🤖 AI in Proptech, Will Institutions Own it All, and Hemlane

Will AI Save Proptech?

The word out of Silicon Valley is that artificial intelligence is going to solve all of humanity’s problems. Or it’s going to make humanity obsolete and turn it into slaves for the robot overlords.   

Perhaps AI will one day allow tech-enabled real estate services businesses to actually scale efficiently and with expanded margins.

The Hype and the Reality

For all the hype about AI, and there is no doubt that its impact on proptech has been overhyped, it’s clear there will be many tasks that can be automated and streamlined. 

But there are significant challenges ahead. Tomer Dorfan, vice president of revenue at Endpoint, a digital title and settlement company, spoke about one of them at the IMN SFR East conference held in Miami in May. Human employees build a relationship with an organization over time, and they learn and process information that goes beyond data.

“One of the most persistent problems, one of the most high-value problems, is aggregating institutional organizational knowledge,” Dorfan said. 

AI is built to go through a series of steps and methodologies to enable machines to understand, analyze, and resolve complex problems. Real estate investing is nothing but a series of problems to solve. In proptech, this translates into better data management and improved information processing, applicable to tasks like identifying favorable market conditions for buying a property and setting market rates for rents.

But at the end of the day, the complications in the single-family residential (SFR) investment market are often more mundane. AI cannot swap out a busted hot water heater or unclog a toilet. Nor can it build a personal relationship with a tenant or landlord, or conduct a turn to make sure a property is clean and move-in ready.

The bottom line is that AI cannot turn proptech, a large part of which is essentially a service business, into a technology business. However, it should speed up customer service, improve information processing, and uncover insights at an order of magnitude better than what was possible before.

Where AI Can Boost Proptech

AI-powered algorithms can enhance efficiency and help make decisions that rely on data, and can automate property search and evaluation tasks, risk analysis, and value assessment. Its strength is analyzing large amounts of data that lead to more accurate valuations, rental yield predictions, and market trends.

AI algorithms can collect market data from various sources, including sales history, transportation networks, schools, and crime rates, to predict future property prices. There are a number of operators who say that AI drives their business, including:

• Entera has a platform that allows investors to find, buy, and operate single-family homes at scale

• Zorba offers a single platform to source, acquire, renovate, lease, and manage single-family rentals all from one place

• Oyster Data leverages AI to optimize operations and forecast capital expenses for SFR operators, asset managers and property managers

• HouseCanary claims it can evaluate the home prices now and in the future

• CREX Capital bills itself as solution the fastest tool for deal origination, evaluation and execution in the commercial real estate space

AI for Property Managers

If anything, proptech has proven that solid property management is an indispensable function with the most critical tasks better performed by a person. Scaling proptech hit a wall when it came to PMs; more doors added to the database invariably required more people to manage those doors.

But there are several categories where AI can help property managers:

Automating Routine Tasks: AI-powered property management software can automate rent collection and reminders, saving property managers significant time and resources.

Enhancing the Tenant Experience: AI-powered chatbots can answer tenant queries in real time, providing instant responses to their questions and concerns. AI-based software can also analyze tenant data to personalize experiences.

Optimizing Operations: AI-powered software can analyze data on rent trends, occupancy rates, and maintenance needs to help property managers allocate resources more efficiently. AI-powered screening tools can analyze applicant data and identify potential risks, such as past evictions or criminal records, helping property managers with the tenant selection process.

Where We Go From Here

AI in proptech will be overhyped and overfunded, leading to numerous failed ventures. However, much like Google stepping into search in the second inning and transforming it, AI will bring improvements in efficiency, data analysis, and automation. It won’t revolutionize real estate, but it will positively impact an industry notoriously late to the innovation party.

Sizing Institutional Ownership in SFR

A media trope these days has the greedy and evil corporation buying up all the homes in the single-family residential (SFR) market, crowding out the mom-and-pop operators and making it harder than ever for Americans to get into starter homes.

Many of these articles reinforce this theme through anecdotes, mostly about uncaring and unresponsive landlords, hidden fees, rising rents, and the pricing out of would-be homebuyers:

• Wall Street Is Buying up Entire Neighborhoods

• Democrats eye new legislation to rein in Wall Street landlords

• The Real Problem with Corporate Landlords

• Wall Street Has Spent Billions Buying Homes. A Crackdown Is Looming

The last article, from the Wall Street Journal, details legislation introduced by Democrats in April, the End Hedge Fund Control of American Homes Act, that calls for large owners of single-family residences to sell their homes to family buyers. A bill in the Ohio state legislature backed by Republicans calls for heavy taxes on institutional owners, and laws aimed at limiting corporate ownership have been proposed in Nebraska, California, New York, Minnesota and North Carolina.

The problem with the evil corporation narrative is that it’s a wild oversimplification.

Yes, home prices are up, and so are interest rates. But institutional buyers are not responsible for the housing shortage in America, which Freddie Mac puts at about 4 million homes and others estimate could be as high as 5.5 million. High prices, quite simply, can be explained by the Econ 101’s supply and demand curve. 

Interest rates? Well, 30-year mortgage rates below 3% were a historical anomaly that few are likely to see again in this lifetime.

Estimates put institutional ownership of SFR at only about 3% of the 82 million single-family homes across the US, and the market functions just fine with them in it. They also bring professional management and provide quality housing.

But the 3% number can be deceiving. In some markets, such as Atlanta, Jacksonville, Tampa, Phoenix and Houston, institutional investors are particularly active and own as much as 10% of the housing stock. In 48 zip codes in Atlanta, 5-13.8% of homes are owned by institutions, according to data compiled by Parcl Labs.

And this trend shows no sign of letting up. Corelogic reported that investor purchases of US homes hit a new high in December. In October, November and December, the share of single-family home purchases that were made by investors was 28%, 27.3% and 28.7%, respectively. This eclipsed the previous all-time high of 28.3% in February 2022 and makes the investor share rising above 30% in 2024 a possibility.

Research by MetLife Investment Management (MIM) estimated that institutions owned 700,000 single-family rentals in 2022, about 5 percent of the 14 million SFRs nationally. MIM’s predicted back then that institutions will increase SFR holdings to 7.6 million homes by 2030, more than 40 percent of all SFRs. 

We will explore how realistic this number is in more detail later in this article.

The Biggest Players in the SFR Space

Five companies combined own about 330,000 single-family rentals, or about 2.4% of all single-family rentals, and about 0.3% of the 95 million single-family houses in the US, according to Wolfstreet.

• Progress Residential, a privately held company, owns about 85,000 houses.

• Invitation Homes, a publicly traded REIT (INVH), has about 82,000 houses. 

• American Homes 4 Rent, another publicly traded REIT (AMH) owns nearly 60,000 single-family properties in the Southeast, Midwest, Southwest and Mountain West.

• FirstKey Homes has about 50,000 houses and is a private company.

• Blackstone acquired Home Partners of America, with 17,000 rental houses, in 2021. In May, it acquired Tricon Residential, a publicly traded Canadian company [TCN], with about 38,000 houses in the US. In total, they now hold over 62,000 houses.

Corelogic says investors are having a small impact on homeownership numbers. Some 16% to 19% of homes investors sold over the past two years were bought by other investors. About 10% of new homes are bought by investors, and in an average year, they sell 15% of their real estate portfolios. 

Some 900,000 homes per year are purchased by investors, and taking the numbers above into account, it results in about 300,000 homes moving from owner-occupied to investor owners in any given year.

That is less than 0.5% of the total US housing market and investor activity would need to increase or hold steady for a very long time to see a decline in the homeownership rate. For example, the effect of home investor purchases could offset if some landlords also choose to sell homes to first-time homebuyers.

How Does the Rise of Build-to-Rent Affect the Market?

BTR homes, or what is also referred to as horizontal multifamily, have attracted SFR institutional investors, homebuilders, commercial developers, and some members of the public looking for a stress-free lifestyle while living in a home that comes with certain amenities. 

For homebuilders, a limited choice of housing types and an institutional partner that is ready to purchase and manage the properties helps reduce risk.

These days, SFR investors are finding it more difficult to purchase existing homes through traditional channels, which was a different story back when the asset class arose in 2012, when they could rely on foreclosures or other distressed sales. As interest rates fell in 2019 and demand increased, competition for desirable homes in prime locations grew keener, and some institutions turned to BTR homes. 

BTR homes are often part of master-planned communities that share amenities such as walking trails, parks, or swimming pools. These amenities are not available in the scattered-site model for other SFR properties.

Yardi and the National Rental Home Council estimate that in addition to the 131,000 BTR units that have already been completed, another 112,000 are in various stages of development, including 31,000 prospective units, 35,000 planned units, and 46,000 units under construction. 

The 131,000 units is less than 1% of the US housing market.  According to the 2021 American Community Survey, there are 127.5 million occupied housing units in the US, 44.1 million of which are rental units. There are 11.4 million occupied detached SFR units and 2.9 million attached SFR units, for a total of 14.3 million occupied SFR units. 

Hunter Housing Economics calls BTR the “strongest niche in real estate” and says about 115,000 to 120,000 units will be added annually in the next several years, and demand could go as high as 150,000 or so units by 2027.

The Bottom Line on Institutional Ownership

If we take 300,000, the number of owner-occupied homes to investor owners in a given year that Corelogic estimates will be transferred, and add the 120,000 units of BTR a year that could enter the market between now and 2030, that moves about 420,000 units into the investors space for the next six years.

That would put about an additional 2.5 million homes into the investor column by 2030, which would be about 18 percent. 

The two-year-old study from MIM put the investor number at 7.6 million, which we think is high, but in fairness, the data in that period suggested a different picture.

Institutions will continue to invest in the SFR market, because, to paraphrase Willie Sutton, that’s where the money is. But these institutions tend to focus their efforts on the Sunbelt markets so competition there is keener. 

The median home sales price is $420,800 as of the first quarter of 2024, a number that discourages some investors based on ROI.

But there are plenty of places that are more affordable, including two cities highlighted in the last two issues of proptext.co, Taylor, TX (median home price of $330,000) and Elsworth, ME (median home price of $300,000).

Phoenix, Arizona

The Phoenix metro area is experiencing significant growth and diversification in its industrial landscape, with an influx of new industries driven by its favorable business climate, available land, skilled labor force, and strategic location. 

Among the key industries expanding in Phoenix are:

• Semiconductor manufacturing

• Electric vehicle assembly 

• Data centers

• Healthcare

• Biotechnology

• Aerospace manufacturing

• Logistics and transportation

The influx of these industries is transforming the city's economic landscape, creating high-quality jobs, fostering innovation, and positioning the city as a hub for diverse, high-growth industries.

One of the most significant developments is the expansion of semiconductor manufacturing. Taiwan Semiconductor Manufacturing Company (TSMC), one of the world’s largest semiconductor manufacturers, is building a $12 billion facility in Phoenix. This plant is expected to create over 1,600 high-tech jobs and establish the city as a hub for semiconductor production.

For short-term rental investors, Scottsdale, which sits in the northeast quadrant of the metro area, offers excellent investment opportunities. Savvy investors are looking at homes with the opportunity to create unique travel experiences by packing amenities into a larger property. Demand from bachelorette parties and other larger groups (for 5+ bedrooms homes) have created a competitive market. New investors in 2024 would need to create an experiential stay by combining high-end design, a full suite of amenities, and a pricing strategy to successfully compete. 

Opportunities for Both STR & SFR

→ The current population of the Phoenix metro area is 4.9M, a 1.27% increase from 2023. The Census Bureau reported that the city’s population increased by 11.2% from 2010 to 2020.

→ According to Zillow, the average Phoenix-Mesa-Scottsdale home value in June of 2024 was $461,352, up 4.4% over the past year.

→  In 2022, 19.5 million people visited Phoenix in 2022, including overnight and day trip visitors and one million international visitors, according to Visit Phoenix.

→ According to AirDNA, the average daily rate (ADR) for STRs in Phoenix was $145, with an average occupancy rate of 72% as of mid-2023.

Future appreciation

35300 N Breezy

This 3-bedroom home features a split floor plan with spacious great room and separate dining area. Richly upgraded with espresso-stained cabinets, granite countertops, stainless steel appliances and tile throughout home except bedrooms. This home is complete with front yard landscape, rain gutters, covered patio 2'' faux blinds and smart home technology package.

The Investment Thesis

→ In Queen Creek area of Phoenix, which is one of the fastest growing sections of a fast growing market.
→ According to Zillow, the median home value in Queen Creek was approximately $425,000 as of June 2023, which is lower than the median home value in Phoenix itself.
→ Queen Creek is known for its excellent school system, which is a significant draw for families.
→ Queen Creek's population grew by approximately 80% from 2010 to 2020

 Property Details

 Financial Projections

Interested in Learning More?

*Appreciation based on 4.5% growth rate. 

Jack Kuveke - Sultan of Satire

Jack Kuveke, LinkedIn satire king and legit fund-raising advisor, logged in last week and decided to napalm the proptech industry in a way only he can. While his post is aimed at young entrepreneurs trying to disrupt home buying before they’ve even had to pay rent, the misconception behind how “ripe for disruption” real estate actually is does impact all ages.

In the world of entrepreneurship, real estate seems like the golden ticket. Most of us grew up in houses, so there is a natural familiarity. The total addressable market (TAM) is enormous — the value of the US housing market surged $2.6 trillion in 2023 alone, according to Zillow, with a total value somewhere around $47 trillion.

And everyone needs a place to live, right? 

But this alluring simplicity is often deceptive, leading many enthusiastic disruptors to convince themselves that they have the technology that will finally cash in on those trillions. Unfortunately, most of these niche solutions, or service businesses masquerading as technology companies, ultimately make their way to the same graveyard.

Why Real Estate Attracts Entrepreneurs

Real estate appeals to entrepreneurs for several reasons. First, there's the familiarity factor which leads some to think they understand the market. Second, the problems in real estate seem straightforward to solve: improve efficiency, reduce costs, and voilà! Third, the sheer size of the market is enticing. With housing being a fundamental human need, the potential for profit appears boundless. 

But as many have discovered the hard way, regulations at the state and federal level create a complex set of problems, and the costs of operating in a mature, compressed-margin industry, makes survival, let alone success, an uphill battle.

Reasons This Misjudgment Happens

1. Dunning-Kruger Effect

The Dunning-Kruger effect is a psychological phenomenon where people with limited knowledge or competence in a domain overestimate their abilities. Young entrepreneurs often fall prey to this bias, thinking that their business skills will easily transfer to real estate. They don’t know what they don’t know, and this blind spot can lead to costly mistakes. They might launch a proptech startup believing they’ve cracked the code, only to find out that real estate's complexities and nuances are far beyond their grasp.

2. Optimism Bias

Optimism bias leads individuals to believe they are less likely to experience negative outcomes compared to others. Young entrepreneurs, fueled by confidence and success in other ventures, often underestimate the risks involved in real estate. They are inclined to focus on potential gains and dismiss the numerous pitfalls that can derail their projects. This unrealistic optimism can result in a rude awakening when the harsh realities of the industry come to light.

3. Oversimplification of the Market

Young disruptors in particular often oversimplify the real estate market. They see it as a series of transactions rather than a web of complex relationships and regulations. They underestimate the importance of local knowledge and the intricacies of property laws. 

Further, the product itself is heterogeneous. No two houses are the same, even if they were built as an identical model. This naiveté leads them to develop solutions that might look good on paper but fail miserably in the real world. They forget that real estate is not just about buildings and land; it's about people, communities, and long-standing practices that can't be changed overnight with a slick app or a fancy algorithm.

But it’s Ripe for Disruption! 🛑

We realize this is a bit of a generalization and doesn’t apply to all proptech companies. The important takeaway here is that founders of all ages would save themselves a lot of pain by co-founding with an industry veteran or at a minimum visiting that graveyard and learn from past failings. 

To this day, you can find a new VC-backed property management, lending, or brokerage company coming to the market despite now having multiple proof points that their respective niches, when traditionally delivered, are growth-restricted business models that require more and more people to execute. If you are going to fund your business with venture capital, make sure you are building a business model that supports the growth rates required, or pick out your headstone. We’ll leave you flowers.

As for Jack, we salute your service, sir.  In the words of Wyndham Lewis, “Where there is objective truth, there is satire.”

Hemlane

Hemlane is a vertically integrated property management platform that streamlines the landlord lifecycle — from leasing to financial reporting. Through a blend of centralized support staff and an intuitive software platform, both accidental investors and professional owner/managers can dramatically improve ROI, enhance resident experience, and save time.

From Concept to Creation: Hemlane’s Journey

Hemlane was born from a desire to simplify property management, a vision shared by its founders, Dana Dunford and Frank Liu. Recognizing the myriad challenges faced by property owners and tenants, they set out to build a platform that could streamline and enhance rental property management.

Founded in 2015, Hemlane's journey wasn't typical of most venture-backed startups. The platform's intuitiveness and nuanced value at critical steps in the landlord journey are the results of years of listening, learning, and executing.

In 2022, Hemlane raised $9M in series A funding, setting the stage for expansion into multiple markets.  Today, Hemlane manages properties in over 5,200 cities, with more than 29,000 units and a 98% customer retention rate.

What Makes Hemlane Unique

Rental owners have traditionally had two options for property management: do-it-yourself or hire a professional third-party manager.

Self-management offers the most control, but takes time and effort. Vetting tenants, setting up and collecting rent, handling maintenance requests, and staying abreast of evolving landlord laws is not for the faint of heart.

Hiring a third-party manager saves time but comes with its own risks and costs, a management fee (typically 8-12% of gross rents), slower communication because of the middleman, and the inherent inefficiencies of a low-margin business model.

Even well-funded, professional third-party managers struggle with issues like poor communication, as evidenced by internal operations campaigns such as "pick up the phone."

Enter Hemlane, a third option. It offers a flexible platform where landlords can customize services from a single login. Start by selecting a base service plan from one of the following four options:

The flexibility in service levels is pretty amazing.  For leasing, would you prefer lockbox or agent showing?  The pros know how challenging lockboxes can be with squatters, and having the ability to choose is invaluable.  How about maintenance?  You can decide whether you handle it all yourself, designate a specific maintenance vendor of your choice in the app for Hemlane support staff to communicate with, or let Hemlane take the wheel with their own pre-vetted vendors.  

The combination of software paired with tech-enabled support staff is the best of both worlds.  

A Deeper Dive With the Team

We recently spoke with Alyssa Clark, a Hemlane rising star who helps landlords save time and money daily. According to Clark, over 10% of maintenance requests are resolved through basic troubleshooting between Hemlane support staff and tenants, saving landlords saving thousands compared to those without the bandwidth to troubleshoot.

Clark also shared some additional stats:

• 4.8-star or better-rated maintenance provider network

• No markups on maintenance costs

• Average time from rent-ready to tenant in place: 19 days 
  (better than many top-tier third-party managers)

What struck us most during our conversation with Dana Dunford, Hemlane's CEO, is her understanding of the platform's potential impact on the industry. Dunford emphasized that property management used to be a choice between DIY and full-service solutions, both of which are inherently flawed. Hemlane offers a new, tech-driven alternative.

Dunford also shared Hemlane's North Star, highlighting the company's focus on execution: “Occupied units are our North Star. As long as we focus on keeping our units occupied and paying efficiently, everything else will fall into place.”

How Can You Get Started ☎️

We see countless ways Hemlane can improve the lives of landlords.  

Are you a small investor managing your properties looking to simplify the process?

Are you an agent looking to build a recurring revenue stream to complement your brokerage business?

Are you a professional third-party manager interested in exploring how Hemlane’s platform could enhance your current tech stack?

All of these and many other landlord scenarios can benefit from Hemlane by speaking with Alyssa.  Schedule a call with her today and experience the difference for yourself!

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