By Hiten Samtani on October 01, 2013.
Compared to other major New York City industries, real estate is notoriously slow to innovate. A conservative business dominated for decades by the same handful of families, real estate hasn’t developed the equivalent of high-frequency trading, which rocked the securities industry, or BuzzFeed, the news-and-entertainment website that’s shaking up media advertising.
There are, however, some new kids on the block who are successfully challenging the way the real estate business is done. Manhattan-based company Floored, for example, is using advanced vision science to give brokers and developers a new way to showcase their listings, while the crowdfunding company Fundrise has built an online platform to help developers gain support from both investors and their communities. And the much-hyped startup Urban Compass is aiming to make the hectic world of Manhattan residential rentals less painful for consumers.
This month, The Real Deal looked at some of the most promising and innovative industry startups launched in the past three years, and examined how they are changing New York real estate.
LinkedIn for real estate: Honest Buildings
Manhattan-based Honest Buildings is an online network that connects developers and landlords with engineers, architects, designers and other vendors. Essentially, it’s “LinkedIn for the real estate industry,” explained founder Riggs Kubiak, who was the global head of sustainability at development giant Tishman Speyer before leaving in 2011 to start his own venture.
Kubiak got the idea for Honest Buildings, he said, because he was frustrated with how inefficiently real estate players go about finding vendors for their projects.
“Hiring decisions [in real estate] for the last 2,000 years have been based on ‘who does my friend Jim know down the street?’ ” Kubiak said. “It just blew my mind that every other industry uses tech to catalyze transactions and make better decisions.”
With Honest Buildings, he set out to create a more systematic way for commercial and residential developers to find the best vendors for their projects, he said.
Here’s how it works. A developer or landlord submits their project details into the “HB Match” online platform, along with criteria for what they’re looking for in a vendor, such as years of experience or expertise with specific materials. The site then searches for matches based on those criteria, and comes up with the short list of vendors appropriate for the project. Analysts check the references of the vendors on the list, then introduce them to the client to kick off the bidding process.
“We use our technology to get them most of the way,” Kubiak said, “and then our team does the rest.”
Rather than charging clients, Honest takes a commission — typically between 3 and 5 percent — from vendors if they are hired through the network.
Honest Buildings launched in March 2012, and has since built a network of 5,000 to 10,000 New York City vendors, Kubiak said. Clients include Vornado Realty Trust, Sitt Asset Management, and Cushman and Wakefield’s property and asset management group, which used Honest Buildings to find engineers to work on 119 West 40th Street, a 355,000-square-foot Midtown tower it manages.
Abe Hedaya, director of operations at Sitt Asset Management, said the firm used Honest to find a contractor experienced in cast-iron facades to work on Sitt’s 450 Broadway in Soho.
So far, Kubiak claims Honest Buildings has originated $42 million in business through HB Match. Given that amount, TRD estimates the company’s 2013 year-to-date revenue to be between $1.3 and $2.1 million. Kubiak declined to disclose current revenues, but said the company’s objective is “to be profitable in the near term. Based on our trajectory, we definitely think it’s possible.”
Meanwhile, the 15-employee company has secured $5.5 million in Series A funding (the first round of significant startup capital) from investors such as RockPort Capital and the Wesley Group, and has raised $7.5 million overall, Kubiak said.
In September, Honest moved into a 3,000-square-foot office at the iconic Woolworth Building at 233 Broadway.
Marketing with virtual reality: Floored
As real estate professionals know well, one of the biggest challenges to marketing an under-construction building is that potential purchasers or tenants can’t actually see the space. Floored, a Manhattan-based company that launched in January, is trying to change that.
Floored’s proprietary technology can take high-resolution, 3D scans of any interior or exterior space, said firm co-founder David Eisenberg. The result is a hyper-realistic virtual tour — somewhat akin to a video game — that lets users experience the depth, lighting and layout of the space. The technology is also interactive, so it lets users see what the space would look like if they were to move the furniture around.
Floored’s product is far more realistic than most virtual tours, which are simply two-dimensional panoramic photos, Eisenberg said.
“We want to give people full digital control over what it’s like to be inside the space,” said Eisenberg, a Harvard graduate who heads an 11-person army of software wonks. He wants Floored to become the industry standard in real estate marketing.
“Our hope is that this can replace the photograph,” he said.
Floored has nabbed a number of high-profile office and retail clients, among them Vornado, Cushman, CBRE Group, the developer Hines and Taconic Investment Partners.
Colleen Wenke, a vice-president on the construction team at Taconic, used Floored’s technology in lieu of renderings to lease up 619 West 54th Street, a 330,000-square-foot office building. Taconic also plans to integrate Floored technology to showcase spaces on its main corporate website.
“[It] helps to bridge the gap of experiencing the space — of putting furniture in, understanding how many offices could go in the perimeter, how many bodies can I put in,” Wenke said. “A video won’t tell you that.”
Meanwhile, Hines is using Floored to lease up 7 Bryant Park, a 470,000-square-foot office building slated for completion in 2015, according to Dan Doty, a managing director at the firm.
“People really want to be on the floor and walk the space to experience it,” he said. When that’s not possible, “this is a great way to fill that void.”
Floored has raised about $1 million in funding to date, from investors such as Thomas Lehrman of the consulting and research firm Gerson Lehrman Group and David Vivero, the founder of the online rental management company RentJuice, which the real estate website Zillow purchased last year for $40 million.
Floored’s revenue — calculated on a rolling basis — for 2013 is in the single-digit millions, Eisenberg said, and has grown steadily quarter-over-quarter.
Plaudits for the product have come in from all corners. Architectural Digest magazine featured the company as one of its innovators of the year. And in June, Floored took the top prize in brokerage giant Realogy’s 100-company technology competition.
In addition to commercial clients, Floored works with residential companies such as Better Homes and Gardens Real Estate, Sotheby’s International Realty and Stonehenge Partners.
Stonehenge used Floored to market its 101 West 15th Street rental project in Chelsea, for example, posting 3D scans of apartments on the website for renters to peruse, said Jonathan Fishman, who helps oversee Stonehenge’s retail and rental divisions.
And Stonehenge intends to use Floored at 501 West 113th Street, a 100-unit rental project near Columbia University, he added. The technology would allow international clients — common near the university — to check out spaces without flying to New York, Fishman said.
The technology can also cater to the whims of New York City’s elite. Eisenberg recently worked with an apartment owner in a white-glove building who was selling her apartment, but didn’t want any of her personal items or family photos visible on the listing broker’s website. So “we scanned the apartment and stripped out all the furniture,” Eisenberg said, but declined to name the building citing a confidentiality agreement. Floored is in talks with brokers at Zeckendorfs’ legendary 15 Central Park West to do something similar, Eisenberg said.
Floored, which is a vendor on the Honest Buildings network, is “the sexiest thing in the industry right now,” Kubiak said admiringly. “The way that these guys are taking a software approach [to real estate] is legitimately game-changing.”;
Sharing market stats: CompStak
“Comps” — details about pricing and other deal terms — are the secret sauce of office leasing. Historically, brokers shared comps in whispered conversations with their colleagues or dug them up from research reports, but were loath to discuss them openly. But CompStak, an online database of leasing comps launched in January 2012, has given them an incentive to do just that.
Founded by former Grubb & Ellis broker Michael Mandel and programmer Vadim Belobravka, CompStak claims to have data on nearly all of the Manhattan commercial office deals completed in the past year. CompStak accomplished that by taking a novel approach to crowdsourcing: The site is free for brokers, but when they want access to a comp, they have to provide information about their own deals.
By contrast, CompStak’s main competitor, Washington, D.C.–based CoStar Group, gets its data directly from brokerages, but charges brokers for information. And because it’s crowdsourced, CompStak sometimes has data that CoStar can’t get from firms, such as effective rent.
Since CompStak is free for agents, it makes its money by selling information to institutional investors, real estate investment trusts, hedge funds and private equity firms who analyze comps to make investment decisions.
Clients include Boston REIT Beacon Capital Partners, Malkin Holdings and Wells Fargo, according to CompStak’s website. The company declined to say how much it charges for these services, but this spring, Mandel predicted the firm’s revenue would reach $1 million for 2013.
So far, the 30-employee startup has raised about $5.6 million from investors, and Mandel said the firm is focused on growing its national operations — CompStak currently operates in six markets, including San Francisco, Chicago and Washington, D.C. Mandel estimated that CompStak’s user base has grown an average of 160 percent per month over the past six months.
The company is also launching new features such as CompStak Team, which allows brokerage teams to manage and share their comps with their colleagues in the same office — right now, CompStak only allows individual profiles.
Andrew Phillips, a managing director in the capital markets group at Newmark Grubb Knight Frank, said CompStak has proved useful for investment sales brokers trying to gauge what a building is worth.
“The first thing you do when you value a building is look at the lease comps,” he said.
“Michael’s is a pretty amazing story, considering this was a guy who was a leasing broker in the worst market on record,” said Phillips, who knows Mandel from his time at Grubb & Ellis.
Indeed, Mandel said his time as a commercial leasing broker is what sparked the idea for CompStak. During office meetings, “most of the deals that were being talked about were big flashy deals at 9 West 57th Street, 375 Park, 510 Madison,” he recalled. “Unfortunately for me, I wasn’t doing deals in the Plaza District. On occasion, a deal would be mentioned that was relevant to me, but the process was horribly inefficient.”
Crowdfunding for developers: Fundrise
What if a community could actively shape a developer’s vision for new projects in their neighborhood — and benefit financially in the process? That’s the lofty goal of Fundrise, a Washington, D.C.–based crowdfunding company launched in 2012 by brothers Benjamin and Daniel Miller.
“We’re looking to democratize investment,” said Benjamin, a stocky, bearded 37-year-old.
He and 26-year-old Daniel are the sons of Herbert Miller, a major Washington, D.C., developer who is behind mixed-use projects such as Georgetown Park, Market Square and Washington Harbor. After working with their father in various capacities and at outside firms, the brothers spun off their own development company, WestMill Capital Partners, which has developed about $50 million worth of projects in the Washington area.
But the brothers wanted to change developers’ current dependence on private equity money. “It doesn’t make sense for capital to come from absentee owners,” Benjamin said.
They started looking for ways to raise capital from community-based investors, but they discovered that most real estate crowdfunding websites, such as Realty Mogul, only work with accredited investors — those with a net worth of $1 million or more who are permitted by the SEC to invest in private firms.
Fundrise, however, takes on the cumbersome and expensive task of registering each development project with the SEC and taking it public, which allows unaccredited investors to get involved.
The Miller brothers started by taking their own buildings public, then raising capital for them from the community. But the business has now evolved into a software platform that lets other developers do the same thing. On the Fundrise website, building owners create a profile describing the project they need funding for. Potential investors who log onto the site can then search for various projects, and even communicate with developers about what type of projects they would like to see in their neighborhood. If they decide to invest, they can do so directly through Fundrise.
Fundrise, which has nine employees, makes its money through a combination of subscription fees from developers and a roughly 3 percent transaction fee for all funds collected. The brothers — who invested $3 million of the money they made from WestMill and their savings into the business — declined to disclose revenues figures, saying it was too early.
Benjamin said he wants Fundrise to help change the adversarial dynamic between developers and the communities they work in. When community members are financially invested in a project, he said, they’re more likely to go to bat for a developer on a host of issues, such as zoning.
For example, at a popular retail project the Millers did at 1351 H Street NE in Washington, Benjamin said, “When I had permits that were bogged down, I had hundreds of people emailing the permit officer.”
In Washington, Fundrise has worked with developers such as Forest City Enterprises, the parent company of Forest City Ratner. And the firm recently started working with several New York City developers, including Twining Properties, Jason Goodman of 3rd Ward, and David Belt’s DBI and Macro Sea.
Belt — whose Macro Sea is developing the 84,000-square-foot design incubator New Lab at the Brooklyn Navy Yard — said Fundrise “gives me the opportunity to have many more investors.” That’s helpful, he said, because lenders are sometimes unwilling to bankroll his non-traditional projects. He added that the Millers’ experience made the venture appealing to him.
“If it was just some Internet kid who had the idea, I would never really get involved in it,” Belt said. “Dan’s really young, but he understands commercial real estate and financing, and he understands how people interact with investments. He’s 26 years old, with 20 years’ experience.”
While Fundrise’s current model is to register a building with the SEC and take it public — a process that can take months and cost up to $50,000 — a proposed change through the federal JOBS Act would allow unaccredited investors to invest a portion of their investment in private firms, eliminating the need to take projects public at all, said Daniel.
And the company expects to get a boost now that the SEC has lifted a decades-old ban on private companies advertising investments that aren’t registered with the SEC.