Rethinking Real Estate Startups, Investments, and Innovation Consultants

  1. ‎Dislocation - Real Estate Tech, Proptech, CRETech on Apple Podcasts

In October 2016, I went to the first MIPIM Proptech Summit in New York City. Though unaware of it at the time, the conference was a highpoint of investor and founder confidence in the belief that technology would disrupt and transform the profoundly broken, analogue real estate industry. At the conference, a guy named Dror Poleg introduced himself and expressed interest in meeting. Dror explained his background, which most recently involved a failed app startup, and developing commercial real estate in China.

Because my professional focus was housing, I was slow to take Dror up on his offer to meet, but he was persistent and we eventually met up. In time, we became friends and collaborators, co-hosting a dinner series with proptech founders, VCs, and developers called “Real Estate Anonymous,” and a podcast called, “The Dislocation Podcast.” We were good foils for one other: Dror, the pressed-shirt-wearing commercial real estate (CRE) straight man, and me, the unbuttoned housing party guy. Our combined views, breadth of knowledge, and location in the center of the global real estate industry (NYC) quickly made us preeminent authorities on the future of real estate.

Our relationship began deteriorating in late 2019, around the time his book, Rethinking Real Estate, was published. We were both consultants, but with very different focuses and clients. I typically worked with small and mid-sized startups as well as a few regional developers tackling hard problems like housing affordability and introducing new construction methods into mainstream development pipelines. Dror worked with multinational developers and investors like Cushman & Wakefiled, Brookfield, and JLL as well as well-funded commercial real estate startups like Breather, Knotel, and Convene. Dror’s Midtown Manhattan book launch centered on an interview with Convene’s outgoing CEO and cofounder, Chris Kelly.

Dror, pictured at left with Convene coworking’s outgoing CEO, Chris Kelly, went from indirectly promoting Ponzi schemes to being explicit.

Around this time, I started realizing the Ponzi scheme-nature of real estate and startup development and investing. Developers amassed so much money building a building, they seemed to lose concern for those buildings when they were built, leading to a glut of new and vacant Class-A towers. Similarly, startups made so much money from venture raises, they didn’t need to establish if their businesses had product-market fit. WeWork’s failed IPO in September 2019 — with its $47B valuation based on bogus pipelines and Adam Neumann’s self-dealings — was the first publicized event to cast light on the scope of the scam.

Coworking startups raised billions based on absurd projections and as Hail Mary use-cases for countless office buildings in an era where information technology made geography a less important consideration for conducting business operations.

WeWork may have been the most publicized example of Ponzi-modeled startups, but it was hardly the only. The addressable markets touted in pitch decks of the most hyped-up proptech startups were proving to be pure fiction, and Dror’s clients were well-represented in this fiction library. Breather, which raised $122.5M, had to cancel most of its leases by late 2020. Knotel, which raised $560M, declared bankruptcy in early 2021, before being acquired by Newmark for $70M. Convene, which raised $281.6M, laid off 20 percent of its staff shortly after Kelly’s exit and Dror’s book party in early 2020; revenue went down 70 percent that same year. These collapses were well underway before the pandemic, the consequence of developing and over-funding companies built around phantom markets.

The Anonymous, Dislocated Real Estate Industry

Dror and my differing professional focuses can perhaps be attributed to our different upbringings. Dror is the son of Zvi Poleg, the former mayor of Netanya, an overbuilt Israeli coastal resort town between Haifa and Tel Aviv. He entered real estate by developing offices and shopping malls in China, where he lived for a decade before moving to NYC. I’m the son of a radical-turned-technologist and a former nun. My first home was a townhouse in a planned south suburban Chicago greenfield development; meant as a multicultural utopia, the suburb became ghettofied — like many speculative suburban real estate projects — throughout the eighties. My journey into real estate began after being featured in a 2009 New York Times Real Estate piece about creative and cheap housing arrangements in the wake of the mortgage bust, and later working at the micro-housing and minimalist lifestyle startup, LifeEdited.

When we met in 2016, Dror had just moved to New York City, where I had lived for 15 years, and his connection to the city was limited to a lease on a new Brooklyn Heights apartment. My connection to the city included longstanding membership in several communities, and it being the place where I graduated college, worked, threw events, got married, had children, and built a home.

When Dror suggested the names “Real Estate Anonymous” and “Dislocation” as names for our projects, I didn’t fully comprehend their meaning or relation to Dror , but I do now.

NYC, Boston, San Francisco, and other cities are becoming indistinguishable due to the influence remote real estate investors and developers backing commodity buildings with no connection to local people or place.

Dror was, and is, the mouthpiece for anonymized and dislocated real estate ownership and operations. For him and his minions, real estate is a financial vehicle where asset ownership and operations belong to whoever has the most money. In this world, diversified, multinational, and faceless real estate holding companies like Blackstone, Cushman, and Brookfield gobble up as many real estate assets as they can, wherever they can. Most of these firms are structured as real estate investment trusts (REITs) that aggregate global portfolios and balance sheets into tradeable stocks in investment markets. These firms’ stock and trade is generic investment-grade real estate: glass-and-steel urban towers, sprawling single family rental developments, fulfillment warehouses, server farms, etc. Their holdings may be in different regions with different cultures and economic dynamics, but they’re building the same buildings serving the same small pool of investors.

Real estate investment returns (left) have had similar returns as the stock market in recent decades, aided by the REIT structure (middle), which enables large holding companies to aggregate portfolios and balance sheets into tradeable stocks. Proptech investment (right) also experienced massive gains in the past few years, though that investment has been reduced significantly as many of the first wave of proptech startups floundered and failed.

The anonymous and dislocated real estate industry’s quest for money has succeeded to a large extent, with investment returns booming over the past decade. Much the same can be said about proptech investing, though the aforementioned flops (and many others) have significantly curbed investing of late. On the flipside, these booming returns for institutional investors and fly-by-night startups has made real estate of all asset classes more expensive than ever, forcing businesses to close, raising rents and home prices, squeezing citizens, and sending people into the streets at record levels. These trends were well underway before the lockdown.

Investor profits have driven housing costs to all time highs.

The fact Dror — and Adam Neumann and other failed proptech startup founders — is Israeli bears noting. Not only do Israelis own a large number of real estate assets across the globe, but they are the world’s leading technicians for expatriating and funneling (some might call it laundering) Saudi, Emirati, Chinese, and other dubious sovereign funds into real estate assets and startups. In my former home New York, Israelis pump tons of money into politicians’ coffers to ensure that money has a home in perpetuity.

Despite its small population, Israel holds a great deal of political and economic sway in terms of real estate capital flows, acting as an intermediary for sovereign wealth looking for investment buckets. This sway includes backing politicians who support pro-real estate policies.

But Israelis are far from the only culprits of this anonymized and dislocated real estate ownership and operations. Canadian, English, and Chinese investors are especially active in wresting control of real estate from local owners and operators, whether in the U.S., Egypt, or elsewhere.

Relocating and Personalizing Real Estate

Unfortunately, there’s no good takeaway for solving the problem of anonymous, dislocated real estate investors, developers, startups, and consultants. New York City, Boston, San Francisco, and most other major metropolises are already littered with ugly, generic, and empty towers, their populations already broke, dispossessed, overworked, underhoused, or unhoused. Sprawling tracts of made-for-rent single family rentals have already blanketed middle America. Venture funds that could have been spent on worthwhile startups have already been squandered on stillborn ones.

If this piece has any conclusion, it’s a plea to stop: stop building the wrong real estate in the wrong places, stop investing in the dumb startups, and stop taking people like Dror, Adam Neumann, Masayoshi Son, Marc Andreesson, and the countless other perpetrators of this graft at their word or seriously.

Real estate will always be a local affair. Every market presents its own economic, social, and environmental resources and constraints. So when real estate owners, operators, and “experts” aren’t geographically or socially bound a place, it’s guaranteed they will make decisions based on their interests, which are usually the opposite of the locals using the real estate. When these broke, angry, and unheard locals reach a critical mass, when they can’t take one more rent hike, it will cause a default event that will make 2008 — and probably 1929 — seem trivial. Mark my words. I’m usually right about this stuff.

Dear reader, I write stuff like this because it needs to be said and heard, not because it pays — it doesn’t. If you want real and unfiltered real estate insights or a legitimate startup to invest in, I can and would love to help.