Real estate firms pivot to energy development amid booming data center demand
Brendan Wall has been thinking a lot lately. Wallace is co-founder and CEO of Fifth Wall Ventures. The firm has been around for nine years, managing $3.2 billion worth of assets. Wallace is also a home owner in Los Angeles, where wildfires continue to rage. Many of his friends, however, have not been as fortunate.
Wallace has become accustomed to forces outside his control. The pandemic has changed the landscape of many Fifth Wall limited partners (CBRE Cushman & Wakefield Lennar) and their real estate companies. Unfortunately for many of those same players, office vacancy rates still stand at roughly 20% nationwide, and analysts don’t expect that number to budge as many companies abandon the idea of a full return to the office.
Proptech has also taken its slings and arrows in recent years, partly owing to high-fliers whose fortunes turned fast, like WeWork, which emerged from bankruptcy last June following a failed IPO and massive restructuring. The industry has seen a rebound in recent years, thanks to the hidden benefits of change. According to Wallace, the opportunities are exploding in asset resilience – or using technology to help real estate assets resist damage and disruption. He sees an opportunity for Fifth Wall’s partners to more aggressively capitalize on the demand from the tech industry for data centers, and the energy needed to power them.
We spoke with Wallace about these trends and life in L.A., during what many have felt like an apocalypse. You can listen in on that full chat here or read on for excerpts from our conversation, edited lightly for length.
You’re in L.A. How are you doing?
It’s just tragic what has happened. Our team is all safe. Our office was evacuated because we were in Santa Monica. Los Angeles is going through a difficult time. There will be much reflection after this event, as the political and economic issues that California has struggled with for years come to the forefront. It’s positive, but it’s devastating to see so many parts of Los Angeles destroyed. What do you think will happen next? This must represent unexpected opportunities, as unseemly as that is to say. It’s not an opportunity, but it’s a time of rebuilding, reimagining, and reconstruction for Los Angeles. Fifth Wall is excited to be part of this. What does it look like to be a part? I don’t yet know.
The flight of insurance companies from the state was a major problem that business owners and homeowners were facing….
We are one of the most active fintech investors for the residential sector. Fifth Wall has invested in Hippo which was a California-based home insurance provider.
It’s ironic that a lot regulation, while well-intentioned, has had the opposite impact. It creates market imbalances that exacerbate the problems we are currently facing, such as the uninsured homes or the cancellation of insurance. We are interested in investing in two things. First, there are potential solutions that would benefit consumers. Second, we want to reduce the amount of bureaucracy required to launch insurance companies. The other thing that I’d like to see is a streamlining of the amount of bureaucracy that is required to launch insurance companies.
Regulations aside, does the math work out? It’s hard to understand how startups with different regulations can [even before the fires] California when these devastating things happen that make it very hard for insurers to recoup their investments.
It’s very hard to answer that question without looking at a county-by-county analysis. It’s possible that some areas are going to be uninsurable, but it’s also possible that some areas are going to be uninsurable that otherwise would be without regulation, and the latter is what I’m focused on mitigating.[Editor’s note: Hippo stopped writing new homeowners’ insurance nationwide last summer.]
This isn’t just a California problem. The problem may be more severe in California or the home values higher, but it is a national issue. This doesn’t appear to be the case in Miami. Southern California will see a lot more new construction, which will increase the cost of replacing homes. There won’t be a mass exodus from these beautiful areas of the country.
The rise in insurance rates will also lead to a decrease in affordability, which could put downward pressure on home prices [insure]. The net of it, though, is this is going to increase a lot of home prices throughout Southern California and especially in West Los Angeles.
You’re an investor in ICON, a 3d printer of modular homes. Do you see an opportunity for this company? We reported this month that it had laid off a quarter its staff before the fires started. Fifth Wall is an investor in the company. Our thesis was not so much around wildfire prevention or post-natural-disaster rebuilding but around, how do you build homes faster and cheaper and with fewer materials than you do today? They’ve developed a method of printing homes and reducing waste in the construction process.
One of those crazy statistics that many people are unaware of is that 5 percent of the waste in U.S. land fills was material that came from a construction site, and then went directly to the landfill. This is a huge problem, which drives up costs for consumers, makes it difficult to run construction companies and leaves a large carbon footprint. The question is, how can we scale this up?
Have you made investments in companies that are specifically focused on making nonflammable materials?
No, but we should. I think it’s a space that will receive a lot of attention right now.
Have you made investments in companies that are specifically focused on making nonflammable materials?[meaning houses might cost slightly less because sellers have to factor in the high cost of insurance]No, but we should, and I think it’s a space that will receive a lot of attention right now …
retrofitting is going to be the big problem. The majority of homes that we want to protect have already been built and are made with materials which are difficult to remove. In rebuilding we must be aware of the materials we use and choose the best solutions. But the vast majority of the homes at risk in Southern California already exist today.
Broadly speaking, the proptech sector has seen fewer deals in recent years. Is it accurate to say the interest in this industry has cooled down?
It is absolutely true. I believe we have just experienced — and still are in — a cold, bitter capital market for proptech. You had not seen any major M&A deals. In that time period, none of the venture funds with a focus, Fifth Wall included raised any capital. Very little VC money was invested in the area. The flip side is that you are now seeing companies that have survived this Darwinian event. Companies that have made the necessary cost cuts, restructured their business models, refocused their marketing and recapitalized are coming out on the other end stronger, more viable and more durable. Proptech is a growing industry and there are many positive signs in the market right now. What about the existential threat that we have been hearing about for years to the office sector?
Long-term,
, about the office market, but you are also seeing explosive growth in categories which were not even considered real estate previously. The data centers are exploding. This explosion has forced the real estate sector to ask some big questions. The AI revolution, which has the world enthralled, is impossible without massive expansion of data centers across the U.S. Go on…[Going forward,]We’ll need racks and racks of servers to do training and inference around the globe. It’s no secret that data centers are the most popular asset class for real estate capital markets. They have been the hot property in the industry for the last two years. There’s a new problem emerging that is associated with data centers. . . which is that data center is so energy intensive, the local utility will not allow you to plug in that grid …
That’s forcing the real estate industry to say, “We have to be in the energy business ourselves if we want to be in the business of computational data centers.”
What are your LPs expecting you to do? What do your LPs expect you to do?
Fusion may be exciting, but there is a problem that we need to solve sooner rather than later. We need energy right now, or by next year. We don’t want dirty fossil fuels, so we are looking at renewables, most notably solar, which we know is cost-effective.
The bottom line is that we are investing alongside our real-estate investors in solutions to speed up the development of solar. Real estate companies will also become energy development firms themselves.
