Today I’m excited to share our first SFR Technology Market Map which highlights many of the companies building across every segment of the SFR ownership lifecycle: A higher-resolution version is available for downloadhere.
Across the United States today there are more than 47 million renter households. Historically, we’ve thought of rental housing as being primarily composed of apartment units — high- and mid-rise buildings in downtown corridors, or garden-style units in suburban areas. However, in the decade-plus period following the Great Financial Crisis (GFC), single-family rentals (SFRs) have been the fastest growing segment of rental occupied households, adding more than 4 million rental homes. Today, nearly 34% of rented units are SFRs, representing 16 million properties across the U.S.
What prompted this shift towards SFRs? There are a number of factors, including:
Demographic and migratory tailwinds in recent years supporting demand for single-family housing.
Limited construction activity in the single-family sector following the GFC, resulting in rapid home price appreciation and affordability challenges for first-time homebuyers. One recent estimate found that the U.S. requires up to 6.8 million new units to meet current housing demand.
While the majority of SFRs are owned by small individual landlords, there is a growing universe of “sophisticated” operators of SFR portfolios, who developed the scale and track record required to attract institutional capital. Firms like Invitation Homes, Progress Residential, Blackstone and KKR have scaled to tens of thousands of units under management.
The emergence of technology platforms to remotely manage portfolios of geographically distributed SFR (Read more...)
Startups Building at the Intersection of Real Estate and AI — 4 Early Use Cases
In November 2022, ChatGPT, a chatbot built on top of the GPT-3 model, became a viral sensation, amassing one million users in under five days. As a large language model (LLM), ChatGPT has been trained on a massive corpus of text data and generates human-like responses to natural language inputs. The frenzy surrounding ChatGPT has sparked people’s imagination about the potential of AI. Early adopters of the beta version have been testing the model’s ability to generate a variety of content, from song lyrics to source code. Entrepreneurs, in turn, have been rushed to develop applications that harness ChatGPT’s capabilities across a wide array of tasks.
Over time, we believe that AI will revolutionize the way we interact with technology across several industries such as finance, healthcare, and marketing. Real estate is no exception, and we believe AI can be used to enhance and streamline various aspects of the industry. Here are four potential use cases of AI in real estate we believe gain mass adoption over the next several years:
1. Property Valuation and Price Prediction
AI has already been adopted in real estate to assist in property valuation and price prediction. AI-powered tools can analyze vast amounts of data, including comparable sales, location, market trends, and neighborhood demographics to provide an accurate estimate of a property’s value. For example, Zillow, a popular online real estate marketplace, uses AI to provide its Zestimate feature, which estimates the value (Read more...)
It’s been a dizzying two years in the U.S. housing market — 2021 was arguably the hottest year on record for residential real estate, driven by pandemic-related fiscal stimulus and historically low interest rates. In 2022, the Federal Reserve reversed course and began aggressively hiking interest rates in an effort to cool inflation. This has led to a sharp rise in mortgage rates — from about 2.5% in 2020, to nearly 7% as of October 2022. As a result, housing affordability has deteriorated faster than at any point in the last 30+ years. Many prognosticators expect a housing market correction in 2023.
To help make sense of market conditions, we are releasing an update to the Thomvest Housing Report which includes data through Q3 2022. The full report is accessible here, and I’ve included several highlights below.
What effect will rising mortgage rates have on home prices?
After record mortgage origination volume in 2021, rising interest rates have effectively wiped out the refinance market in the U.S. (refinancings are expected to decline 74% year-over-year) and impaired the purchase origination market (expected to decline 14% year-over-year). Prospective home buyers are grappling with mortgage costs that are at a record-high relative to income — according to the NAHB/Wells Fargo Housing Opportunity Index (HOI), just 42.2% of new and existing homes sold between the beginning of July and end of September were affordable to families earning the U.S. median income of $90,000.
Despite rising rates, home price appreciation has yet to decline meaningfully — in fact, many markets (like Nashville, Raleigh, Dallas and Phoenix) experienced double digit home price growth in 2022. Why have home prices remained stubbornly high? A few factors…
First, there are several persistent demand tailwinds — most notably, demographic data suggests that the universe of first-time homebuyers (median age of 33) over the next 24 months will be the largest it has been in 30+ years. Additionally, a growing number of institutional buyers of real estate have entered the single-family home category — more than $45 billion was committed to the single-family rental (SFR) space by institutional investors in 2021. In some ways these institutions create a pricing floor in markets like Atlanta, Phoenix and Dallas where rentals common.
Second, the supply of homes for sale remains very low by historical standards. In a rising interest rate environment, existing homeowners with sub-3% interest rate mortgages may not be motivated to sell their homes in order to purchase a new home with a higher-rate loan. This has driven down transaction volume meaningfully — Fannie Mae forecasts 3.9M existing home sales in 2023, a 23% year-over-year decline. Additionally, lack of new housing construction is a major contributor to home price appreciation — housing completions have trailed household growth in every year since following the Great Recession. 12.3 million U.S. households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time.
And finally, foreclosures remain low, driven by strong employment and wage growth remain. We have not yet seen a meaningful spike in delinquency rates in the mortgage space — as of Q3 2022, only 0.5% of mortgage balances are 90+ days past due, which is up slightly vs. 2021 but still very low by historical standards. Whereas the pre-recession origination boom (2003–2006) was spurred by a relaxed credit standards and private (non-GSE) securitizations of mortgages, origination volume during the COVID-period is a byproduct of low interest rates, refinance volume, and demand for single-family housing. Credit standards have remained high throughout the pandemic, despite the spike in origination volume
So while we have yet to experience a meaningful decline in home values, we are experiencing what many analysts describe as a frozen market, leading to a rapid decline in transaction volume across most markets. For instance, mortgage origination volume in Q3 2022 declined 47% from the third quarter of 2021 — the biggest annual drop in 21 years. Institutional investors in the single-family rental space have largely stayed on the sidelines with the expectation that pricing would become more attractive over the next few quarters.
Many participants in the real estate ecosystem are waiting for clarity from the Fed on how the interest rate environment may change in 2023 and where mortgage rates may ultimately settle. Housing is an important component of CPI, and the Fed has a stated goal of driving down housing demand and pricing:
After a housing boom partly driven by pandemic-era FOMO beliefs, cooling market participants’ expectations is key to shifting house prices toward a more sustainable path and avoiding the peril of a disorderly market correction.
We will be watching closely as the Fed attempts to navigate a bit of a tightrope: steering towards a gradual slow down of home prices and rents (a “soft landing”) without triggering a more widespread housing recession.
How will the real estate technology sector respond?
This period of volatility and uncertainty has impacted every consituency in real estate — agents, lenders, investors, service providers and technology companies. Many real estate companies generate revenue on a transactional basis, meaning a softening or frozen housing market has a direct impact on revenue growth expectations. I’ve written previously about the worsening valuation environment for public real estate technology companies such as Opendoor, Zillow and Redfin, which have traded down meaningfully in 2022.
This is certainly a period in which CEOs must make difficult decisions around strategy, team and managing cash flow in order to survive. Ben Horowitz describes this moment well:
In wartime, a company is fending off an imminent existential threat. Such a threat can come from a wide range of sources including competition, dramatic macro economic change, market change, supply chain change, and so forth.
A classic wartime mission was Andy Grove’s drive to get out of the memory business in the mid 1980s due to an irrepressible threat from the Japanese semiconductor companies. In this mission, the competitive threat — which could have bankrupted the company — was so great that Intel had to exit its core business, which employed 80% of its staff.
In real estate tech, startups are quickly adapting to today’s market conditions—for example, implementing austerity measures as a means of extending runway, or refocusing businesses around products that have strong demand in this market environment. A few tactics we’ve observed:
Companies are adjusting burn in order to extend runway and defer an external fundraise to 2024, in hopes that market conditions improve over the next 12 months.
Startups in the real estate lending space are tightening their credit standards, lowering loan amounts to manage risk, and diversifying sources of capital.
In some cases, startups are opting to raise PropCo capital in order to build a more permanent capital base as compared to credit providers who may be pulling out of real estate lending. In this “balance sheet light” model, assets are owned by the PropCo and management fees flow into the OpCo.
Management teams must embrace agility in order to develop counter-cyclical products (i.e. HELOC) that appeal to customers even in a high interest rate environment.
The next several months will be quite interesting for these companies: investors will certainly monitor the macroeconomic environment (CPI, rate hikes, geopolitical risk, etc.) and its impact on real estate. More importantly, however, they will track whether leadership teams can successfully steer their companies towards positive cash flow despite choppy market conditions. Over the long term, startups that survive this period will ultimately evolve into more agile organizations that can thrive despite the inherent cyclicality of the real estate sector.
I’m excited to release Thomvest’s 2022 real estate technology market map, which includes more than 275 companies operating within the residential real estate segment. This is the fourth update to the market map and includes over 70 new companies this year — a testament to the pace of entrepreneurship in this category. A few relevant links:
A high-resolution version of the market map can be accessed here.
The full list of companies included in this market map is available here.
Please note that while I try to be as comprehensive as possible when compiling these maps, I will inevitably miss several great companies. If you’d like to add a company for future inclusion on the market map, you the form to do so is available here.
My commercial real estate market map is available here. I plan to publish a 2022 update to this map next month.
This market map real estate technology companies operating across every phase of the home purchase value chain. These companies have collectively raised more than $35B in venture capital, and range from seed stage businesses to public companies.
Much has changed over the last year in the housing sector — a sharp rise in interest rates has flipped market sentient from frenzied to fearful. Following record home price appreciation over the last two years, housing sales have largely stalled and mortgage originations are expected to decline by more than 40 percent year-over-year. Many real estate technology companies generate revenue on a transactional basis, meaning a softening (Read more...)
We’re excited to announce our investment in Willow Servicing, a mortgage servicing software platform founded by Laura Cain and Teddy Coleman. Willow Servicing was founded in 2021 with the vision of modernizing the core technology that orchestrates the collection of $18 trillion of U.S. mortgage debt. Willow has built an automated servicing toolset that allows small and large servicers alike to efficiently service their loans in-house. We’re joined by several great investors in this round including Zigg Capital, Global Asset Capital, The Mortgage Collaborative, and Webb Investment Network.
Why Mortgage Servicing and Why Willow?
The mortgage industry has faced several headwinds this year — rising interest rates, limited housing supply, and record-high home prices impacting affordability. After two record-setting years of loan origination volume, the mortgage industry is contracting, sharply. The industry is now struggling with the perfect storm of lower volume, lower revenues, and higher costs per loan, which all impact lender profitability. Non-bank mortgage lenders on average lost $82 per loan in Q2 2022, according to the Mortgage Bankers Association.
Somewhat counterintuitively, we believe this is the best time to be building a mortgage technology business. As margins compress in the current environment, we expect there to be added focus from mortgage originators on finding ways to drive differentiation and operational efficiency. To survive, lenders must do more with less resources, and they will turn to technology partners that enable automation, delight customers and drive down cost — a true win, win, win. We believe Willow does just (Read more...)
I’m excited to release an update to Thomvest’s real estate technology market map, which includes more than 240 companies operating within the residential real estate segment. This is the third update to the market map and includes over 100 additional companies — a testament to the volume of entrepreneurship in this segment. A high-resolution version of the map can be accessed here, and the full list of companies is available here.
So much has happened in the housing market over the last year — home pricing across the U.S. are up 16% year-over-year, interest rates remain near historic lows and housing construction starts are up meaningfully for the first time in more than a decade (for more detail on this, see my recent housing market update). Times have also been good for technology companies in real estate — several companies in the sector went public over the last year, including Opendoor, Compass, Better and Blend (a Thomvest portfolio company). Venture capital activity in real estate has also remained quite strong — investment in the category reached $8 billion through the first 9 months of 2021, a record.
This market map real estate technology companies operating across every phase of the home purchase value chain. These companies have collectively raised more than $30B in venture capital, and range from seed stage businesses to public companies. If you’d like to suggest a company to be added to this market map, please submit them using this form.
You’ll notice that several companies are included in more than one section — this (Read more...)
Near the start of the COVID-19 pandemic, Thomvest released a research report on the state of the U.S. housing market. In particular, we were interested in understanding the potential impacts of the pandemic on the real estate sector, the “health” of the pre-pandemic housing market, and the downstream effects of the pandemic on real estate technology companies. In that post, I argued that the housing market was actually quite strong, especially compared to the period immediately preceding the Great Recession. However, the impact of lockdowns and uncertainty around the broader U.S. economy had manyprognosticators fearing mass foreclosures and rapid home price depreciation.
Fast forward sixteen months and we are in the midst of an incredible housing boom — home prices are at an all-time high and mortgage origination exceeded $4.3T in 2020. The total value of the housing market reached $36.0 trillion in the first quarter of 2021, 41% percent higher than the pre-crisis peak in 2006. Today we’re excited to release an update to the Thomvest Housing Report which includes data through Q2 2021 and attempts to quantify what has been a record-breaking year in U.S. real estate. The full report is accessible here, and I’ve included several highlights below.
In March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included sweeping borrower protections. This included a ban on foreclosures, a legal right to mortgage forbearance and a suspension of late fees or penalties imposed on borrowers for missed (Read more...)
Compass, a technology-enabled real estate brokerage, filed its S-1 in early March with plans to raise about $550 million as part of an initial public offering. The company updated its S-1 last week to include a share price range of $18-$19 (down from $23-$26 in the initial S-1), implying a post-money valuation of about $7.2 billion. Compass plans to trade on the New York Stock Exchange under the ticker “COMP” and the IPO is being underwritten by which is being underwritten by Goldman Sachs, Morgan Stanley and Barclays.
Founded in 2012 by Robert Reffkin and Ori Allon, Compass has rapidly grown to become one of the largest independent real estate brokerages in the country, with over 19,000 agents who facilitated more than $150 billion in total transaction value in 2020. The company has raised $1.6 billion since its founding, from investors including SoftBank Group, Wellington Management Capital, Institutional Venture Partners & Thrive Capital. Its last private round was a $500 million Series G completed in November 2019, which valued the company at a $6.5 billion post-money valuation.
In this post, I’ll dig into the Compass S-1, including the company’s financials, product strategy and valuation expectations as a public company. In particular, I’ll review some of the key themes highlighted by the Compass management team throughout the S-1: the central role of the agent in a real estate transaction, the company’s focus on top agent acquisition, and the role of technology as a key differentiator.
Opendoor, the nation’s largest iBuyer, is going public. It is doing so via a merger with Social Capital Hedosophia Corp II (NYSE: IPOB), which is a special purpose acquisition company (SPAC) led by investor Chamath Palihapitiya. Opendoor published an investor presentation as part of its merger announcement in September, and last week the company filed its S-4 (similar to an S-1, but used for companies engaged in a merger process). The transaction values Opendoor at $4.8B (pre-merger value) and the company will receive north of $1B in proceeds ($600M PIPE and $414M via merger with IPOB). While the SPAC merger process is quite interesting on its own (good posts on the topic here and here), this post will focus in on the Opendoor business, its progress to date and its prospects for the future.
Opendoor, founded in 2014, transforms the process of selling a home into a seamless digital experience, eliminating uncertainty for sellers. Sellers can go to Opendoor.com, receive an offer for their home, sign and close on the date of their choice — a dramatic improvement over the traditional selling process which can take 100+ days. In return, Opendoor receives a 6–12% discount on the market value of the home. This model is remarkably consistent with the vision described in Opendoor’s Series A presentation (worth a read). In addition to the spread captured when buying and selling homes, Opendoor earns revenue via ancillary services related to the real estate transaction, including title insurance, escrow services and (Read more...)
