- Companies like Compass, Opendoor, and Redfin are reporting losses and cutting thousands of jobs.
- The proptech sector is battling two challenges at once: a slowing housing market and a tech bust.
- Many major firms and startups are facing their first downturns, and the culling could be brutal.
From July through September, the real-estate brokerage Compass burned through $75.5 million of cash and saw its revenue drop sharply for the first time. During an earnings call to discuss the quarter, CEO Robert Reffkin couldn’t rule out further job cuts after two rounds of layoffs shed almost 1,200 workers, or about a quarter of its staff.
Big home-flipping companies known as iBuyers — which scoop up properties partly based on high-tech algorithms and then renovate and resell them — are also struggling. The sector’s biggest firm, the San Francisco-based Opendoor, bled $928 million during the third quarter, its worst-ever three-month performance, and said it would dismiss 550 workers, or 18% of its headcount.
And Redfin, the home-listings site and brokerage, announced it would shutter its own iBuying arm after posting a $90.2 million loss across its business during that same time period. It said it would let go of 862 workers amounting to 13% of its workforce.
For almost a decade, a growing group of companies have thrived by introducing tech innovations to a stubbornly analog real-estate industry. The so-called property-technology sector, often called proptech, has produced household names like Compass, Opendoor, and Redfin, along with hundreds of lesser-known startups.
Many of these firms have focused on the country’s multitrillion-dollar residential market, seeing an especially lucrative opportunity to remake the traditional process of buying and selling a home, or taking out a mortgage, to be faster, cheaper, and more easily accessible online.
But after a decade of steady growth fueled by billions of dollars of investor cash, these companies are now experiencing a downturn that many in the young proptech industry have never seen. Those whose fortunes are tethered to the health of the residential market have been hit especially hard in recent months as fast-rising interest rates have swamped sales transactions and brought down home prices in some areas of the US. If the nation’s economy tips into a recession and market conditions continue to worsen, proptech experts warn of more red ink, layoffs, scrambled business ambitions — and perhaps even a painful industrywide culling.
“It didn’t seem like real estate was a cyclical business for the last 12 years, but, in fact, it is,” said Constance Freedman, the founder and managing partner of Moderne Ventures, an early-stage fund with about $500 million of investments in 140 proptech-related companies. “If a company is totally beholden to the health of the real-estate business and doesn’t have a countercyclical model within it, it’s probably not going to fare well in a downturn.”
Proptech must contend with both a cooling housing market and a slowing economy overall
The tumult has been felt by industry stalwarts such as Zillow, which said in October that it would cut about 300 jobs, along with newer startups including Pacaso, which shed about a third of its roughly 300 workers that same month. The San Francisco-based Pacaso purchases vacation homes in tony areas of the country such as Lake Tahoe and Vail and then sells more-affordable shares in the properties to buyers who visit for a fraction of the year.
Proptech is not alone: Businesses across the economy have been battered by sinking stock values, muted expectations for growth, and substantial job reductions. Amazon, for instance, plans to cut 10,000 corporate employees, according to reports, and Meta recently laid off 11,000 workers.
Proptech’s nascency along with the dual punches of being caught at the intersection of two wobbling sectors — real estate and tech — have made business conditions especially challenging, experts said.
“We have been in two parallel bull markets for both technology and real estate, and proptech has really benefited,” said Clelia Peters, the founding partner of Era Ventures, a recently launched venture-capital firm in New York City. “Now we’re seeing something that feels like a confluence between the 2001 dot-com bust in the venture-capital world and the 2008 market crash in real estate. This is an environment that’s an existential threat, even for the giants in the industry.”
Shares of both Opendoor and Redfin, which once drew investor attention to the soaring proptech industry, are worth roughly one-tenth what where they were a year ago. Compass’ stock is worth roughly one-fifth its IPO price from April of last year. Meta’s shares, by contrast, have cratered more modestly, trading recently at roughly a third of where they were a year ago. Amazon’s shares have been down by almost half.
A September report about the proptech industry by Ryan Tomasello, an analyst at Keefe, Bruyette & Woods, reported that public proptech stocks had fallen in value by 46% from the beginning of the year on average compared with declines of 16% for the S&P 500 and 25% for the Nasdaq.
Tomasello estimated that venture investment in proptech totaled about $7.4 billion through August, a decline of about 5% from the previous year during the same period. The rate at which investment dollars have been flowing into the sector, however, appears to be falling rapidly, with about $2.6 billion invested in the second quarter, a decline of 16% from a year prior and 45% below the amount of investment in the first quarter of 2022.
Proptech firms have had to take action to survive
To survive, proptech players have had to reshuffle priorities. As in the wider tech industry, many companies have turned away from their focus on revenue expansion over profits in recent years to conserve cash, scale back growth, and cut expenses.
“Your two- to three-year runway of cash can suddenly shrink to five or six months,” said Austin Allison, the CEO of Pacaso. “Then you really have two choices. You go out of business or you make difficult decisions to survive.”
For Pacaso, which received a $1 billion valuation after a March 2021 funding round, that meant pruning advertising expenses to publicize its vacation-home shares for sale, pausing its expansion into new regions, and laying off about 100 workers. It marked the first substantial downsizing for the company since its founding in 2020 by Allison, a former Zillow executive, and the tech investor Spencer Rascoff, who was Zillow’s CEO from 2010 to 2019.
“You lose a bunch of really amazing people,” Allison said. “It’s difficult. There’s just no other way to describe it.”
Allison said the moves were more defensive than dire. The company, he said, hasn’t yet had to tap into $125 million it raised in a Series C round in September. The company doesn’t disclose how many homes it has purchased, but it told Insider it just sold its 1,000th share.
Allison argues that Pacaso’s timeshare-like model still appeals during down cycles. As higher mortgage rates and sinking stock portfolios make wealthy buyers feel less flush, some may see fractional ownership as a more affordable way to own a second home. Nonetheless, he said the company planned to cut back its acquisition pipeline of new homes by 60% in the near term.
Tomo, a digital mortgage platform launched in 2020, has similarly scaled back, cutting almost a third of its 150-person team in May and pausing its plans to expand its operations beyond 12 states and Washington, DC.
Greg Schwartz, who cofounded the company and is another Zillow alum, said the current conditions were a head-spinning departure from dramatic growth expectations set during the coronavirus pandemic when low interest rates and a flurry of homes sales created a surge of mortgage originations.
The Mortgage Bankers Association estimates that about $480 billion of mortgages tied to one- to four-family homes will get done in the third quarter, a 29% drop from the second-quarter dollar volume and a nearly 50% decline from the third quarter a year ago.
“As a startup, the question you got used to hearing from investors was, ‘How many customers and how much revenue do you have?'” Schwartz said. “You never wanted to say you were ‘slow growth’ because you’d get hammered. But that’s what we’re dealing with now and, as a founder, you have to adjust your ego.”
Companies that aren’t flailing are still acting cautious
Not all of proptech has become embroiled in crisis.
Point is a seven-year-old firm based in Seattle that pays homeowners a lump sum for a stake in their properties and then cashes out when the house is eventually sold.
The company’s cofounder Eoin Matthews said inquiries from customers had increased as rising rates for conventional mortgages had prompted homeowners to contemplate tapping the equity in their existing homes rather than refinancing or moving.
The company hasn’t laid off any of its 300-person staff — including a roughly 50-person tech team — and doesn’t plan to, Matthews said.
But Matthews conceded that he’d also become more cautious about its business.
Before the slowdown this summer, Point generally bought a portion of a home’s equity at a roughly 10% to 15% discount from its appraised value to buffer itself from the potential for falling prices and build in a profit.
Now it is carving itself a margin of more than 20% on deals, he said.
“We have to price in more risk,” Matthews said, “because the risks have gone up.”