A Bain Capital Ventures partner says construction will be a hot corner of real-estate tech this year - but short-term rental startups may be overhyped

• Construction tech is one of three real-estate tech trends that Bain Capital Ventures is watching in 2020, according to partner Merritt Hummer.
• She also included the increasing institutionalization of short term rentals and the Internet of Things (IoT) as some of the top real-estate tech trends.
• Hummer doesn't think that proptech as a whole is overvalued, but real estate companies that "masquerade" as tech companies may see lower valuations in 2020. She highlighted coworking, coliving, and short-term rentals that will be hit the hardest by this shift.
• Read more BI Prime stories here.

On of the biggest trends of 2020 in real estate technology will likely be the continued adoption of tech in one of the world's oldest industries.

Construction, which has trailed the economy in labor productivity growth since the 1970s, has been attracting entrepreneurs and venture capital dollars alike.

"It's the least automated industry there is," Merritt Hummer, partner at Bain Capital Ventures, told Business Insider.

Construction tech is one of three real estate tech trends that Bain Capital Ventures is watching in 2020, according to Hummer.

But some of the buzzier parts of real-estate tech in 2019 may have been overvalued, according to Hummer. She highlighted coworking, with large funding rounds for Knotel, Industrious, and WeWork, and short-term rentals, with large rounds for Sonder, Lyric, and Domio, as two verticals that could take a hit.

Bain Capital Ventures, the venture arm of Bain Capital, has found success in many verticals, namely e-commerce and fintech. Hummer, who led recent investments in mortgage company Ribbon and IoT and property management company SmartRent, is leading its foray into proptech.

While Bain is operating in a space with lots of specialist funds with strategic LP bases consisting of the largest real estate companies, Hummer said that Bain has some clear advantages.

"We just have more capital, so having a bigger fund enables us to support companies through their entire lifecycle," Hummer said, pointing to their ability to lead early and late stage rounds.

Two of three Bain Capital Ventures real-estate tech investments, in Roofstock and Ribbon, point to another adavantage: they can bring their fintech expertise to companies at the cross-section of finance and real estate.

2020 proptech trends

Most construction-tech companies doesn't overlap with Bain Capital Venture's historical expertise, but the larger company's global scale means that that it can easily consult with experts that it has worked with on previous projects.

Bain's view is that the best construction-tech investments are with companies that aren't trying to totally "overhaul" the existing ways that construction is done, but are instead "shaving off cost and time." Construction is a highly fragmented industry, which means that it would be much harder for one company, by itself, to make an industry-changing impact.

"They're not going to homebuilders and saying, 'We would completely transform the way you do business.'" Hummer said. "Others make that claim, and may be successful in the long run, but it will likely take them longer."

Hummer highlighted Openspace, a company that uses helmet-mounted cameras to create 3D renderings of worksites, and Mosaic, a construction company that has created its own project management software , as two companies that use tech to make improvements on their existing workflow.

Some experts see construction tech as a way to make the actual cost of housing cheaper, and while Hummer said that affordability isn't Bain's focus, it may have an impact in some markets.

"The supply and demand dynamic of each local market will dictate how much of the incremental profit can be retained by the builder," Hummer said. In hot markets, the savings may be absorbed by the builders or developers, while in markets with less demand, they could lower costs for renters or homeowners.

The fragmented nature of construction also means that, regardless of market conditions, some builders may pass on the savings, while others will keep them.

Single-family rentals are, historically, similarly fragmented. Hummer named the institutionalization of single family rentals as another proptech trend to watch.

The direct impact is that single-family rentals will "become an investable asset class" for both retail and institutional investors. Currently, there are only a few, nationally-focused single family public equities. Hummer sees this changing rapidly, with investors being able to choose between national and more localized investment strategies.

Roofstock, a Bain portfolio company that just recently raised $50 million in funding, is a marketplace for single-family rental investments that also connects investors with property managers, opening up investors to markets far from where they live or work.

Companies that sell property management tools will also benefit from this increased institutionalization. Large investors will work with them to manage their portfolios while smaller investors that have historically been tech-adverse will begin to adopt more technology to compete.

The third theme, one that Hummer said has been a theme for the last few years, is the IoT.

"It's a very fast-moving category that looks different every year," Hummer said.

SmartRent, another Bain Capital Ventures portfolio company, combines IoT with property management by providing a suite of hardware and software to multifamily residential owners. Tenants are given typical IoT control over building access, lighting, and climate, while property managers are given building management tools and data.

The state of valuations in proptech and venture more broadly

WeWork's massive valuation slide and abandoned IPO plans, plus Uber and Lyft's troubles in the public market were some of the biggest business stories of the year, prompting some experts to predict more crumbling valuations in 2020. Hummer has noticed the trend and thinks it will have varying effects on different verticals in the proptech universe.

"We think of proptech as not just one area, but an amalgamation of many, many different business models," Hummer said.

WeWork is considered, by some, to be a proptech company and Hummer thinks that valuations may decrease in some of the areas that are closest to WeWork's business model, but not across the whole sector.

"There's not going to be a single wave that influences valuations across the board," Hummer said. "Our view is that it should be a lot more nuanced."

Proptech that is more purely technological will be much less affected than tech-enabled models.

"We do think that there has been a recognition that some real estate businesses are masquerading as tech businesses," Hummer said.

She highlighted coworking, coliving, and short-term rentals that will be hit the hardest by this shift.