The Pandemic Froze Demand For Office Proptech, But Reopening Is Creating A Surge In Adoption
Companies are beginning to return to the workplace, but employees will soon find it is not the same office environment they left in March.
The coronavirus pandemic is forcing office building owners to adopt a host of new technologies to allow people to enter buildings and ride elevators without touching surfaces, monitor common area occupancy and air control, and better communicate with their tenants.
Landlords who had once seen these technologies as interesting long-term features that they could slowly implement have gained an increased sense of urgency, industry experts say, and many are accelerating timelines and rolling out products across their portfolios.
The race to implement these technologies as companies prepare to return to the office has created a sudden boon for proptech companies focused on workplace solutions. Many of these companies saw a severe dip in sales in the early weeks of the pandemic when offices quickly emptied out, but they are now experiencing a strong resurgence.
Several proptech companies have pivoted their business models or launched new products to respond to the pandemic and the changes that building owners need to make.
The growing pace of adoption is not without headwinds. The health crisis being accompanied by an economic crisis has put some tenants and landlords in difficult financial situations and forced them to cut costs, making them hesitant to invest money into new technologies. They have become more concerned about not only seeing an immediate return on investment but also ensuring the technologies they pay for are not just temporary solutions and will continue to benefit their buildings for the long haul.
"There will always be challenges around willingness to pay and ability to pay, but what this has done is forced a change in that behavior where there isn't an alternative," said Nine-Four Ventures General Partner Kurt Ramirez, whose venture capital firm invests in proptech companies. "You're going to have to adopt and change, or people aren't going to be able to come into your buildings."
The Inflection Point
For several weeks in March and April, workplace technology companies suffered from falling sales as people stopped going into the office and landlords cut back on new spending. That all changed last month.
Several proptech executives and investors say they experienced a sharp increase in demand starting in mid-May that has grown during the first two weeks of June.
Openpath, a company that provides touchless access into buildings through a mobile platform, had been growing at a rate of 20% per month before the pandemic, co-founder and President James Segil said.
"We were on this tear growing at a pretty phenomenal rate, and then COVID happened and things slowed down a bit because everything froze," Segil said.
"As people started to assess 'how do we return to work?' it became apparent this is one of those low-hanging-fruit opportunities," he added. "They said, 'We were going to do this anyway, let's just do it now.' For the last four weeks, the phone has literally been ringing off the hook and we're just scrambling to keep up."
Segil said sales in June are on track to double May's total, but demand has still yet to return to pre-crisis levels.
One of the office building owners adopting Openpath is KPG Funds. The Manhattan-based firm is rolling out what co-founder Gregory Kraut says will be "the first frictionless building in New York City." Office workers aren't yet allowed to return to New York City buildings, and most companies expect to wait until the fall to bring workers back to the country's densest office market.
KPG acquired the vacant, 40K SF office building at 446 Broadway about 18 months ago, and it now sees adding touchless access technology as a way to attract tenants.
"You're going to be able to walk up to the building with a smartphone, the app then communicates with the device on the door, and the door opens automatically for you, you don't have to touch anything," Kraut said. "You walk through the hallway and doors open up for you, you get in the elevator and the app knows what floor you're going to without having to touch anything."
Eden, a tech platform that provides a marketplace for workplace services and office supplies, has an à la carte-style business model in which users pay separately for each order. This creates more revenue volatility than subscription-based services, and it made the early crisis drop and recent spike in demand even more pronounced.
"April certainly brought a big reduction in our revenue," Eden CEO Joe Du Bey said. "People were pausing recurring services until they better understood what was going on in the world, and it was too early for them to plan for the future. That did bring a material drop in our revenue."
But in May, Eden started to see companies preparing to return to the office. It experienced a surge in companies scheduling specialty cleaning services and ordering personal protective equipment through its marketplace.
"We've got a rush of new clients that have come to sign up for our online platform and have started to request a number of services," Du Bey said. "We've never seen higher spending on supplies or specialty cleaning."
That growth has continued in June, he said, but some of its users are still not planning to return to work for multiple months and haven't begun placing orders in preparation for their return. The continued lack of regular services from those companies has balanced out some of the growth from users that are returning.
"We expect that by September there will be an uptick due to a majority of clients having begun to reopen," Du Bey said. "But in this moment, it's more of a mixed impact."
In addition to touchless access, cleaning and protective equipment, landlords also see communication as a key function that needs to be improved as tenants return to the office. As they adapt buildings to respond to health regulations, landlords need the ability to provide instant updates to tenants on issues like common area availability, visitor access and elevator usage.
One company that provides this type of tenant engagement platform that has experienced growing adoption in recent weeks is HqO.
Navitas Capital co-founder Travis Putnam, whose firm has invested in HqO since its seed round, said it experienced a 30-day slowdown starting in March, but in April it began to see demand accelerating. Its sales have grown even faster in May and June, and he said landlords are now looking to deploy the technology much quicker than they were before the crisis.
"Major office portfolios are coming and signing full portfolio deals with [HqO] right off the bat," Putnam said. "Last year, they would say 'Tenant engagement software is interesting, we think that's the future, and let's try a couple buildings now.' Now what we're seeing is existing customers are going to full portfolio rollouts."
Global real estate firm Jamestown is in talks to expand HqO to a larger portion of its portfolio, Jamestown Vice President of Technology Ginny Miller said.
Before the pandemic, the global real estate owner had deployed the technology at six properties: Levi's Plaza in San Francisco, Chelsea Market in Manhattan, Industry City in Brooklyn, the Innovation and Design Building in Boston, Ponce City Market in Atlanta and Ballston Exchange in Arlington, Virginia.
"We're increasing lines of communication with tenants and having better platforms for communicating with what tenants are doing and what we're doing, and being able to adjust in real time as new regulations and policies come out," Miller said. "It was already becoming increasingly important, but now that tenants have more unique needs, having that platform that can act as an intermediary in how and when you deliver services is super-important."
Adapting To The New Normal
While some workplace proptech companies have functions that naturally positioned them for a recent surge in demand, many others are now pivoting their models and launching new products to respond to the pandemic.
Monday, proptech startup Jones launched a new product aimed at helping the reopening of office buildings. The Vendor Reentry service allows building managers to better communicate with vendors that regularly visit a property, such as delivery services, movers, construction workers, IT professionals and engineers.
The new Jones product gives building managers the ability to coordinate vendor arrivals to reduce crowding, provide building entry guidance to the visitors and ask a series of health questions to ensure safety. It launched with 10 buildings, and Jones founder Omri Stern said it has already seen an explosion of interest. He said it is in talks with companies that could add 50M SF of properties to the platform.
"We realized there's a need for better, more dynamic communication to make sure everybody working on a property has proper approvals and has a health screening done," Stern said. "We went to work the past month coding like crazy, doing night shifts at home and launched the solution. Now we're getting a lot of demand for it."
Arc, a tech company affiliated with the U.S. Green Building Council, announced Wednesday it is launching a new service in response to the pandemic. The product, Arc Re-Entry, offers a set of tools to companies to document health policies, collect occupancy data and measure air quality.
"Our users came to us and said they were thinking about re-entry," Arc Senior Vice President of Product Chris Pyke said. "They wanted something we can deploy in the next month and put in the hands of a facilities manager to help make their re-entry activities more transparent, and provide actionable measures to make sure policies and practices are working."
Openpath redesigned its website to emphasize its offerings that align well with the pandemic-related issues companies are considering as they return to the workplace. It has a homepage heading called "Safety Platform for the Built World" and several subheads for individual offerings such as touchless access and temperature screening.
"We're actually pivoting a little to be better-positioned for this market," Segil said. "We're highlighting the hands-free access, the wellness verification, occupancy management, contact tracing, and you can connect thermal cameras and use this for touchless elevators."
Thursday, HqO announced a new partnership with LiveSafe, a risk intelligence and safety communication platform, and indicated it is in response to the pandemic.
"Now more than ever, the use of technology to ensure safety and communication in the workplace is paramount," HqO co-founder and CEO Chase Garbarino said in a release.
Where The Money Will Go
These new technologies may seem attractive to owners looking to prepare their buildings for workers returning during a pandemic, but most offerings require them to spend more money during an economic recession when many firms are facing a cash crunch.
While many new services may seem necessary now, owners want to ensure they are investing in products that will be relevant for the long-term.
"One way we're looking at technology is where were there tailwinds in place pre-COVID that we think have been accelerated versus an idiosyncratic need that has popped up because of COVID," Miller said.
Jamestown announced May 4 it was investing $50M in relief efforts to help its tenants, especially small businesses, develop strategies for reopening, including the adoption of new technologies.
As the landlord evaluates which technologies to adopt, Miller said it is being careful to make sure the investments are creating a tangible benefit that will last beyond the near-term.
"Where we spend money, we want to be extremely thoughtful that it's something that is really impactful and will distinctly change the tenant experience and have long-lasting changes moving forward," Miller said.
Kraut said the proptech costs are "not that dramatically high" compared to the investment in buying a building and building out tenant spaces, but KPG is still being cautious about where it spends money. He said the proliferation of hundreds of proptech companies has made it more difficult to determine the best ones to use.
"There is a shitload of tech, and there are only a couple ones that actually make people's lives easier," Kraut said. "We're kind of letting things shake out a bit. We're only putting in necessary ones until I feel there will be some clear winners."
Venture capital firms are looking to back companies that will be well-positioned after the pandemic, but they are cautious about not putting money into solutions that are only temporary, Ramirez said.
"Investors want to be careful they're not going to invest in a company that's only going to capitalize on something that's current," Ramirez said.
Segil said landlords he has spoken with see certain expenses as necessary for adapting to the pandemic, and he expects some of the costs may be passed onto the tenants.
"There is going to be a shared expense between landlords and tenants to ready the buildings for return to work," Segil said. "Landlords are putting cash out of pocket today, but I think it's going to be reflected in rent."
Stern said he is seeing landlords increase their willingness to pay for technologies that prove their worth.
"If you're solving a critical pain — and a lot of startups may not be doing that — but if you are, then you should expect that real estate companies will be willing to pay for your tech," Stern said.
CRETech CEO Michael Beckerman said many of the technologies, such as touchless buildings, air control monitoring and occupancy tracking, were inevitably going to be adopted by real estate owners, but the pandemic is now turning them into must-have items.
"These are the tools that represent the future of the industry, whether COVID-19 happened or not, these were the types of tools that were eventually going to find their way into the workplace," Beckerman said.
Putnam said companies are more willing to invest technologies when they create cost savings. He also said he saw the use of many of these technologies as inevitable, and the pandemic is accelerating that adoption.
"After the pause and people have seen what their exposure is, there is now a broad understanding that technology is going to be a crucial part of the new normal post-COVID," Putnam said. "We're seeing that evidenced in real demand for specific solutions today. What you're going to see is five years of tech adoption in the industry pulled forward into the next 12 or 24 months."