Recent Trends in Real Estate & Their Impact on PropTech
The past couple of years have been atypical for the US real estate market. After a steady recovery from the Great Recession, the industry was hit by a global pandemic, historically low inventory, and skyrocketing property prices—creating the hottest market in decades.
In this article I take a look at the 4 most prominent real estate trends at the moment and how I expect them to affect proptech.
1. Residential Property Prices and Mortgage Rates Are on the Rise
The trend that has caught the most attention since 2020 is the sharp increase in home values as a result of the shortage of real estate listings created by the pandemic. The average home value has gone up by 20% over the past year and by 40% since the beginning of the Covid-19 pandemic, reaching $354,000.
The burden which this posed on homebuyers and beginner real estate investors was further exacerbated by the steep upward move in mortgage rates as of this year. Currently the interest rate on the 30-year fixed-rate mortgage stands at 5.54%, crossing the 5% mark for the first time since February 2011.
The combined effect of these two leading trends is pushing first-time homebuyers and small-scale investors out of the market, producing a void. This gap was quickly filled in by larger-scale investors who have more initial capital, equity from other properties, and better access to alternative financing methods. Coupled with the slowdown in property price appreciation following the exit of some homebuyers, I expect investments in real estate to accelerate.
This is good news for proptech startups providing various services to investors—anything from analyzing deals, through purchasing properties, to managing rentals and portfolios. This surge in investmets will allow existing platforms to grow and new ones to emerge.
Home values and mortgage interest rates rising will create demand for three specific proptech services:
Off Market Property Platforms
As MLS listings and other traditional for sale listings become more expensive, investors will seek off market properties such as foreclosures, REOs, and distressed homes which sell below market value and offer more affordable opportunities. Aspiring entrepreneurs should work on the further development of online marketplaces which provide access to such properties.
Fractional Ownership
Demand for less expensive investment options will continue to drive the growth in fractional investing including crowdfunding and tokenization, allowing smaller retail investors to own a slice of an investment they couldn’t afford to own solo. This will boost interest in proptech platforms that facilitate the process of choosing, buying, and managing fractional investment property ownership for passive income.
Alternative Financing Options
Lastly, even investors who qualify for a conventional mortgage will search for other financing methods that cost less. Thus, I expect good opportunities for tech companies in hard money lending, private money lending, crowdfunding, and the rest of the lending industry.
2. There Is a Shift Towards Suburban and Rural Markets
In the last decade, we’ve seen a migration from large cities (primary markets) to suburban and rural locations (secondary and tertiary markets). This trend has been expedited by the pandemic, which led more professionals to work remotely, allowing them to choose the lifestyle and location that feel the most comfortable for them and their family. As a result, the interest in smaller markets grew at an even faster rate.
While property prices are rising everywhere, we have to remember that the real estate market is highly local. In suburban and rural markets, in general, homeownership tends to be more affordable than renting, as these locations have lower price to rent ratios than metro areas.
I expect this real estate trend to have an important repercussion on the proptech scene. Namely, tech companies will need to work on improving their geographical coverage to serve the population that is moving to smaller markets. At the moment, there are many promising proptech startups that have unique products and services which unfortunately only cover major cities.
Real estate entrepreneurs and the investors who put funds into their projects will benefit from appreciating and paying attention to the growing demand for both home buying and renting solutions nationwide.
3. The Short-Term Rental Industry Is Recovering and Expected to Grow
Due to its dependence on traveling, the vacation rental business experienced one of the first and strongest negative effects of the pandemic. As soon as the global health crisis was announced, a tsunami of rental cancellations followed, leading to soaring vacancy rates at Airbnb properties.
At the time, many thought that this might be the end of the Airbnb industry, causing a collapse as fast as the initial growth. However, the short-term rental industry demonstrated resilience and started rebounding as soon as travel bans and restrictions began to weaken.
In 2022, the business has largely recovered from the initial impact of the pandemic and is back on its growth trajectory.
I expect to see further growth in tech startups related to vacation rental properties, whether providing complementary services for properties listed on Airbnb, Vrbo, or similar platforms—or, the emergence of companies aspiring to be the next Airbnb, only better.
A promising area of focus in this regard could be platforms that really streamline the short-term rental investment process for busy investors or those with limited knowledge of the business. Currently, many companies provide different services, but very few—if any—offer full automation. Bridging this gap is an excellent opportunity to demonstrate the power of technology in the real estate industry.
4. Inflation Is Going Through the Roof
I cannot conclude here without a few words on inflation. The consumer price index went up by 9.1% year-on-year, with major consequences on the real estate market. The most important one though, in my opinion, is the increased interest in real estate as a hedge against inflation. This works in parallel with the relatively higher instability of other investment strategies.
In other words, those who have the financial means to invest in real estate will do so at an accelerated rate. This opens a lot of space for existing and new startups which serve the needs and requirements of all levels and types of property investors. As this real estate trend allows some proptech startups to show maturity and more promising results, we can expect a continuation of the growth in proptech investment, albeit at a slower and more careful speed than over the past couple of years.
In summary, the four real estate trends outlined above all point in the same direction. The current market reality is creating numerous opportunities for proptech companies and those investing in them to continue digitizing and democratizing the otherwise traditional real estate industry.