Brendan Wallace (0:00 - 0:24)

What matters to truly capture the value of generative authentic AI is you don't, you can't think of it as technology. You have to think of it as business. It is your business. 


And exactly as you said, the people are core components of that and people are complicated and people think in confusing, hard to define ways that don't lend themselves to mechanical algorithms.

Nancy Lashine (0:25 - 3:10)

Hello, and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is a lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities.

Who are they? What motivates them? What can we learn from their experiences?

On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision makers. And we talk about what is important to them, how they make critical decisions, who has influenced them and a lot more. Our guest today is Brendan Wallace, co-founder, CEO and chief investment officer of Fifth Wall, a venture capital firm focused on real estate technology.

Today, Fifth Wall manages approximately 3 billion in capital across multiple strategies. Over the last decade, Fifth Wall has built an impressive network of over 115 strategic LP partners, including some of the world's largest real estate owners and operators and has invested in nearly 170 companies. Brendan has an impressive resume.

He began his career in investment banking at Goldman Sachs and then joined Blackstone's Real Estate Private Equity Group. After earning his MBA from Stanford, Brendan shifted to entrepreneurship, co-founding Identified, an artificial intelligence company that was subsequently acquired by Workday and Cabify, which grew into one of the largest ride-sharing platforms in Latin America. In 2016, he channeled his experiences in institutional real estate venture capital and company building to launch Fifth Wall.

In our conversation, we dive deep into the subject of how AI is impacting, well, everything. Fifth Wall's portfolio companies, real estate public and private firms, and how it is blurring the lines between industries from technology to real estate to service providers and so much more. Brendan has a unique view into the intersection of AI technology and real estate. And I think you will enjoy this conversation. 

Brendan, thanks so much for joining us. Really excited to have you on the show. I think Fifth Wall has become just a name synonymous with prop tech investing. And I'll be honest, like, I think I knew what that meant until the last few months. And in the wake of what's going on with AI and what is software and the new importance of hardware and the new importance of integration of all of this and to help people spend their day, I've actually started to wonder if I even know what prop tech is all about.

So I'm so glad to have you here. There's a lot to talk about. Thank you so much for joining us today.

Brendan Wallace (3:10 - 3:11)

Thank you for having me.

Nancy Lashine (3:12 - 3:40)

Big shout out to my friend, Brendan Sedloff at Juniper Square. He did a great podcast with you on the distribution, which if you're in the audience, you haven't listened to, I highly recommend. And you went through like your whole background there.

So I'm gonna fast forward and start talking about, because there's so much to talk about in the space of what you're doing today. Tell us, you started Fifth Wall in 2016. What does Fifth Wall look like today?

Brendan Wallace (3:41 - 5:30)

So Fifth Wall today is the largest, the most active. And as you mentioned earlier, I would say the most synonymous investor with what we now call prop tech, which I would say has a whole different ways, bunch of ways of defining it. But broadly speaking, the way I think about that is technology that helps the real estate construction or hospitality industry.

And what makes Fifth Wall unique is that we raise a significant portion of our capital as a firm. We manage $3.2 billion across 10 different funds. And a significant portion of that capital, about 60% of it comes from non-traditional LPs, from actually owners and operators and developers of real estate, who in turn are the largest customers, the largest end users, the largest adopters of the tech that we're investing in.

I kind of started the firm with this thesis of like, we wanted to be king makers for early stage prop tech companies. And that's informed how we built the business. That's informed the complexion of our LP base.

That's why Imco is an investor in Fifth Wall funds. And I would say we've carved out this category as a distinct category of venture, very much by design. And one of the things that I think is interesting, because you've known Fifth Wall for a while, is to go back in time to 2016 and reflect on the fact that prop tech was not a category.

Prop tech was not, the nomenclature kind of existed, but it certainly wasn't thought of as a distinct vertical within venture. And there's a lot of reasons for that. I'd say the most obvious of which is that not a lot of people from the real estate industry ever go into tech and venture capital. And so because those spheres don't overlap- 

Nancy Lashine (5:30 - 5:34)

The dollars are too small, Brendan, just too small.

Brendan Wallace (5:35 - 5:41)

Yeah, I actually don't know what do you mean, which side of that you mean, but I'm sure either side would say they're either too big or too small. But- 

Nancy Lashine(5:41 - 5:43)

The investment dollars are too small.

Brendan Wallace (5:44 - 5:47)

Exactly, yeah, and the risk is too high. And they're very different industries, right? Real estate is a- 

Nancy Lashine (5:47 - 5:52)

Really two sides, 180 degrees from an investor's perspective.

Brendan Wallace (5:53 - 6:06)

I would say that we've built our role as somewhat of like a diplomat, right? And going between these two spheres and being able to be conversant in both and helping the real estate industry understand tech and vice versa.

Nancy Lashine (6:06 - 6:29)

When you started, as I recall, and you'll set me straight here, I think you had some very large, maybe six strategic investors. And they were the category killers, if you were, in the different sectors, office, industrial, et cetera. And today you have over 100.

How did that evolution come about and why?

Brendan Wallace (6:30 - 6:36)

That's a great question. And I feel like whenever you kind of look back on things, you end up reinventing history a little bit.

Nancy Lashine (6:37 - 6:37)

Absolutely, absolutely.

Brendan Wallace (6:37 - 7:30)

Everyone naturally does that. I'm gonna try not to do that. Meaning the first reason we brought in real estate corporates was not that we're so smart and we knew that this was going to be something the whole industry did.

It was that we needed capital and we were a brand new fund and they were willing to give us capital. So it was a happy accident of history that when Fifth Wall went out to raise many of these large real estate owners that were in our first fund, groups like CBRE, Prologis, Lenar, Hines, Host Hotels, Equity Residential, they were looking for a venture capital solution. And we came along at the right time, they came in.

Now, those first six firms were like very much at the vanguard of the industry, meaning they were leaning into tech at a time when a lot of real estate owners were, I would say, leaning out would be almost an overstatement. They just had no posture on tech. They didn't really care about it.

Nancy Lashine (7:30 - 7:31)

They were wearing blinders.

Brendan Wallace (7:31 - 8:08)

Yeah, and what happened is, I'd say that changed profoundly. I think Fifth Wall and our emergence had some small hand in driving that, but other real estate owners started to recognize, I actually need to have a point of view on technology. I need to have an offensive posture on this space and I don't.

Real estate as an industry is one of the only major industries in the US that basically has no budget line for R&D. And the absence of that budget line in some ways is probably the singular explainer on Fifth Wall's emergence and our success and our growth, which is we in some ways serve that function. So-

Nancy Lashine (8:08 - 8:010)

Right. It's a brilliant model, by the way. That was- 

Brendan Wallace (8:10 - 8:36)

Yeah, it has network effects, which is unique for a fund, right? Because the more real estate owners you work with, the more insight you get, the more distribution you can drive to your portfolio companies, and also the real estate industry, for better or for worse, has somewhat of a herding mentality around it.

You actually see this in what technologies get adopted, which is, it's not always the best technology that wins. It's the technology-

Nancy Lashine (8:36 - 9:13)

Yeah, no, but you did it extremely well. I mean, you were quite eclectic in how you, I think, the way you thought about PropTech. We were working with RATV at a similar timeframe and they tried to get the top multifamily investors and they did.

And the concept was analogous that they would, the key, you might have great technology, but if you can't get a big firm to adopt it, then it's not going to get adopted. And once the biggest firms have adopted it, it becomes the industry standard. And the customers start, and the tenants start to expect it.

But it never got the breadth that you have today.

Brendan Wallace (9:14 - 10:10)

Yeah, I mean, I would say, you actually started the conversation by saying, I think that I, or I thought I understood what PropTech was. Until the last 12 months, and it's changed quite a bit. But I would say everything we've just been discussing, this model of like herding behavior, the real estate industry playing kingmaker for early stage tech companies, a lot of those core ingoing assumptions we had, that I would say have run true for the last nine years, have at least been called into question by the advent of generative and agentic AI and the implications for the real estate industry that prompts.

No pun intended. That just, it's a very, it should be a very motivating force for the real estate industry. And it's changing, I would say, what PropTech means as a category.

And I think that's probably the biggest change we've ever seen at FifthWall in the last 10 years.

Nancy Lashine (10:11 - 10:18)

Okay, so what do you mean by, what is changing specifically and how is it changing?

Brendan Wallace (10:19 - 11:34)

So I'll caveat this by saying, I don't know. And I think anyone who says they know is just overconfident. But here's what I, here's how I would creep up on that answer.

The heretofore, the model has been that we connect large institutional national footprint real estate owners with the best technologies that we invest in. They adopt those technologies to solve some problem in their business, a point solution, and it works out great. And we've had a lot of success doing that.

But the basic motion is industry incumbents buy a software, vertical software solution, and they adopt it and they roll it out and it grows and hopefully everyone does well. And that still happens. And that's still a great business model.

What has changed is that I would say real estate owners, I would say that is a necessary but not sufficient activity to truly be innovative as a real estate company. And now what real estate companies have to do is start to build internal AI infrastructure that requires them to do something they truly have never done before, which is build, actually build technology for their own business. And the reason is-

Nancy Lashine (11:34 - 11:38)

And the reason is, sorry, I was just saying.

Brendan Wallace (11:39 - 12:44)

The reason is that generative and agentic AI solutions can't really work as well as they are supposed to or could if they don't truly integrate themselves into everything with a capital E you do as a business. And so it's no longer just, hey, connect this app to your rent rolls and this app to your tax reporting and this app to your ingress and egress. You actually need all of it to be integrated.

And what that requires is some connective tissue, but a kind of stitched infrastructure layer at the real estate company that they need to build. No one can build that but themselves. And while, of course, some prop tech companies will offer to do this, they're usually doing it in the service of what they're ultimately selling, which is some software.

But real estate companies, of course, want that software, but they have many problems and no single point solution will be able to grow and I think develop the kind of interior infrastructure that's needed to really change these businesses.

Nancy Lashine (12:44 - 13:54)

It's so hard, it was really hard for me to understand what you're saying until I had the privilege of hearing the COO of Walmart talk this week. And he was just giving example after example of how they've started using AI to solve problems within the firm. And he said, we call it people-led, tech-empowered.

And so it's putting tools in people's hands and figuring out what pain points they're solving for, having them solve for it and then sharing amongst everybody else and then ultimately integrating that through software and all of your systems. And everybody may have one device, a mobile device that they're integrating through, but the things that they're doing with it and the problems that they're solving kind of have to come from the people. And that's a very different approach to using tech.

It's the antithesis of saying, I'm gonna go to the tech department to sort this out. It's like every department has to be the tech department, if you will. And we're talking about- 

Brendan Wallace (13:55 - 15:34)

In some ways that attitude of kind of a thinking of PropTech as in this kind of parochial way, this is the IT department and they make sure our systems are up and we don't get attacked by cyber criminals and all the different functions they have, all of that is still important. But if you still conceptualize your business that way, as we have leasing and development and reporting and then tech over here, you've lost the plot. You've fully lost the plot because what matters to truly capture the value of generative authentic AI is you don't, you can't think of it as technology.

You have to think of it as business. It is your business. And exactly as you said, the people are core components of that and people are complicated and people think in confusing, hard to define ways that don't lend themselves to mechanical algorithms.

A perfect example of that is that there's way more intelligence in the email directories of large real estate companies than any of their backend systems. Now, the problem is that it's all unstructured. It's disorganized and chaotic like everyone's email is, just like our brains are.

And for that very reason, that's where all the good stuff is and it's changing your point of view around what it is that technology does. Technology is not a expediter of things. It actually is a doer of things in the same way people are doers of things.

But you need to actually give it access to that mess.

Nancy Lashine (15:35 - 16:19)

I love coming in in the morning and asking either, well, I've been asking Claude, although I'm told that maybe Copilot's better at this at the moment, to go through my emails and help me with X, Y, or Z. Because it's probably all, I guess there are two different people, two different types of people in the world. There are people with zero inboxes and people with more emails in there than they want to admit.

I'm in the latter camp. So it's all in there. Yeah.

Another way of thinking about it is that so many firms are struggling to move up the adoption curve because of the people, but not the technology. And so let me put you on the spot, given that you work with so many different real estate companies that are real estate companies. Who's out in front?

Brendan Wallace (16:24 - 16:51)

It's a great question. And my suspenseful hesitation is actually premised on not knowing. I don't really know because I haven't seen anyone actually doing it very well.

I've seen announcements. There's some REITs that have put out some big announcements, but without actually seeing what's under the hood, I haven't seen anyone that's doing anything exceptionally well right now. I'm starting to form a view, but I just, I don't want to put on blast the people that are really good.

Nancy Lashine (16:51 - 16:58)

There you go, Wallace says, Wallace says. So if you go outside the real estate business, just so we get context, who is doing this well?

Brendan Wallace (16:58 - 19:10)

That's a great question. Amazon is doing this very well, and Amazon did this very early. And Amazon truly conceptualized technology not as a support function, but as integral to everything the company does.

And we've actually brought on some folks from Amazon, and they've just told us how early into this curve they started layering this throughout the organization. Unsurprising to some extent that tech companies become the first adopters of tech. But I have not yet seen anyone in real estate do anything even remotely close to that.

And a lot of what you do see in real estate is this anticipatory stutter step before actually adopting AI, which is the typical dynamic, as we say, you should layer in AI infrastructure to help your business. And the pushback is, no, well, we can't because we've been going through this process of building our data lake or our data warehouse or whatever name a consultant gave them for it, which is a kind of complicated way of saying isn't like an actual structured business intelligence. So you build these ontologies and taxonomies of all the documents and all the information inside your business, you make it structured so that you can clearly run any query against it.

And yes, that actually was, past tense, was extremely important in being able to deploy business objects or some BI software. The thing that people can't get their heads around is that the models don't need that anymore. You don't need clean data.

In fact, it's arguably better to give it unclean data because now these foundational models can draw inferences that it's very unlikely someone who's structuring your data would be able to draw, they wouldn't build the right categories and connections between them. That's how networks work, right? And so if you give it actually messier, more cluttered, more complicated data, more unstructured data, you can actually get better outputs.

So there's this, I would say, antecedent step that I think is a mistake that has elongated AI adoption cycles around, I have to get my data in order first. And that's wrong. It's just, it used to be right.

Nancy Lashine (19:10 - 19:12)

Well, it used to be right. Yeah, yeah, yeah.

Brendan Wallace (19:12 - 19:22)

It used to be right. I know a lot of people take a lot of consultants to tell them that was right. And so disabusing them of that notion feels like an expensive proposition, but it's just true now, you don't need it.

Nancy Lashine  (19:22 - 19:38)

So I'm listening to you and I'm thinking, if I'm sitting in your seat, trying to figure out what to invest in today, probably a very different view about what companies I want to invest in versus what it might've looked like a few years ago before AI.

Brendan Wallace (19:39 - 19:39)

That's right.

Nancy Lashine (19:40 - 19:55)

So what, and I know it's early days, right? But what is interesting to you today? Are hardware solutions becoming more interesting because they can't be displaced by an agent?

Brendan Wallace (19:56 - 21:10)

I'm not sure that's even true, but I would say, I would not say this is not made hardware per se a more attractive category for Fifth Wall to invest in. What I will say it has done is it's increased our sense of replacement, like kind of the rate of functional obsolescence on any technology. Meaning you can basically build anything without being technical very, very fast nowadays.

And so the moat of an actual, the development of lines of code which served as a structural advantage in a moat, it's really weak nowadays. So you're not just underwriting where a company is today, but you have to underwrite their ability to constantly iterate because the functional obsolescence cycle of the technology they have is now extremely fast. So I would say that's a new criteria that we've increased as we look at new deals.

The other thing is, I just think more, like the historical model of venture where you had these kinds of vertical solutions. I still think there'll be vertical solutions, but I think there'll be more custom built and they'll use horizontal infrastructure. And so I think what PropTech starts to morph into- 

Nancy Lashine (21:10 - 21:12)

Can you explain what that means? When you say horizontal infrastructure?

Brendan Wallace (21:12 - 21:18)

Your use case, right? You just described that you use Claude to give you a download on your inbox.

Nancy Lashine (21:18 - 21:19)

What's in my inbox, yeah.

Brendan Wallace (21:19 - 22:12)

Yeah, maybe three years ago, it could have been like some real estate specific analytic tool could have given you some insights from your inbox. Now you don't need that. You can just have Claude do that.

But there probably are a bunch of idiosyncrasies to what you care about and how you like to work that are very unique to you. And so actually the kind of blunt structure of just like you work in real estate, so we're gonna use real estate insights for you is almost too blunt. So what I'm saying is there's this kind of dichotomy between increasingly powerful horizontal solutions with the need for extreme personalization and customization at the end user face level.

And so that kind of, it pushes you to the extremes a bit in terms of where you see value. So I'm giving you somewhat of a hand wavy answer because we're still figuring this out in real time and what that means.

Nancy Lashine (22:12 - 22:14)

Have you made any commitments in the last quarter?

Brendan Wallace (22:16 - 22:20)

Investments? We have, although I don't think we've announced any of them yet.

Nancy Lashine (22:20 - 22:23)

Okay, we won't talk about them unless you want to.

Brendan Wallace (22:23 - 23:08)

What I can say, because we just did our AGM and so I think I know the high level stats, but it's like of the six new investments we've made, I think four were what we call AI native businesses. So they're businesses which really couldn't exist in the absence of generative AI. They're built on that platform, they depend on that platform.

Whereas the other two businesses, they use AI as part of their business. I would not say the dependency is there. And what would that have looked like three years ago, four years ago?

One out of six investments, one out of seven investments was kind of what we would describe as AI native. So that's been a very real change in Fifth Wall's business.

Nancy Lashine (23:08 - 23:19)

You've got a lot of portfolio companies. Are you spending a lot of your time trying to figure out how to help them manage through this iteration?

Brendan Wallace (23:19 - 24:10)

Of course, yeah. Yeah, we have. I mean, we have a lot of portfolio companies that are public, private, doing really well, struggling, every shape, size and type of company. And this new vector of AI has changed their businesses pretty dramatically.

And so I think a lot of companies are undergoing huge changes around what their business model is, despite having already really strong businesses, but whose functional obsolescence cycle and defensibility, or their functional obsolescence cycle just sped up and their defensibility is way down. And that's true of every business. I would say that's true of venture capital, that's true of podcasting, that's true of real estate, that's true of everything.

Yeah, we're spending a lot of time with them, helping them think through that.

Nancy Lashine (24:12 - 24:43)

Yeah. How do you think this is all going to impact the real estate investment management businesses? And when you think about, which is the business obviously we spend most of our time in, do you think it favors the big guys and the folks that have obviously huge scale and incumbency?

Or do you see this as a real opening for new investment firms to develop with maybe AI native technologies?

Brendan Wallace (24:44 - 27:10)

It's a little bit of both, but I would say it does probably slightly favor the large incumbents because they have the most costs, the most OPEX, like a lot of where the opportunity is, and to be clear, there's opportunity on the top line as well, but let's just, for the sake of simplicity, focus on the fact that generative and agentic AI can help you manage and operate any business, real estate included, faster and cheaper and easier.

That's an absolute statement. So in light of that, those who have the most OPEX have the most gain, and real estate is an industry where if an additional dollar drops to the bottom line, so you take out a dollar of OPEX that enters to NOI, and typically depending on the asset and the location and the subsector, 15 to 30 times, right, is the amount of value you create. So you save a dollar of cost, you create 15 to 30 bucks of value.

Real estate has a very high leverage point around that. So yes, that favors the incumbents. I also think, and we haven't yet seen this, you will see new asset management models for real estate start to encroach on the incumbents.

A good example of this is, I was recently at a big real estate conference and everyone was talking about the behemoths in the asset management space and what are they thinking? What is Blackstone and Brookfield and Aerie, what are they thinking? Which is a great question because they're very important.

And I was like, you guys should also be thinking about what is Amazon thinking? Because for sure, the real estate industry is in their aperture. They're looking at this industry that has lots of inefficiencies, where the assets do a lot of their work for you, no matter what anyone tells you, the assets do a lot of the work just by existing.

And you can cut out cost and they are very adept at layering in agentic solutions to cut out cost. And no one had thought of that. That was kind of a out of left field comment, which just shows me the balkanization of these two industries that the largest tech companies have openly stated that they want roll-ups of companies that have lots of inefficiencies.

And somehow no one in the real estate industry thought that might apply to them.

Nancy Lashine (27:10 - 27:16)

No, no, we've heard it. I hadn't heard it specific to Amazon, but certainly specific to some of the larger tech companies.

Brendan Wallace (27:16 - 27:19)

It's not just Amazon, but yeah, Amazon and others.

Nancy Lashine (27:19 - 27:24)

Yeah, no, they don't wanna be in the tech business, they wanna be in every business.

Brendan Wallace (27:24 - 27:56)

And I think that point there is exactly, I think what they would object to and is like the whole dynamic, which is I don't think they think of themselves as being in the tech business. I think they see themselves as being in business and they want good businesses. And I think the real estate industry is a good business.

It is a very predictable, very stable business. It has very high gross margins. It lends itself very well to algorithmic mechanical workflows.

It is a clear target and it really isn't on anyone's radar. Now-

Nancy Lashine (27:57 - 28:01)

Watch out SIC codes, they're gonna all get mushed together, right?

Brendan Wallace (28:01 - 28:03)

Yeah, exactly, exactly.

Nancy Lashine (28:07 - 28:29)

People pay you to invest their capital in great investment opportunities, primarily so that they can take advantage of the technology, but they're also looking for good returns, presumably from their investments. Does what's happening with AI change your perspective on what kind of returns you should be able or would be able to generate?

Brendan Wallace (28:31 - 28:42)

A little bit in the sense that I think it's gonna lead to more, the concentration of returns is gonna be even greater. That's a dynamic that you've seen over the last three decades in venture capital.

Nancy Lashine (28:42 - 29:05)

Fewer companies succeeding within the venture stack. If you invest in- It used to be when I started actually doing venture and IPOs back in the 80s in the investment bank, and you invest in 10, one's the home run, a few doubles and a single or two, and then you can afford to let the rest go away. But is it not one out of 10 anymore? Is it one out of 30?

Brendan Wallace (29:05 - 29:15)

Yeah, I would say it's not so much the success rate as it's no longer a home run, it's a grand slam times 10, right? So it's like-

Nancy Lashine (29:15 - 29:17)

It’s the entire season in one hit.

Brendan Wallace (29:18 - 29:31)

Yeah, you just need one of these. Literally, you could have made 49 investments that have all gone to zero and bet on Anthropic early and it doesn't matter. It just doesn't matter. And that also highlights-

Nancy Lashine (29:32 - 29:37)

So does that suggest to you that you need to be more diversified or you just need to be smarter?

Brendan Wallace (29:38 - 30:42)

No, I don't think it suggests we need to be more diversified. If anything, I think it means we almost wanna be more concentrated, but you wanna build that concentration over time. What I do think it suggests is like that dynamic is totally anathema to how the real estate industry thinks.

The idea of betting on 50 buildings, having 49 of them go to zero and making all your money on one is just not something the real estate industry can wrap their head around. So what has changed is that, and I think about this from where we sit, Fifth Wall is largely in the business of educating the real estate industry on how venture capital and technology works. And it works fundamentally differently than real estate.

And real estate has kind of stayed similar or close to the same, but tech has changed profoundly. And the nature of that one hit, the home run in your example and how impactful it can be and these power law dynamics, those have become so extreme that the real estate industry, I think is really struggling to understand that.

Nancy Lashine (30:43 - 31:25)

If you're a CIO of a large pension plan or pool of capital, it still makes sense. You never want real estate because you can buy a building and it's got tendencies and cashflow. You should never lose money in real estate.

You should never lose your principle in real estate. And that's just real estate 101. And it's whether you're investing in it for long-term steady income or for some kind of opportunistic total return.

You can talk about where you want to be on that spectrum and there's lots of different opportunities, but security of principle, that is key principle for real. Why else would you invest in real estate? Doesn't make sense.

Brendan Wallace (31:25 - 31:48)

Yeah, that's how I think the industry does identify. You're at some essential level. You are dealing with physically instantiated bonds, right?

That's a real estate asset. And so, yeah, you shouldn't be taking principle risk. And yet they do take principle risk and they do take losses and people do lose money all the time.

Nancy Lashine (31:48 - 32:06)

Can over-leverage, you can develop a building that can't get developed or can't get leased up. There are things that happen, but that's really the exception. That is not what anybody is ever, well, that is not a risk that real estate investors are willing to take.

Certainly not in the institutional world.

Brendan Wallace (32:07 - 32:07)

Yeah.

Nancy Lashine (32:08 - 32:15)

So they are different animals. Do you think that prop tech investing becomes more synonymous with just venture investing over time?

Brendan Wallace (32:17 - 32:26)

I think it already has to some extent. I think the line between where prop tech ends and generalist venture investing begins is already pretty blurry.

Nancy Lashine (32:27 - 32:27)

Right.

Brendan Wallace (32:27 - 33:06)

And I think, yeah, it does become more obfuscated over time because of AI. But I would also say by that same measure, the line between what a real estate company is and a tech company, to my points earlier, is also gonna get pretty blurry. And so this kind of verticalization, the balkanization of industry that everyone sees the world through, there's tech and there's real estate and there's healthcare.

Sometimes they overlap a little bit, but they're not one and the same. I think that's what's made it very hard to be the CEO of any company that doesn't push the envelope. And real estate falls squarely in that.

Nancy Lashine (33:07 - 33:25)

You've had the opportunity to invest globally. I know you personally did a lot in Mexico. You have offices now in Asia and in Europe, as well as here in the States.

What have you learned about the innovative mindset of entrepreneurs on a more global basis?

Brendan Wallace (33:26 - 35:07)

You have amazing innovations coming out of everywhere in the world. What does impact the investability and the financial performance of those investments is the size of the markets and the robustness of the capital markets around them. Meaning Fifth Wall or any venture fund is not enough on our own to make a company successful, even if we bet on the best entrepreneur and the best technology.

We depend and we exist as part of a complex ecosystem of clients and capital and LPs and venture funds and growth funds and investment banks to take them public and media. And what I would say is that ecosystem is just orders of magnitude better in the US than anywhere else. And so that's not a knock on the entrepreneurs internationally or the ideas or the technologies.

It's just a dynamic that I think many venture investors have recognized, which is why is it that so many of the largest, most transformative tech companies seem not just to come out of the US but come out of California. And it's because this ecosystem works and there's a path dependency to outcomes when you have so many people that are so focused on this category with so much capital and so many resources and so much expertise, that's been hard to replicate internationally. And while it's improved, I would say the US is still orders of magnitude better in terms of how robust and durable that ecosystem is.

Nancy Lashine (35:07 - 35:09)

What would be second place in your view?

Brendan Wallace (35:10 - 35:10)

China.

Nancy Lashine (35:11 - 35:23)

China itself, not Singapore. Okay, interesting. So regulation or government intervention hasn't really dampened the ability to build businesses.

Brendan Wallace (35:23 - 36:10)

Oh, well, I think it's, I would say it's a bit more complicated than it just has dampened it. To some extent, the only reason innovation exists is partially because of regulation over there as well. Meaning you can't really disentangle the state from anything that happened in China.

So yes, I would say that more recently, yes, I would say regulation and the perception of China as a completely disparate, disconnected economy from the rest of the world has made it worse in some way. I think if you talk to some folks in the CCP, they'd probably say it's made it better. But from our perspective, it might've made it worse.

But by that same token, a lot of the innovation that China does have came from the top down, right? Right.

Nancy Lashine (36:10 - 36:12)

Right. Do you have capital invested in China?

Brendan Wallace (36:13 - 36:19)

No, we have no capital invested in China. Yeah, too short. Nor do we have any capital from China either.

Nancy Lashine (36:19 - 36:39)

Yeah, yeah. That is, I hear what you're saying and it does make sense from other conversations I've had, but it's so very hard to be an American and invest capital there. Think that you'll ever get your capital out.

So many horrors. I mean, I was there. I spent a lot of time.

It's very hard. It's very hard environment for us.

Brendan Wallace(36:39 - 37:21)

Anyway, we've hosted a lot of companies there. We've spoken to a large number of major Chinese real estate companies, major Chinese investors, major Chinese VCs. And yeah, it's a very different ecosystem.

So everything I just described about the robustness and the strength of the US innovation economy, there are merits of China's model as well, but they're just very different. And the features and the contours of what that means because of state intervention and regulation and access to your capital and human capital, it's a totally different ecosystem. And because of that, it's one we have elected not to plan.

Nancy Lashine (37:22 - 37:29)

Yeah, you would definitely be the foreigner. You've done a lot. I know you've done one or maybe two funds now with climate change.

Brendan Wallace (37:30 - 37:30)

Correct.

Nancy Lashine (37:30 - 37:43)

Tell us about what your goals are in that area. And then given the change in the current administration, where are we and what can we expect to happen with climate change technology over the next three years?

Brendan Wallace (37:45 - 39:31)

Yeah, so we launched two funds in about 2020 focused on how the real estate industry needs to decarbonize. And we borrowed the model from what we had done in PropTech. And we specifically invested in anything and everything the real estate industry needs to decarbonize.

Everything from stationary batteries to EV charging to battery recycling to utility scale solar is a lot of hard infrastructure, hard tech. And initially we had a lot of interest from the real estate industry where large real estate owners were making these huge decarbonization claims and large pensions and institutions were doing the same. And I remember when I was launching it, I had talked to a bunch of other GPs that had launched climate funds.

And they were like, be careful because as quickly as these people hop on this bandwagon, they will hop off when the political climate or the administration changes. And of course, I considered that what has happened is that there is almost no capital available anymore from the real estate industry, certainly, but I would say even otherwise for anything decarbonization or sustainability related. It's really sad, I think, at some level.

I understand it. I understand that as a business, large organizations have to be sensitized to what's important and what's not, but you can just see it. The number of times ESG and sustainability appeared in earnings calls from 2020 to 2024 versus recently, it's fallen off a cliff.

It's just, it's not a priority for a large number of real estate companies.

Nancy Lashine (39:31 - 39:32)

It's not a spoken priority.

Brendan Wallace (39:33 - 40:49)

Yeah, I think it's more than just not a spoken priority. It's not a priority. And the similar dynamic has happened in capital markets.

There's also very limited capital from institutions for the space. That is extremely true in the US, slightly less true in Europe, but I would say nonetheless true globally. And you're dealing with a category that I think is super important.

I think it's a big economic opportunity. I think it's a big ethical imperative. And I think it's a really interesting space that has been exposed to how fickle industry incumbents are in their commitments to sustainability.

So it's been, I would say, a learning experience for me just in seeing how quickly the industry can pivot in its priorities and how durable certain commitments are. But nonetheless, I think it will make a comeback. Who knows what happens in the next federal administration and what their priorities will be.

And I think as quickly as people have pulled out of the space, they will probably jump right back into it when it becomes palatable and attractive to investors again. So we're in a low ebb, but I don't think we're at the end of the ballgame. As it relates-

Nancy Lashine (40:49 - 40:52)

Were you able to invest the funds that you raised?

Brendan Wallace (40:53 - 41:27)

We haven't invested all of them, but we've invested the majority of them. So we've invested in about 40-some-odd companies across the landscape of climate tech. And we've invested alongside a number of other very big venture investors in the category, like Bill Gates's fund, and there's a group called Energy Impact Partners, and none of these groups have capital.

To be clear, if Bill Gates's fund doesn't have capital, and he's doing it for very different reasons than the real estate industry is, that tells you a lot about how much the political climate and the zeitgeist has shifted.

Nancy Lashine (41:27 - 41:33)

It is just- Are these 40 companies generally trading water? Are they gonna survive?

Brendan Wallace (41:33 - 42:59)

Some are doing very well, actually. It depends on the category. So if you are in climate resilience, or if you're in anything around nuclear, or anything around powered land for data centers, you're doing quite well.

You're doing well for a different reason than probably many of these companies set out to succeed. They're being driven by purely economic forces, not regulatory forces. Other companies, no, many are absolutely struggling.

And one of the reasons is that among, there was this massive retraction from the real estate industry in terms of their interest in sustainability, but the same thing happened at the federal level too. So when federal law, the IRA, the infrastructure bill were passed, many people thought this is law, this is sacrosanct. This is not gonna get rolled back.

I mean, of course, like the US can pull out of international treaties, but domestic legislation is probably pretty durable. That was a completely wrong assumption. And the malleability of these laws and the fragility of these laws, we've seen on full display.

And it's sad because a lot of companies do depend on basic government subsidies and regulation to build their businesses in these early days. These are very capital intensive, high technical risk businesses. And that regulation is gone.

Nancy Lashine (42:59 - 43:20)

Obviously it has huge impact on our ability to control climate change. But further, it's not just ESG, it's the DEI component where the ability to be more democratic in training people, all kinds of people from all kinds of backgrounds has been rolled back in the same way. And so we're in a different place.

Brendan Wallace (43:21 - 44:00)

Physics didn't take the last couple of years off. Physics are still working, right? And the meteorological reality of the situation is the same as it's ever been.

 

But yeah, it's not a topic of conversation. And it's, I think, an interesting demonstration of some of the kind of moral hazard in, it's not term limits, because obviously CEOs don't have term limits, but the duration of a CEO's tenure and the duration of a decarbonization initiative are out of sync. They just don't match up.

And that's a very real problem.

Nancy Lashine (44:03 - 44:19)

In many ways, for lots of reasons, yes. Let's finish up, if we could, talking about the culture of Fifth Wall and what you would like to continue to build a fifth wall, what's been important to you and maybe some of the biggest lessons you've learned in building a business like Fifth Wall?

Brendan Wallace (44:20 - 46:08)

Yeah, that's a great question. I think about that every day, but I'll say a couple of things that I'm really excited about that draft off of what we've already discussed in this conversation. We're at an incredible moment in economic history where I think there's going to be a reshuffling of the deck in every industry that is precipitated by all of the bedrock technology that was adopted over the last two decades and now generative and agentic AI as the icing on the cake, that's the true accelerant.

And I think it's a really cool time to build. And so what that means for us is we're starting to take positions in companies very early, even going so far as incubating some of them ourselves, which is actually something we did right when we started the firm, but just as we had a lot of scale, we kind of leaned out of because it almost made sense to wait. But right now you can build businesses that can grow so fast that there's actually real advantages to being very early, very nimble, and being able to bring all the things that Fifth Wall has, which is all this talent, all this capital, all these strategic partners, this network, this domain expertise, we can really shape those companies.

So that's, I would say one thing that I'm personally really excited about. The second is, we also talked about, which is there's gonna be a reshuffling of the deck in the real estate industry. Just based on the conversations I have with real estate company management teams, I can tell you things are gonna look very different in five years.

I bet there's gonna be more change at the management level of real estate companies in the next five years than there has been in the last 20.

Nancy Lashine (46:09 - 46:13)

And there is- When you say real estate companies, are you referring to?

Brendan Wallace (46:14 - 46:17)

Public, private, funds, everyone.

Nancy Lashine (46:17 - 46:29)

And is that because the people at the top are gonna realize that the way they think about things and we're doing things, they're not as adaptive and they need to bring on different talent.

Brendan Wallace (46:30 - 47:30)

Either they do or they don't. But I would say what I'm seeing right now is the highest level of divergence in terms of how real estate companies are looking at AI. So some companies are massively leaning in and my money would be on them.

I'm biased, of course, this is our industry and this is what we do, but I think that those companies are going to, because they're not gonna do everything right, but they're gonna make some mistakes, but they're gonna do something really well. And they're gonna develop a cost of capital advantage that becomes deterministic over time. And a lot of the CEOs that are saying, I wanna wait, I wanna adopt third-party software, this isn't my business, I'm in the real estate business, tech's not my thing, tech's IT, all the things that have characterized real estate for a very long time, I think you've been able to get away with that for a long time in real estate.

I think the shelf life on that strategy is gonna become very short, frighteningly short. And we're seeing that pretty dramatically. It's probably the highest divergence I've ever seen.

Nancy Lashine (47:30 - 47:32)

Of performance, yeah.

Brendan Wallace (47:32 - 48:16)

No, not so much of performance, because we actually haven't seen the performance yet. It's more the distribution. It's the, talk to a real estate management team.

A lot of real estate management teams would say, layering in generative agentic AI to improve my business is my number one priority. And there's others that would say, that's my number 14 priority. And there's not a lot that are at two or three. There's this wild divergence. And I think that the future state of what this industry looks like, net of all these things that we've talked about, is gonna be dependent on that. Disposition of management teams.

Nancy Lashine (48:17 - 48:57)

We don't really see it in the same way. And if anyone's listening and wants to open my eyes, please reach out from the institutional investor community. So institutional investors, whether they're public or corporate pension funds, endowments, foundations, big family offices, sovereigns, they're largely doing it, they don't necessarily have the same ability to have this initiative.

And so it will be interesting if the real estate operator community or manager community changes the way it does business. Investors are gonna have to change as well.

Brendan Wallace (48:58 - 49:18)

It starts with investors, right? Everyone's beholden to their investors at some level. That is the soft power dynamic of every industry.

And I agree with you, that a lot of institutional investors are not asking questions about this. Or if they do, they're asking really cursory, superficial questions.

Nancy Lashine (49:19 - 49:23)

They're not integrating it into their own organizations in the same way.

Brendan Wallace (49:24 - 49:59)

Yeah, that for sure, that for sure. But I'm actually just saying, what are they asking real estate management companies? And I think a lot of what I've heard is like the questions are like, what's your AI strategy?

Which anyone can answer and you can talk your way through that. Which is a very different question than, show me the costs that you've eliminated in your business through agentic solutions in the last quarter. They're not asking that yet, but I think we're probably 12 to 36 months out from a lot of real estate CEOs being asked those questions because they're happening in other industries.

Nancy Lashine (49:59 - 50:23)

But I'm already hearing people ask and show me the incremental revenue because that's really interesting. How are you creating new synergies? So we are running up to the end of our time and I guess I wanna ask you, if you could say to people who are listening, who are in the real estate business, what is one thing you'd want them to take away from this podcast? What would that be?

Brendan Wallace (50:29 - 50:41)

Doing nothing around generative and agentic AI, not having a strategy is an existential mistake at this point.

Nancy Lashine (50:43 - 50:55)

You heard it here. Brendan, it's great to have you on. We haven't even started to talk about your portfolio companies and what's actually happening in your business, but hopefully save that for another time.

Brendan Wallace (50:56 - 50:57)

Yeah, well, lovely talking to you.

Nancy Lashine (50:58 - 51:01)

Yeah, yeah, it was lots of fun. Thank you, thank you so much for joining us.

Brendan Wallace (51:02 - 51:02)

Thanks, Nancy.

Nancy Lashine (51:03 - 51:35)

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media.

So if you're enjoying the show, please remember to follow it on your favorite podcasting app so you never miss an episode. We'd also love for you to share it with others or give us a review on Apple Podcasts so others can find us. Thanks again for tuning in.

For more information about our firm, please visit our website at parkmadisonpartners.com.