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🏦 The multi-faceted multi-family real-estate startup problem
There can be too many software tools
It is no secret that the multi-family industry is behind when it comes to technology. In a recent Forbes article, Arian Nemati identifies a few main reasons: high cost with low ROI of new software and poor integration into legacy systems. These factors create high barriers to entry in the space but also the potential large rewards on the other side.
In a call two weeks ago with a property management company that owns over 10,000 units, I learned that they had 16 different tools that their leasing teams used to complete their daily tasks. If you work at a software company, 16 seems low. Actually, you might even be laughing as you read this because the average company uses 250 software applications and sees only 45% usage with each tool every 60 days. So, 16 tools seems great, right? Wrong.
These tools do not play nicely together. Incumbent property management systems (PMS) do not make it easy to integrate, and across a portfolio, a property management company may use a different PMS for each different property. A barrier to entry for any new startup in the space is an integration with each of the major PMS vendors. This is expensive and time consuming due to contract cycles, expensive access fees and legacy architecture. Furthermore, the major PMSs have existed for over 20 years so they sort of do everything…just not well. Why innovate if you don’t have to? It’s hard and expensive.
This barrier to entry has resulted in feature companies, startups trying to solve a specific problem in isolation and with the assumption that this will be just like building traditional software. But it isn’t. The industry dynamics are unique and the Silicon Valley, “solve it with software” approach doesn’t work in this environment. A lot of these startups come out of the gate hot, make bold claims and burn out fast (or get sued by the incumbents). There is a large graveyard of startups who tried to make their way into the largest property management companies but it doesn’t have to be this way. We can learn from the mistakes of the past.
It makes sense why the attention is shifting more and more to this space. The industry is predictable, recession resistant (people have to live somewhere!) and behind the times in tech. For founders looking to enter this space, beware of the complex requirements of integrating with incumbent PMSs. Make sure to consider who your customer is, where they are within a property management organization, and whether they are willing to pay for your features. Above all else, speak with potential customers and make sure there's a true need for the solution you're building.
I won’t go as deep here because I can’t do a better job than Sumeet Singh in his blog post “Serving the Multifamily Real Estate Industry with Software.” The argument that resonates most with me is that software that negatively impacts property-level net operating income (NOI) is hard to sell. If costs can be shared at the portfolio/fund level, you may have more of a chance. The management sides of these businesses are often bulky and slower to move. It isn’t like selling to a government institution, but it also isn’t like selling to a startup.
Regardless, it is hard to argue with his point that to have a fighting chance, new entrants in the multi-family proptech space must show clear ROI on day one. This means an integration with the mission-critical PMS that works as the users expect, a short sales cycle, differentiation and above all, simplicity.
What to expect
Over the next 3-5 years, I expect more and more small feature companies to pop up. Throughout this process of feature-centric innovation, I would expect consolidation led by the private equity backed or owned giants in the space. Large incumbents will acquire companies that solve specific problems well because that will be easier for them than building it out themselves.
Beyond that, I believe that delightful solutions with consolidation and simplicity at the forefront will win bigger than the rest. Be mindful, it may take 10+ years to start making a dent in the incumbent’s market share but for the ambitious founder with a long-term view, there are opportunities ripe for the taking. I can’t wait to see how creative founders change this industry for the better and make all aspects of owning, operating, servicing, living in the mutli-family world better.
If you see these same problems and want to take them on, please reach out!