate was a whole bunch of our corporate partners decided to increase the priority of this, so we increased our target size from $200M to $300M because of that increased interest," Smithies said.
2150 partner Christian Hernandez Gallardo, in emailed responses to Bisnow questions, said he has seen the focus from European governments on climate change drive adoption of sustainable technologies, and he expects the U.S. will now follow suit.
"Making existing buildings more efficient is a priority with billions attached to it," Gallardo wrote.
Smithies described the Biden administration's spending approach as providing carrots to building owners who make energy efficiency upgrades, but on the local level, he said cities and states are providing the sticks.
New York City passed a law in 2019, known as Local Law 97, that sets emissions limits on large and midsized buildings starting in 2024 and imposes fines on owners who exceed them.
"That law is probably going to cost landlords in Manhattan around $10B per year in fines if they don't do anything about cleaning up their buildings," Smithies said. "What's really worrying for U.S. landlords is most of the other big cities in America are going to just copy that same law."
In California, 42 cities have adopted building codes to reduce their reliance on gas, including some that require new buildings to be all-electric, according to the Sierra Club.
Arup associate principal Russell Fortmeyer, an engineer who leads the firm's sustainability practice in its Los Angeles office, said heating and cooling systems typically rely on natural gas, but because of these local regulations, developers are looking at ways to go all-electric. He said this is the case in jurisdictions that haven't yet adopted the regulations, because developers expect that in the several years it takes to design and build a project, the regulations could be enacted in their city.
"Pretty much every client we have has asked us to study the implications of all-electric buildings, and a few clients have elected to go that way," he said. "The regulatory field is rapidly changing, so the conversations we have are about preparing for a zero-carbon future."
Building Ventures co-founder Travis Connors, whose Boston-based VC firm invests in sustainable real estate tech startups, said these local regulations are sending a message to building owners across the country, including in jurisdictions that haven't yet enacted the laws, that they need to start looking at ways to reduce their carbon footprint.
"Whether a law is enacted or not, it's the signal it's sending to the marketplace," Connors said. "If you're going to be doing new construction or you're going to be rehabbing a building, knowing a law like this might come down the road can help change the behavior of what products should we buy and what systems should we put in that building to make sure we're compliant on day one."
While government actions can help fund and force building upgrades that use sustainable technology, experts say market forces are proving to be just as powerful of a motivator.
Over the last few years, there has been an increased push from corporate America, including capital providers that finance buildings and tenants that occupy them, to ensure that the real estate in their portfolio is more sustainable. And when these market drivers start to demand more sustainable buildings, developers listen.
Last month, asset managers BlackRock and Vanguard Group signed on to an initiative to commit to press companies in their portfolios to achieve net-zero emissions by 2050 or sooner. The Net Zero Asset Managers Initiative had 73 signatories after BlackRock and Vanguard joined, and those two firms account for roughly half of the $32 trillion supporting the initiative, Reuters reported.
Smithies said that the increased number of asset managers that will only finance sustainable buildings has meant that the cost of capital for green buildings is now lower than non-green buildings.
"People who have clean buildings have a cheaper cost of capital, that's the No. 1 thing that's moving [adoption of green building technologies]," Smithies said.
Tenants are also increasingly favoring buildings that minimize their carbon footprint, a trend that is especially motivating to landlords in today's office market with high vacancies in many cities.
"I think there's an awakening to just how much real estate impacts the climate, and how much these emissions these buildings have in them," Connors said. "And there's a sensitivity from the end user whether the employees themselves or employers to say 'are we doing the right things for the community and the planet?'"
A/O Proptech founder Gregory Dewerpe said the shift in commercial real estate to being more of a tenants' market has made landlords need to pay more attention to factors that attract companies, such as the sustainability of buildings. He said that is a primary factor driving the adoption of climate-focused proptech solutions and one of the reasons his firm launched its €250M fund.
"Part of the requirements of those customers today are to see that spaces are managed more efficiently and that spaces are matching their own net-zero carbon emissions," he said. "Today, if you're not able to provide a space in line with that strategy, if you're not able to showcase that you'll enable them to reach net-zero targets, then you'll not get those customers."
Greensoil Investments Managing Partner Jamie James said he sees these forces of local regulations and market demands accelerating adoption of climate tech in the real estate industry, and it was a main reason his firm decided to focus its second fund specifically on proptech companies reducing the carbon footprint of the built environment.
"If you don't do this now, you won't just be penalized on the regulatory side, you'll be penalized on the market side," James said. "The demands from tenants for better-performing buildings, the expectations from shareholders that REITs are on top of this, those things combined make this the opportune time for us to leverage the technology capabilities and awareness of the real estate asset owners."
The Startup Landscape
The growing acceptance from real estate owners to adopt more sustainable products has given investors the confidence to focus on green proptech, but they still need to find startups that have real solutions and are ready for venture capital investment.
Climate-focused startups aren't new, but Dewerpe said he has seen over the last two years they have become much more feasible and attractive for venture capital investment.
"For us as a VC investor, we're seeing much better market maturity today where those businesses targeting environmental issues have become very investable and scalable businesses, which wasn't always the case before, and therefore it's bound to attract more dollars," Dewerpe said.
Reddy, who has been in the VC industry since the 1990s, said he has seen multiple cycles where climate proptech startups have become a hot trend but haven't ultimately proven to be successful investments because they failed to achieve widespread adoption. He thinks this cycle will be different.
Shadow Ventures is putting initial investments of $100K into five different climate proptech startups that are participating in its accelerator, and he said it may make additional investments.
"I'm betting on this cycle for it to be more successful," Reddy said. "The real catalyst for us and the industry has been the evolution of proptech ... What you're seeing is this cycle there are practical and pragmatic investments that if these technologies are successful, the result will be a big impact on climate change."
Smithies said Fifth Wall is looking to balance its investments evenly between the two different types of climate proptech startups it sees: the "boring" investments and the "sexy" investments.
The boring ones, he said, tend to be products that landlords can buy now to make improvements in the efficiencies of their building systems. These include Turntide Technologies, a company Fifth Wall invested in last month that creates electric motors that run with 30% to 60% less energy than traditional motors.
He said these types of startups are less risky to invest in because the solution has already been proven out and the money can go toward scaling their production and distribution to help meet market demand.
The "sexy" investments, Smithies said, tend to sound more like science fiction. He said they include ways to create new types of concrete, steel and other building materials that would dramatically reduce the carbon emissions from the manufacturing of those products. These types of startups require investors to fund lab research. Even if the science works, they are still several years from selling it to the market, he said, making them more risky investments.
"From a VC perspective, the last time we saw clean tech 10 years ago, a lot of people lost money because the entire industry was in the science fiction phase," Smithies said. "Now we've got a whole bunch of companies in the boring phase, and we're just giving them money to scale up, so from a portfolio perspective, we can balance out the risk between those two types of investments."
Reddy said the biggest opportunity he sees in climate proptech involves the manufacturing of new types of materials like concrete, glass and timber. But he also said these can be more difficult for VCs to invest in.
"The problem is the biggest opportunity at the intersection of proptech and climate change revolves around hardware and materials sciences, not software," Reddy said, adding that software startups can be much easier to scale and gain market adoption.
Building Ventures in February invested in Dandelion Energy, a startup that uses geothermal energy, rather than fossil fuels, to heat homes, and it was part of a funding round led by Bill Gates' Breakthrough Energy Ventures. The firm invested last year in enVerid, an energy-efficient air cleaning system, and in 2019 it invested in 75F, a startup that uses machine learning to optimize the efficiency of HVAC systems.
Connors said climate tech startups have become more attractive investments over the last few years as their products have become less expensive to adopt.
"Technologies that have existed for a long time have gotten to the place in the market where the cost curves for those technologies have come down enough that we can build innovative business models," Connors said.
A/O Proptech in October invested in PassiveLogic, a startup that automates building system controls to reduce energy consumption. In December it invested in 011h, a construction tech startup focused on building with cheaper and more sustainable materials.
Dewerpe said his European venture firm makes about 30% of its investments in U.S. companies. He said he thinks climate tech startups have become more attractive investments because more of them have begun to save building owners money, in addition to making them more climate-friendly.
"We've seen the market really maturing," Dewerpe said. "Not only is there pressure today from regulators and capital markets and customers, but there is also tech enabling you to not only become more climate-friendly but also more financially efficient. Those two are possible together, and that wasn't the case until recently."
Beckerman said he sees a massive amount of money being pooled to invest in the climate tech sector, from proptech-specific VCs and larger investment firms, and he expects the coming wave of investment will eclipse what proptech has seen thus far in its life span.
"I think it'll make what was investing in proptech look minuscule by comparison," Beckerman said. "This is the biggest investment opportunity that people have seen since the formation of the internet."