Real Estate Firms & Data Centers: A Shift to Energy Development

Brendan Wallace on Resilience, Rebuilding, and the Future of Proptech

Brendan Wallace, co-founder of Fifth Wall Ventures – a proptech venture firm managing $3.2 billion in assets – is currently navigating a challenging period. Beyond his professional responsibilities, Wallace is a Los Angeles homeowner contending with the ongoing threat of wildfires. Despite his own property remaining safe, many friends have experienced devastating losses.

Navigating External Disruptions

Wallace acknowledges a growing pattern of uncontrollable external factors impacting both his personal life and Fifth Wall’s investments. The pandemic initially reshaped the landscape for the firm’s limited partners, including prominent real estate firms like CBRE, Cushman & Wakefield, and Lennar. Currently, national office vacancy rates remain around 20%, with analysts predicting little improvement as companies reconsider full-scale returns to the office.

The proptech sector itself has faced headwinds, particularly due to the rapid rise and subsequent struggles of companies like WeWork, which recently emerged from bankruptcy after a failed IPO and significant restructuring.

Opportunities in a Changing Landscape

Despite these challenges, Wallace believes the industry is poised for a resurgence. He identifies significant opportunities related to asset resilience – leveraging technology to enhance the ability of real estate to withstand damage and disruption. Furthermore, he foresees a substantial opportunity for Fifth Wall’s partners to capitalize on the tech industry’s escalating demand for data centers and the necessary energy infrastructure to support them.

Reflections on the Los Angeles Wildfires

You’re based in Los Angeles. How are you coping with the current situation?

The recent events are truly tragic. Thankfully, our entire team is safe, although our Santa Monica office required evacuation. This is a pivotal moment for Los Angeles, prompting crucial reflection on long-standing political and economic issues facing California. While this is a positive development, the immediate devastation is heartbreaking.

Looking Ahead: Rebuilding and Reimagination

What are your thoughts on the path forward? The cleanup and reconstruction efforts will undoubtedly present unexpected opportunities, however difficult it may be to acknowledge that.

I wouldn’t characterize them as “opportunities.” I firmly believe people will continue to desire living in Los Angeles. I remain optimistic about a period of rebuilding and reimagination for this great city, and Fifth Wall is eager to participate. The specific form that participation will take remains to be seen.

The Insurance Crisis in California

A significant concern for both homeowners and business owners, even prior to the fires, is the withdrawal of insurance providers from the state…

Fifth Wall is actively involved in investing in fintech solutions for the residential industry. We previously invested in Hippo, a home insurance company with a strong presence in California. [Editor’s note: Hippo ceased writing new homeowners’ insurance nationwide last summer.]

Regulations, while intended to protect consumers, have inadvertently created market imbalances, exacerbating the current problems of underinsured homes and policy cancellations. We are actively seeking better solutions for consumers and advocating for a more streamlined process for launching insurance companies.

The Viability of Insuring California

Beyond regulations, is it financially feasible to insure California given the increasing frequency and severity of these events, making it difficult for insurers to recoup investments?

Answering that requires a detailed, county-by-county analysis. While some areas may become uninsurable, others might be insurable with different regulations – and that’s the focus of our efforts. This is not solely a California issue; it’s a national challenge.

Real Estate Valuation in High-Risk Areas

Do you anticipate the wildfires will alter real estate valuations in these high-risk zones? This hasn’t been observed in areas like Miami.

I believe prices will likely increase for several reasons. Extensive new construction in Southern California will drive up replacement costs. Demand to live in these desirable areas will persist, preventing a mass exodus. Increased insurance premiums will reduce affordability, potentially exerting some downward pressure on prices. However, the net effect will likely be higher home prices, particularly in West Los Angeles.

ICON and the Future of Construction

Fifth Wall invested in ICON, a company specializing in 3D-printed modular homes. Do you see potential for their technology? They recently announced layoffs prior to the fires.

ICON is a promising company, and Fifth Wall is a minor investor. Our initial investment thesis wasn’t centered on wildfire prevention or post-disaster rebuilding, but rather on accelerating and reducing the cost of home construction while minimizing material waste. Their technology effectively “prints” homes, significantly reducing waste associated with traditional construction.

A surprising statistic is that approximately 5% of all material in U.S. landfills originates from construction sites. This drives up consumer costs, hinders construction company operations, and contributes to a substantial carbon footprint. The key question is scalability and cost-effectiveness.

Investing in Nonflammable Materials

Has Fifth Wall invested in companies focused on developing nonflammable building materials?

Not yet, but it’s an area we should explore, and I expect it will receive increased attention. Retrofitting existing structures will be a major challenge, as most at-risk homes were built with materials that are difficult to replace. Therefore, the greatest value lies in retrofitting existing assets – buildings, homes, and infrastructure.

The Cooling Proptech Market

The proptech sector has experienced a slowdown in deal activity recently. Is it accurate to say that overall interest in the industry has waned?

Interest has undoubtedly cooled. We experienced a period of challenging capital markets for proptech, with limited M&A activity and minimal venture capital inflows. However, this period has also identified companies that have successfully adapted, streamlined operations, and secured recapitalizations, emerging stronger and more resilient.

I believe the proptech industry is now experiencing a resurgence, with positive indicators emerging. [Editor’s note: Wallace cites the IPO of ServiceTitan and the sale of Industrious as examples.]

The Future of the Office Industry

What are your thoughts on the long-term challenges facing the office industry?

While the future of the traditional office remains uncertain, we’re witnessing explosive growth in previously unforeseen real estate categories. Data centers are experiencing unprecedented demand. This growth raises critical questions for the real estate industry, particularly regarding the energy requirements of the AI revolution and the need for massive data center infrastructure.

The Energy Challenge for Data Centers

Could you elaborate on that?

We require vast networks of servers for AI training and inference globally. This necessitates a massive expansion of data centers in the U.S., which in turn demands a substantial increase in energy production. However, local utilities are often unable to accommodate the energy demands of new data centers.

This is forcing the real estate industry to consider becoming energy producers themselves to support the growth of computational data centers.

LP Expectations and Energy Investments

What are your limited partners expecting from you in this evolving landscape? Are you considering investments in fusion startups?

Fusion technology is exciting, but we have more immediate energy needs. We require solutions now or in the near future, ideally from non-fossil fuel sources. This naturally leads to renewable energy, particularly solar. We are actively investing in solutions to accelerate solar development alongside our real estate investors, with real estate companies increasingly becoming energy development companies.