How AI changes Real Estate
A moment in time
I was talking to a friend a few days ago. He heads the venture arm of a large commercial real estate firm.
“How do you know AI will not go the metaverse way?” he asked.
Mark Cuban had recently indicated that the metaverse seemed one of those things which will emerge 5 years from 5 years from 5 years from now. It has potential but no one knows a real use case, yet.
“Will AI meet the same fate?” my friend seemed to suggest. Tech with lots of potential, and the same hype and buzz that surrounded the metaverse a while ago.
CB Insights seems to validate the bit around hype and buzz - it shows the number of times ‘AI’ was mentioned in earnings transcripts over the last few years. Note this is for publicly listed companies and we don’t have data for Q1 2023 yet. A lot of the action has been in the private space this year.
Yet, it would be abjectly wrong to compare the trajectory of AI with that of the metaverse. It’s been a decade or more since people have been working on LLMs, the foundational layer for many recent advancements in AI. Programming is set to move from imperative to declarative code, significantly enhancing productivity and making it accessible for many, many more people. Speech, text, image, and video - the base communication layer for a majority of the world have already witnessed enhancement and change with AI.
So, in the context of real estate tech, are there real use cases today? Yes, there are. As promised last week, here are 6 sizable opportunities in the space. The original article was published in TechCrunch and I have copied it verbatim at the end of this post.
Coming back to my friend’s question, this was my response: “It’s clear that now’s the time to build for AI, which has already demonstrated a different, more urgent trajectory compared to the metaverse.
The more pertinent question then - as seed investors – is shall we be investing aggressively in AI today?”
That’s a nuanced question, which I will try to answer next week.
Artificial Intelligence (AI): A Generational Opportunity in Real Estate
2022 was a breakthrough year for AI. First came image generation models with DALL-E, MidJourney, and StableDiffusion. Then, ChatGPT went viral with GPT 3.5, the most sophisticated text generator/chatbot, trained on large language models (LLMs) by its parent company OpenAI. Riding on the euphoria generated by these technological developments, $49 Bn in venture capital was invested in AI in 2022, up 40% from the year before, with industry stalwarts indicating that recent technical advancements would usher in “the golden age of AI.”
Yet, there has been little conversation about how AI will play a growing role in real estate, a $50+ Tn asset class, and one of the key drivers of the global economy. We believe this represents a significant opportunity for real estate tech entrepreneurs, because of the scale of the opportunity, and the moment of time we find ourselves in.
The Opportunity in Real Estate Tech
AI’s emergence will cut through material use cases in real estate tech from search and listings to mortgages, construction, and sustainability. Notably, some of the most valuable companies in the early years of the real estate tech cycle created significant stakeholder value across these sub-sectors in real estate tech listed below - all of that will be in play with AI in the future.
Residential search and listings: Google’s first real threat to its Search product could come through Bing’s integration with ChatGPT. That said, both Search and Bing are not tailormade for real estate, which in part, explains why Zillow, Redfin, and StreetEasy have become valuable businesses. A machine learning (ML) enabled search and listings engine that leverages large language models, integrates with MLS providers, and provides more robust results for buyers and renters presents a significant opportunity.
Real estate brokerages: We believe real estate will always need the consultative hand of brokers - they are invaluable and cannot be replaced when an individual or family is making the largest financial decision of their lives in buying a home. Yet, a number of services provided by brokers and brokerages can be automated in a similarly personalized and consultative manner. Enter AI-powered chatbots that power real estate brokerages of the future.
Mortgage marketplaces and underwriting: The single-family mortgage market is estimated to be >$13 Tn in the United States alone. Mortgage search and underwriting have gotten better over the years but there’s room for much more. For one, the industry stands out for its abject lack of personalization. AI has the ability to create and work off infinite customer personas, providing more robust search and underwriting solutions.
Renters and homeowners’ insurance: Landlords and mortgage lenders typically mandate renters/buyers to get an insurance policy before moving into an apartment/home. Unlike real estate brokerages, where the agent’s role is critical, it is our belief that AI can completely automate the insurance layer, especially as it relates to renters' and homeowners’ insurance policies. These products are relatively cheaper and not as complex, and ML-tooled bots can improve the customer journey: from acquisition and underwriting to policy administration and claims management. Companies like Lemonade have given a glimpse of what’s possible with Maya AI but we have only gotten started in this $125 Bn+ market.
Construction estimation, bids and materials: The world is going to add 2 Tn square feet of real estate by 2060 – the equivalent of adding 1 New York City every month for the next 37 years! Pause for a moment and think about the amount of data the construction industry will generate over the next few years – and now consider the existing BIM and BOM models and current paper/spreadsheet-based estimation and bidding tools, and their technical sophistication. We are not going to replace general contractors at the job site but it’s amiss to say that general contractors that don’t partner with AI companies to leverage their own data will be at a competitive disadvantage in the years to come.
Sustainable construction: The built world accounts for 40% of global greenhouse emissions, and with 2 trillion square feet of additional real estate coming up, the number does not look any better. Part of the problem in solving emissions from the built world is that there’s only as much we can do with existing real estate – emissions that have been already operationalized in the environment. The more effective solution is to embed sustainability at the point of inception of the project, when a building is still in its design stages. Layering AI in an architect’s workflow to determine emissions outcomes across scenarios, and subsequently make recommendations triaging cost, zoning and sustainability is going to be critical in how the built world interacts with climate change.
Moment in Time
Considering the significant opportunity set for real estate and AI today, we distinctly believe startups are better positioned to build new companies in the space, compared to legacy real estate technology companies looking to add AI to their existing product mix.
Entrepreneur and author Elad Gil has written extensively on the nature of companies the AI revolution will birth, drawing a distinction between 2 categories:
De novo applications built on top of large language models by startups that don’t exist today but will thrive in the years to come. Ex: an AI-enabled new real estate search platform with a distinct UI/UX.
Incumbent products that add AI/machine learning tooling to remain competitive in the market and retain distribution. Ex: Zillow injects AI into its search feed but largely retains its product functionality.
When it comes to real estate tech, it is crucial to juxtapose Gil’s distinction with how 2022 panned out for incumbents in the industry. Layoffs abounded in real estate tech last year – close to 10,000 people were let go in 2022, up 300% from 2021, as companies sought to preserve burn and refocus on their core offerings. An index of 17 publicly listed real estate technology companies was down >80% from their peak valuation, many of them having gone public via SPACs in the recent past.
At a time when several incumbents in real estate tech continue to battle challenging micro and macro conditions, it is tough to envision how existing players can effectively adapt AI in a meaningful fashion this year. Our analysis indicates that mature companies are looking to play defense and preserve their core offering, ruling out any robust embrace of AI in their existing products.
This, in turn, creates a unique and urgent window for startups to build ground-up de novo applications for real estate with AI at its core. The technology is not perfect but is growing at a breakneck speed. ChatGPT 4.0 is expected to launch this year and will open yet another paradigm in AI. We have entered an era where programming moves from imperative to declarative code, expediting product cycles and feedback loops in an unprecedented fashion. In all of this, the opportunity set for entrepreneurs in real estate tech across search, listings, mortgage, insurance, construction, and sustainability stands out as a generational one.
The article originally appeared on TC here.