The Surprising Impact of Real Estate Tech

EXECUTIVE SUMMARY

Stellifi VC is dedicated to identifying and investing in groundbreaking products and teams in Real Estate tech that have the potential to transform a meaningful segment of the immense value chains that support the built environment. In our search, we've discovered best-in-class solutions that not only excel in terms of being “better, faster, and cheaper” than existing workflows but also have the potential to be transformative for the real estate and construction industries.

Real Estate is not only the world’s largest asset class, it’s also responsible for 40% of global CO2 emissions and touches the lives of virtually every human on the planet daily.  This means that by making the world’s largest asset class better, faster, and cheaper, one can’t help but create positive externalities, like emissions reductions attributable to more efficient materials, supply chains, and construction methods. 

Real Estate technology companies emerging today benefit from key trends in the real estate and construction industries that align with common impact investing trends, including: changing consumer demands,  a drive towards economic efficiency, converging regulatory regimes related to labor markets and development standards, and the emergence of non-concessionary impact capital.  All of this is to say, that the fundamental tailwinds in financial, real estate, and regulatory markets will accidentally turn a lot of managers into impact investors. 

The five companies featured in this article are examples of solutions in our portfolio that were selected by our investment committee as stewards of LP capital with a mandate to provide top decile returns. Given the potential for scale, the companies are also poised to have a tremendous cumulative impact as they achieve further financial success.

PORTFOLIO COMPANY IMPACT

Organizations are increasingly tracking and reporting their emissions to understand their full carbon footprint and identify opportunities for reduction. These emissions can be categorized into three distinct scopes based on their source.

Table 2.0 displays the scope of emissions reduction and real examples of emissions reductions attributable to the subject companies. With one exception (Tough Leaf), the portfolio companies in the table below assist their customers in reducing emissions, whether or not it is an explicit goal. To facilitate measurement and comparison, emissions are typically quantified and represented using a metric known as carbon dioxide equivalent (CO2e).

A CHANGING LANDSCAPE FOR REAL ESTATE TECH USERS

Broadly speaking there are 5 kinds of real estate tech users. 

1. “Users” in the traditional Real Estate sense of the term. The tenants or occupiers of a building. 
2. Service Providers - e.g. Architects, General Contractors, or engineers that use technology to more efficiently deliver a better work-for-hire product or service.
3. Property Managers - People who manage the real assets and the people who occupy them
4. Asset/Portfolio Managers - These folks manage the financial asset(s) as opposed to the real asset(s)
5. Owners/Sponsors - Buyers, sellers, GPs, and LPs - the people who ultimately bear the risk of loss of the project's equity. 

This list is also roughly in order from most to least likely to have adopted technological tools that resemble those used in other industries for similar purposes. We sometimes spend our late afternoons speculating as to why technology has only penetrated real estate narrowly and to such a shallow depth, but the reasons aren’t as important as the opportunity that the state of affairs represents.  

With the end of more than a decade of free money; expectations, yields, and asset values are returning to less lofty levels. High interest rates have also frozen real estate capital markets and inflation has squeezed end users.  The result is that every category of real estate tech user is focusing on pulling the very few levers available to them - Increasing revenues, improving productivity and operational efficiency, and controlling costs.  This is true whether you are a multifamily renter hunting for better value in your next unit, a developer trying to increase your yield on cost, or an architect using AI-driven software to generate a billion iterations of floor plans to determine with mathematical certainty the highest and best use of a property. 

When you appreciate the unforgiving, continued ratcheting of financial conditions for each of the 5 potential user types mentioned above, as well as the fact that there has been shockingly little adoption of technology within the real estate industry, you can begin to see how an explosion of adoption in at least a handful of giant, greenfield industries is inevitable.  

This lens of an industry in the early innings of a hockey stick-shaped phase transition from analog, to web 1.0 infrastructure, to generative and responsive web 3.0 solutions in a very short time informs our thinking about the growth potential of our investments. It’s not dissimilar from how Africa went straight to mobile communications and skipped landlines entirely, saving untold sums and other resources by doing so. Real Estate tech will digitize a huge industry and then build applied solutions with the deep generalist tech that’s already available, tried and true.  

Finally, let’s briefly consider the consolidation of capital and regulatory markets along with the emerging consensus in consumer demand:

1. Consumer Demand:
   
   Consumer demand is shifting towards more sustainable and environmentally conscious products and services.  For the real estate world, this translates to a shift in demand from tenants, homeowners, and business patrons. From EVs to solar roofs, some corporations have found a niche where they can capitalize on trends and incentives that have strong consumer buy-in. Real estate stakeholders are being forced to incorporate development and management practices that align with the areas of impact that consumers increasingly demand. As the industry adopts the technology behind these trends, it will drive a material reduction in the carbon emissions attributable to the built world.
   
   
2. Regulatory Consolidation:
   
   What has to date been a patchwork of regulations on a state-by-state basis is now coalescing into national and even global standards. Governments and regulatory bodies in many regions are introducing stricter environmental regulations. Building codes and zoning laws are evolving to promote energy efficiency, reduce emissions, and encourage sustainable building practices. Real estate companies must adapt to these new regulations or face potential financial penalties and market risks. Building technology and software are the best tools that these companies have to meet the changing regulations.
   
   
3. Capital Market Consolidation:
   
   Many investors and financial institutions are integrating impact investing criteria into their strategies. Real estate companies that can demonstrate strong alignment with investor’s impact goals may have easier access to capital, lower borrowing costs, and more favorable terms on loans. For example, Fannie Mae and Freddie Mac are required to deploy 50% of their 2023 allocations into mission-driven investments targeting affordability. These mission-driven loans provide benefits to the borrower through lower interest rates, flexible underwriting, and greater loan proceeds. In response, developers and operators are implementing technology that can help meet the impact investing criteria from lenders and LPs. 
   

The confluence of these three trends: 

1. A Real Estate Industry that’s being squeezed inexorably towards greater efficiency by any means possible, 
2. A Real Estate technology market at a tipping point in terms of adoption and penetration of the real estate asset class; and 
3. The demands of customers, allocators, and regulators for improved sustainability and labor practices

has positioned the following 5 Stellifi Fund I portfolio companies for potentially transformative impact along with superlative non-concessionary returns for LPs.

STELLIFI VC PORTFOLIO

Selected Companies & Case Studies

Dextall

Dextall, an immigrant-founded and owned company, offers a unitized prefabricated exterior wall system tailored for mid-to-high-rise buildings. This innovative approach enhances efficiency for developers by consolidating seven distinct trades (drywall, insulation, windows, etc.) into a streamlined prefabricated solution, simplifying execution and oversight throughout the construction process. This construction method yields substantial benefits for developers, including cost savings of 15% to 20%, and a remarkable 20-fold reduction in on-site labor compared to conventional construction practices, all while delivering an aesthetically appealing design. 

Dextall provides an all-encompassing use case by being applicable in both:

1. Retrofitting obsolete exterior envelopes at existing properties.
2. Providing cost efficiencies within new construction in an inflationary environment.

NYSERDA – Retrofit Use Case

Dextall was officially selected as part of the New York State Energy Research and Development Authority's (NYSERDA) RetrofitNY Program. This fund aims to revolutionize the energy performance, aesthetics, and comfort of multifamily residential buildings with minimal disruption to residents – specifically targeting net-zero energy solution providers. Dextall demonstrates a clear alignment with NYSERDA’s goal as its building envelope solutions perform at levels 40% higher in energy efficiency than the current code, helping owners reduce scope 2 emissions. Dextall also contributes to this mission by shortening installation timelines by 70%, reducing scope 3 emissions and waste associated with existing window and envelope construction practices. Its innovative platform offers energy-efficient, precision-manufactured structural wall panels that enhance building resilience, lower utility costs, and improve indoor air quality. NYSERDA ultimately selected Dextall due to its proven ability to reduce construction emissions and waste. Dextall also addresses unmet needs like durability, lower insurance premiums, and reduced operational costs, making it a promising model for transforming the affordable housing industry in New York and beyond while pushing toward net-zero energy performance.

HELIXintel

HELIXintel is a user-friendly digital platform designed to assist facility owners and operators in more efficiently managing their properties and equipment. The platform facilitates proactive management of equipment performance, enabling equipment owners to enhance maintenance control, boost operational efficiency, and improve risk management practices.

HELIXintel goes beyond traditional facility management and in doing so, promotes reductions in scope 1, 2, and 3 emissions. Through its marketplace and managed services program, HELIXintel helps equipment operators and facility managers in the following ways:

1. Energy Savings and Rebates: Streamlines the process of obtaining energy rebates that can be used to fund equipment upgrades and preventative maintenance, which leads to a reduction in scope 1 and 2 emissions. The Department of Energy estimates that commercial properties can lower energy usage by 10-20% by completing preventative maintenance and upgrading outdated equipment. For a typical HELIXintel customer, like an education facility, this could translate to an estimated 88 tons of CO2e savings per property per year.
   
   
2. IoT Monitoring and Alerting: Integrates IoT (Internet of Things) monitoring and alerting systems like Meshify to predict and prevent risks like water damage or frozen pipes. The IoT solutions that HELIXintel supports reduce unnecessary electricity and water consumption, resulting in lower scope 1 emissions.
   
   
3. Equipment Disposal and Recycling: Helps facilities managers stay compliant with state and local regulations by connecting them to the nation's top vendors for proper equipment disposal, including recycling, and removal of assets no longer usable or sustainable. This helps businesses reduce scope 3 emissions, and eliminate the risks associated with failure to properly dispose of their equipment including data breaches, environmental factors, and damage to a brand’s reputation.

Soil Connect

Soil Connect is a SaaS-enabled marketplace for construction professionals to locate, transport, and acquire soil and aggregates. The solution was developed to tackle the outdated and extremely profitable business of dirt brokerage, which has historically been manual and opaque. As much as 15% of a project's cost can go toward moving and disposing of excess dirt from a construction site. Construction professionals often engage in long-distance transactions, incurring higher transport costs and CO2 emissions, unaware of closer options. Brokers take advantage of industry opacity to overprice services, causing delays in project execution. Soil Connect has established itself as a proven disrupter of this fragmented marketplace, helping developers and GCs save time and money, while reducing scope 1 emissions in the process.

ARCO/Murray National Construction Case Study

ARCO/Murray National Construction collaborated with Soil Connect to address an unexpected earth-moving challenge at a North Texas construction site. The GC had a surplus of 21,000 cubic yards of common fill clay, which could not be stockpiled onsite due to local regulations. Exporting the surplus soil was estimated to cost $400K and take 8-9 weeks.

ARCO/Murray partnered with Soil Connect, leveraging their extensive network and load-tracking app, eTickets. By quickly connecting ARCO/Murray with a local trucking contractor and fill sites, Soil Connect helped increase the daily load by 2.5x, reducing hauling duration by 2 days. The load tracking app streamlined the entire process, resulting in total time savings of 3 weeks and cost savings of over $180K for ARCO/Murray. In the end, the project had a substantial environmental impact, saving over 58,000 miles of truck travel and reducing CO2 emissions by 130.2 tons.

The project's successful outcome satisfied the municipality, avoided fines, pleased the client with the project timeline, expedited payment for the trucking company, and significantly reduced the environmental footprint of the project. ARCO/Murray achieved cost savings of over $180,000, reduced job site and administrative time, and saved thousands of trucking miles, leading to a reduction in scope 1 emissions. Soil Connect's combination of network and technology, alongside ARCO/Murray's innovative approach, proved to be a winning combination, showcasing the benefits of Soil Connect as a comprehensive Soil Management Solution.

IncentiFind

IncentiFind is the leading resource for connecting properties with over 540,000 incentives, making it the go-to database for commercial real estate and home improvement projects nationwide. Whether it's a residential renovation or a new commercial development, IncentiFind simplifies the process of discovering cost-saving incentives by leveraging APIs and a suite of web platform products. By helping developers, property owners, and tenants find financial support for their projects, IncentiFind is actively contributing to the transformation of the built environment into a more sustainable one through incentives. Most projects are eligible for incentives, particularly when they incorporate above-code products, which applies to the majority of products available in the market today.

Since its founding  IncentiFind has been on a mission to match owners and developers with the incentive programs that are best for them. IncentiFind publishes an annual collection of case studies that display the impact their services have on customer projects. The case study below is just one recent example where IncentiFind matched their customer’s new development with local incentives.

IncentiFind Case Study - Multi-Family New Construction

In November 2020, during the planning stage of a new development project, IncentiFind was commissioned by a St. Louis-based customer. After purchasing one of IncentiFind's VERIFY reports to determine which incentives they qualified for, the customer used IncentiFind’s managed services to navigate the entire process. The client applied for incentives and rebates for new energy-efficient products, such as windows, thermostats, appliances, and more. Throughout the project, the customer saved an estimated $320K in total rebates, tax benefits, and financial incentives. Ameregen, the utility provider, also provided a direct cash reimbursement of $12K following the completion of construction in April 2023. Ameregen projects that integrating energy-efficient fixtures and equipment into the development will save 45 tons of CO2E in scope 1 emissions annually.  

Tough Leaf

Tough Leaf is a platform that leverages AI-powered matching to connect contractors with certified Minority-Owned, Women-Owned, Disadvantaged, Service-Disabled and Veteran-Owned, and Local Business Enterprises (MWBEs). The need for such a platform emerged as government entities began to require participation from MWBEs in government-funded projects. Today, federal construction project requirements mandate that 5% of project costs be awarded to MWBEs. State and local jurisdictions may have even stricter requirements, like New York City, which mandates that 20% of city-funded projects be awarded to MWBEs. Tough Leaf's comprehensive directory of over 80,000 diverse companies empowers GCs to seamlessly meet their project requirements, certifications, and capabilities. 

Tough Leaf’s comprehensive database covers all possible trades that have MWBE requirements – from electrical and construction to logistics, healthcare, and information technology. Tough Leaf automates the search process for their customers through their “Matching Platform” which connects GCs and subcontractors based on selected criteria including certifications, union affiliations, project resumes, and more. This AI-powered matching process speeds up a crucial part of the pre-construction and bidding process. In the case of Restani Construction Corp., Tough Leaf helped their customer exceed their MWBE requirement by $1.4M, all while delivering substantial cost savings.

Restani Construction Corp. Case Study

Restani Construction Corp. partnered with Tough Leaf to meet their 20% MWBE participation requirement for a $36M project in Westchester County. Tough Leaf matched Restani with a range of eligible contractors, resulting in a 3.5x increase in the total number of bids from MWDBE firms compared to previous projects. This volume of bids helped Restani secure $7M in contracts with MWDBE contractors, exceeding their initial requirements. The competitive bidding environment also helped Restani achieve an estimated $1.M in savings.

CONCLUSION

The real estate sector, once characterized by its analog and fragmented nature, is now starting to embrace digital transformation, which will inevitably lead to improved efficiency, sustainability, and stakeholder alignment.

As the real estate industry undergoes this transformation, the five companies highlighted in this white paper stand poised to affect transformative change and generate exceptional returns for LPs. The convergence of these three trends: 

1.  A Real Estate Industry that’s being squeezed inexorably towards greater efficiency by any means possible.
2. A Real Estate technology market at a tipping point in terms of adoption and penetration of the real estate asset class; and
3. The demands of customers, allocators, and regulators for improved sustainability and labor practices

will catalyze the growth of the featured companies. We are thrilled to play a pivotal role in this technological transformation, investing in the winning solutions that deliver outsized returns and positive impact for all stakeholders.