We recently kicked off a new insights series with a focus on the real estate industry in Germany. With new startups continually entering the market, the entire industry is in a process of change. The German PropTech market is still in its infancy when compared to more mature ecosystems like the US. For instance, Katerra, an American company founded in 2015 with a focus on Construction has received more funding than all investment in the German PropTech market since 2013. Given that the construction sector in Germany is valued at €430B*, this sector is primed to receive more attention from disruptive players like Katerra that are looking to expand their international presence.
Building on the research done in our introductory post, we want to focus more intently on the segment Design & Build: companies that are involved in the design, construction, or demolition of buildings. The majority of companies in this segment focus on B2B customers. End-consumers are rarely involved in the process.
In this article, we will elaborate on the various trends that are currently shaping the Design & Build segment within the real estate industry. Specifically, on how investment trends within modular construction, AI, VR, and sustainability are advancing the industry to a more efficient and digitized future.
Through continued pressure and innovation from new startups, the industry is already evolving into a highly digital and tech-focused industry. Consequently, old technologies are being replaced by new solutions, continuously challenging the status quo. Due to the speed at which innovations are pushed into the market, large incumbents may face the issue of falling behind or-even worse-not making it through this digital transformation of the industry.
Before diving deeper into innovation trends of the real estate industry, let’s look at some financial data first. In order to better understand the investment landscape of the Design and Build segment within real estate, we analyzed investment trends from Crunchbase and Builtworld. We then narrowed the focus to companies founded between 2013 and 2019 in order to focus on startup-specific data. Since 2013, 77 startups were founded within the Design and Build segment, with an overall VC funding volume of approximately $66.8 million. In comparison, the total VC funding volume of the entire real estate industry amounted to roughly $950 million during the same period.
One of the recurring trends within the Design and Build segment is modular construction: the process of mounting of prefabricated buildings in a factory and assembling on-site.
According to a recent report by Fortune Business Insights, the global modular construction size valued $64.85 Billion in 2018 and is projected to reach $107.21 Billion by 2026, exhibiting a CAGR of 6.5% during the forecast period. The modular approach also results in significant time savings of 30-50% when compared to traditional construction as more than 80% of the construction is performed offsite.
Despite being first commercialized almost 200 years ago and used throughout the 20th century to serve booming populations, modular construction practices have not become mainstream in many countries. Some countries have adopted the practice more aggressively than others, showing for the potential for growth in a number of industrialized economies:
The combination of large-scale unmet demand for housing and labor shortages makes German’s larger cities attractive markets for modular construction.
According to the Federal Office for Building and Regional Planning, Germany will require about 350,000 new housing units per year by 2021. In 2018, the German government made an announcement regarding its plan to construct around 1.5 million housing units by 2021.
This of course only mentions the residential market, while the modular construction industry also serves commercial spaces like offices and warehouses. Given the Swedish standard of 83% market share for modular housing and increased margins for contractors, it is no surprise that this segment is receiving a lot of recent attention from founders and investors alike. Huf Haus is the most established German incumbent, having built prefab buildings for over 108 years, but they remain focused on high-end clients and have failed to cause an industry-wide shift towards modular construction. Startups like Containerwerk and Cabinspacey are only two examples of young companies entering the market space and accelerating the industry into a more efficient industry.
Two more recent trends in the construction industry are more technological in nature: 3D Visualization & 3D Printing. In both areas, new startups enter the market with solutions that strongly increase onsite construction efficiency. In some cases, startups combine modular designs with 3D visualization and 3D printing to combine efficiencies and pass cost savings on to the end consumer (companies like DIRTT being a prime example). Smart software planning tools through artificial intelligence and 3D visualization strongly enhance the entire planning process by allowing clients to visually see space through the use of VR technology, resulting in fewer change orders and delays when the building is eventually constructed. The use of 3D printing also leads to less industrial waste, helping construction companies reach their sustainability targets at the same time. Incumbents without the respective technology in place already face the problem of a decrease in a competitive position in comparison to new market entrants but also lose out on the cost savings and efficiencies that impact their bottom line. By offering fast, efficient and less cost-intensive construction and planning services, startups can effectively conquer market share from incumbents.
The 3D printing & Visualisation industry is nascent in Germany, with the most notable players being PlanRadar and Capmo who have raised Series A rounds of $33.86M and $7.6M, respectively. PlanRadar offers a SaaS solution for documentation and communication in construction and real estate projects, and its customer portfolio includes industry regulars like Implenia and Vonovia. Capmo is a younger startup founded in 2018 that provides digital construction plans and other services that help construction companies cut down on administration costs.
In recent debates about climate change, the focus has continuously shifted towards the real estate industry. According to a study conducted by the European Commission, buildings are responsible for around 40% of energy consumption and 32% of CO2 emissions in the EU. Amongst other things, this can be traced back to the fact that older buildings consume about 25 liters heating oil per square meter per year, while modern buildings with new thermal insulation and other contributing innovations only consume around 3-5 liters heating oil per square meter.
Besides the high energy consumption for existing buildings, also the way construction is still done today is environmentally unfriendly. An example is the ongoing usage of concrete, which is responsible for around 5% of CO2 emissions on a global basis.
In order to change that and meet their responsibilities, the European Commission has started to put legal barriers in place that enforce the industry and its large incumbents to change their way of doing business. As a result, young startups see opportunities to conquer market share by meeting the new construction requirements with more agility than their predecessors. As mentioned above, startups offering modular construction by using digital construction planning tools via AI and VR will see compiling effects that result in environmentally friendly construction practices. Startups like Noventis, for instance, have specialized themselves in green building and have not only taken over market share but also strongly decreased their CO2 emissions dramatically during the construction process. Consequently, incumbents will experience a sharp decline in market share if they cannot manage to adapt to these changes and foster innovation themselves.
Another current trend is the re-emergence of timber as an alternative to concrete. Innovation in structural design and load balancing have led to remarkable structures being built with timber because the materials provide the strength of structural steel at a fraction of the weight.
There are now nearly 600 built or planned wooden commercial buildings in the contiguous U.S.
According to The Wood Products Council, and the increased use of the material is due not only to its structural properties, cost savings, and performance in fire conditions. While there is some debate about the specific emissions of timber, it is estimated to also cut down on greenhouses by ⅓ when compared to traditional steel and concrete equivalents. JLL has been a market leader in pushing timber use and innovation forward.
Startups are disrupting the Design and Build segment by challenging industry incumbents across the value chain. Some industry players have adjusted well to the shifting climate, but others are sure to be left behind by changes in technology, environmental regulations, and customer expectations. We would also be remiss if we did nothing to mention other innovative approaches happening across the industry, from multi-use properties to material recycling and up-cycling.