Brendan Wallace

Brendan Wallace — Fifth Wall

Wednesday, May 25, 2022

So interesting talking to Brendan Wallace about how he built Fifth Wall to $1.2B in 3.5 years.

We talk about how the retail landscape is changing, how the work week will change and hopefully how the carbon impact of real estate will change. 


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So excited to be talking to Brendan Wallace today. Brendan is the founder and managing partner at Fifth Wall. Fifth Wall is one of the largest, if not the largest, active venture fund in L.A. They’re investing into technology for the built world out of three active funds a real estate tech fund, a retail fund, and a carbon impact fund.

And Brendan and team built this all over the past three and a half, three to four years. So really rapid growth. Really excited to have you on this show. Thanks so much.

Yeah. Thank you so much for having me. It’s a pleasure to join.

So I was really excited.

I am really excited about sort of the implications of real estate and how we’re all going to return to work. But before I get us off on that topic, I want to make sure that I got the basics of Fifth Wall correct. And maybe you could tell us a little bit more about your funds and what you’re investing in to. Sure.

Yeah. So Fifth Wall is a venture capital fund that invests in technology for the built world.

So as as we define that technology, that’s strategic for owners, operators and developers of real estate assets. And so that’s a pretty broad aperture. And you talk more about the components of that.

But, ah, I think what really makes us unique is not just our our very intense focus on real estate tech, but rather the way we’ve constructed our fund, which has been very different than how other venture funds are typically capitalized. So we’ve raised about two thirds of our capital from the largest owners and operators and developers of real estate who are themselves the largest customers, the most desired partners, the distributors for the very technologies we invest in. And so our model is to engage with those real estate owners and say, you know, what do you care about?

What’s a tech pain point for you? What’s a tech opportunity for you? And it I think the most interesting thing about that model is that most venture funds, that the challenges, they want to stay small.

Right. There’s kind of this inverse relationship between the size of your funds and your returns. We have kind of a unique dynamic in the sense that we actually have network effects, meaning the more strategic LP is that we work with, the more relationships we can build, the more kind of areas and scopes of technology that we can look out for them. The deeper those relationships become with the real estate corporates, the better the distribution advantage we have for early stage companies.

And I think that we’ve also talked about is a lot of what you’re investing into. It’s not heavy on the technology risk so much as the distribution risk.

That’s right. You know, real estate is an industry that it sat out a lot of innovation. Right. It’s one of the lowest spending major industries in the United States on technology. 

What constitutes real innovation in the real estate world is oftentimes very simple, meaning like take how you get into an out of a building? Right. So being able to use your phone to open a door is not incredibly hard technology at a fundamental level to build.

It’s very hard to distribute. And so the characteristic that we see that’s kind of endemic across real estate tech is that the companies are generally characterized by low technical risk, meaning the big existential questions of can you build it? Does it work? Is it better than the status quo? Does it have a positive ROI? These big questions you typically face in other industries in real estate tech? The answer is usually yes. For almost every single company, the risk tends to hinge on can you distribute it?

So it works. But can you sell it to Marriott or can you sell it to Hymes or can you sell it to British land? Our strategic LP is. And that’s really the role that we see ourselves playing in the ecosystem.

Does that change your relationship with the founders or make it different than the relationship between a purely financial or financial investor with financially backed LPs?

It does. I think it offers something quite different. Right. So, you know, most venture funds are what I would call a generalist venture funds, and they’re backed by financial LPs. And it’s not to say they can’t add value. They do absolutely add value. But it’s a it’s a more generic kind of value. And you tend to hear a lot of the same things, which is we roll up our sleeves. We help out our founders.

We help you think through product market fit. We help you with market. And we help you with hiring. All of which are incredibly important. 

But for an entrepreneur who is struggling to sell into the real estate industry, which I think if you talk to any prop tech entrepreneur, that’s all of them. That’s a very hard industry to sell into.

That’s a really welcome message to say we’ve opened these distribution lanes for you to capitalize on. 

And do your deals look like VC deals or there are different components to them, warrants and things like that?

No, they look very much like venture deals that you see in the space. I think the thing that is different is that we don’t spend as much time as, I think a typical venture fund hunting for deals.

Right. And kind of positioning ourselves to get into deals. Most of the real estate tech companies, they do come to Fifth Wall, and that’s the function, I think, of our network. We’re obviously quite large. We have one point two billion under management, but also because we we’ve kind of done this so often. So it’s it’s oftentimes the other way around where we’ll run like an RFP process, a competitive process between many similar startups who are competing for our investment because they want to get access to the same real estate partners.

Oh, I didn’t know that about you. Is that so? Is that like a literally you’ll have like an RFP process where you say we’re looking for someone who can solve this sort of problem because this is what? All right. We’ve done it many times and they don’t mean it in extreme cases, they’re publicized, right?

Press articles written on our RFD

For the entrepreneurs out there who might be approaching, you might see any of your retail fund is you’ll be investing in brands that are digitally native. The going off line, right? Yeah. 

Yeah. So we have Fifth Wall has a number of products. So we have our North American real estate technology funds. We had our first fund, which was two hundred and twelve billion dollars that we raised in twenty seventeen. And then we had our five hundred and three million dollar fund. In that same strategy that we launched last year, separately from that in that fund again focuses on real estate tech.

So the core of I think what most people know us for. We also have another fund called the Fifth Wall Retail Fund, which exactly, as you said, invests in emerging new occupier’s of space. So there’s a lot of mall owner, shopping centre owners, street retail owners that are struggling with the fact that many traditional retailers are not doing very well, especially now, and they need to fill space. And the thing that most people don’t recognize is that a lot of these e-commerce brands are opening stores.

I know that sounds so counterintuitive and it’s totally inconsistent with what you’d read or think reading TechCrunch. But the cost of customer acquisition offline is now becoming more competitive with online because online has become more competitive, offline has become less competitive. So brands like Warby Parker and Bonobos and Casper, they are just voraciously opening up stores and there’s a whole cohort of new brands behind them that are doing the same. The challenge for retail real estate owners is that in the past their job was pretty straightforward.

If you’re in a mall, you maintain 20 or so 200 relationships with major retailers and you filled up your mall. That doesn’t work anymore because, you know, you have to maintain those 200 relationships. And then there’s probably 5000 new brands that are all considering opening their first store. Maybe their second store. And you have to know about them. You have to understand them. You have to understand how they fit in with your existing brands. And so that’s what our fund invests in.

We have raised capital from large retail real estate owners and we identify these new emerging brands. And then our last strategy, which you mentioned, is our Carbon Impact Fund, which is focused on decarbonisation and sustainability for the real estate industry.

So do you think that’s, to stick with retail? Because it’s fascinating right now. If there was sort of a bit of a playbook, which is once you get to a certain size, maybe in revenue online, you start to look off-line. Do you think that those playbooks are being rewritten? And what were they and where do you think they will be in the near term and where do you think they’ll fall out?

It’s just it’s an acceleration of the same trend.

It’s easier than ever before. It started e-commerce company. The challenge is scale, meaning once you get to a certain point, it gets harder and harder to acquire customers online. And most people don’t notice. But even with all of the e-commerce growth we’ve seen over the last two decades and Amazon, you know, much e commerce or online retail represents the total U.S. retail. Now, I’m, I guess, 10 percent.

I was going to guess. Well, I was going to say. Good.

So it’s it’s a crazy stat, right? Because most people in California, New York, they’re like what I thought was like 50 percent, because our experience is that. But, you know, out of every ten dollars that is spent by the U.S. consumer, nine of them are spent off-line and stores. And so, one, you have just a huge pool of capital that’s still spending money off line. You’ve got these rising customer acquisition costs online. And so what many brands recognize is that rent.

Right. So retail rent is a form of customer acquisition. It’s really the same thing as paying for Google AdWords. It’s getting customers to see and experience and potentially buy your product. And as rents have fallen, online marketing costs have risen. And so in many cases, we’ve crossed this inflection point. So we typically saw maybe two years ago is that at like 50 million in revenue? Many brands would say, I got to go off line. That number is getting lower and lower.

Like the first stores for many digitally native brands started online. They’re opening their first store at like 10 million dollars of revenue. And there’s other reasons that I can talk about, you know, understanding your customers better, the intimacy that can omnichannel component of being where your customers are. There’s many other reasons. But at the most essential level, it’s economics. It’s cost of customer acquisition.

Now, I can talk more broadly about what happening in retail in light of the current circumstances we’re in. But that might be a separate topic, though.

Please do so that what we’re seeing in the US retail industry is totally unprecedented. I mean, this is in so many respects. This crisis has had unprecedented consequences. But the idea of just closing retail assets and in many cases indefinitely.

And at the same time that’s happening. You have the biggest one time forced adoption of e-commerce ever. So e-commerce transaction volumes in March of 2020 were up 74 percent over twenty nineteen. And the reason is you couldn’t go to a store, see, in some cases just had to buy stuff online. 

And so you have this almost perfect storm for US retail. And it’s happening at the worst possible time because so many these retailers were already overstored over levered.

And I’m talking largely about the established retail names. I don’t want to name them specifically, but we all know who they are. And you read about a bankruptcy of an established retailer almost every day. But the issue is that too many stores and too much debt. And so they were already compromised. And now this happens. So I think you’re going to see a surge in retail bankruptcies, especially the traditional retailers. And that’s really bad for retail real estate.

But at the same time, I do think it’s this. It can create new life and it can. It can breathe new life into retail centers and and shopping districts that had become antiquated and stale. We now have a once in a generation opportunity to refashion, reconstitute, re characterize what what goes in ah ah ah centers.

And I think that’s a mix of new emerging brands, smaller brands, brands that are harder to access.

Will people be comfortable going through these experiences? Will they go to movie theaters?

They’ll be in malls anchoring them.

It’s a great question. And the way I think about it is. If you can get the same thing basically online, you will. So consumer staples buying paper towel. Why would you go to the grocery store to do that when you can buy that airline? Right. There’s nothing nice or experiential about buying paper towel or, you know, basic nice laundry detergent. I think more of the things that don’t require an intimacy between brand and product and consumer, those things will happen more and more often.

But I haven’t had a haircut in three months, four months. I can’t do that online. I can’t get a haircut online.

I got to go to a physical space and someone has to cut my hair. There’s all sorts of experiences like that to simply can’t happen off line.

But I think the net of it is the consumer is going to have a higher bar. And so it puts more pressure on retail landlords to deliver a differentiated experience and to curate that experience where that, you know, what a mall was supposed to do, which is create that serendipity.

Oh, that looks interesting. Let me walk into that store. You can’t do that. The Gap, Old Navy and Abercrombie anymore. It doesn’t do it because you can buy the same things online. And so that’s, I think, what’s going to happen. So do you think there’s some parallel with what employers are going to have to do in terms of not quite having experiences for their employees? Because that sounds like I’ve spent my whole career working at Google, which I have.

But we’re going into the office is going to change dramatically. And what employers as well as landlords are going to be providing is going to change a lot.

It was already happening before this crisis. And again, this crisis accelerates. There’s a different trend, but a related trend, which is. You don’t need to all work in the same office for most companies. 

I think what most companies and I would put Fifth Wall as a company that falls in this bucket is they never really wanted to test it. We were too stuck in our ways. It’s too easy to have an office. And that was just the way things were done. A new work, five days a week, you know, nine to five. This changed all that. It, like, just shocked the system. And everyone was thrust into this new experience of running their companies remotely and interacting with their colleagues remotely.

And the general sentiment and this is anecdotal, I don’t think there’s any real data to suggest this, but anecdotally, it seems like most professionals have been surprised. Borderline shocked at how productive they are working remotely. I certainly am.

The same thing. Zoom in. Telepresence has been around for years. I just never used it. And so there’s been this moment in time where everyone’s done that and creating a full service, immersive experience of an office, becomes more incumbent on landlords and tenants to provide that for their employees, because otherwise, why do you need to go to an office and take that risk and deal with that inconvenient.

But David did a really nice thing and called our portfolio company CEOs together last night, actually talked about returning to the office. And while a lot of people said that they’re feeling more productive. You lose the camaraderie. And so, you know, how do you onboard a new employee? You know, it’s not about productivity. It’s about in inculcating them.

You said one thing that was interesting. You talked about the nine to five, five days a week. Do you think that’s going to change?

Yeah, I do. I’ve always wondered that. I’ve always wondered why, you know, we it’s like if you look at our economy and our labor force, we went from a largely agrarian economy to a largely industrial economy, to a knowledge economy. And yet our workweeks didn’t change. And I think the reason for that is the same reason that everyone continued to just do things the way they’ve always done, that there was just a kind of inertia to that change.

But it doesn’t make sense. And I never really actually thought a tremendous amount about that. But I was like, why do we work five days a week? Why do I ask my employees to commute to the office at the exact same time as everyone else is commuting to the office on the exact same days of the week, irrespective of whether jobs relate to one another. And there’s an opportunity to reimagine that. Now, there are certain structural considerations, right, that you still have to consider.

Many people are religious and they still want the weekends for religious observation reasons. You also have schools, right, that have a particular time. They operate. So there’s certain reasons why the status quo is going to be fairly sticky. But I do think you’ll start to see companies reimagine that. It might be smaller offices where three days a week, half the company comes in another three days, another half of the company comes in or you have kind of rolling teams or it’s more episodic.

You work in the office for three months. You travel remotely for three months.

I think it just becomes more fundable and more flexible over time. How do you think the industry is going to take up the slack if fewer people are going to go into the office or if people are going episodically, you probably need less real estate.

It used to be that the real estate industry self conceptualized itself as, what do we do? Well, we build buildings. We keep the heat in. Right. And we keep or we keep the cold in depending on the climate. We keep the bad people out.

We keep the rain out. We keep the lights working. That’s what we do. The reason many companies like working in, for example, industrious one of our portfolio companies is that it’s turnkey.

They show up in the office. It’s a beautiful office, nicely designed, beautiful aesthetic, but also all the things you need as a knowledge worker or in that office and to manage a team of knowledge workers are all there. You have functioning Wi-Fi. You have good acoustics. You have good lighting. Well, that’s been thought through. You have IT support. You have coffee. You give everything that you want. And it’s that tenants have started to conflate in their minds the experience of an office with renting space from a landlord.

We’ve been I think that for a very long time, start building to start cycles. All that tell you that exposure. That is payment cycle.

Right. Particularly, it’s going to start to converge with. These are the services that I’d love to hear a little bit about your the real estate industry. And I think the most forward looking, landlords will use all that to their advantage to really advise tenants.

And hey, here’s how you should think about your workforce. I know what works for companies like yours. And that’s very compelling, I think.

So let me ask a different question, though, because most of the entrepreneurs who are listening to this show are probably not the 10 thousand person workforce. Right. When they’re approaching a landlord, let’s say it’s early in their move to being having an online presence. What should they be asking for now? Maybe they can be asking for what should they be thinking about now that in some sense the balance of power maybe has shifted some in terms of what they can get from landlords?

The main thing is flexibility. Right. You know what, this crisis is underscored for so many people and it’s not just small companies, it’s big companies, too. Is that the future is very hard to predict. 

And by the way, that is a theme that is true across the real estate category. This kind of consumerization of real estate, where if you think about real estate, is, you know, a a a service that’s being sold to any kind of customer, whether it’s a tenant of a multifamily building or a tenant of a shopping mall or an industrial tenant, they’re all starting to think like consumers, which is I want more flexibility and I want more services.

And that’s a trend that’s been happening for a very long time. Yes. So our carbon impact bond is very much model off all of our core funds, which is we look at problems in for the real estate industry where technology and emerging new companies can provide a solution. And so one of the things that we focused a lot on, in part because I personally care a lot about it, as does our firm, is sustainability.

And what most people don’t realize is that real estate is arguably the single most polluting industry in the US. It’s funny because many people that consider themselves sustainability experts are very quick to talk about things like heavy manufacturing and transportation, mining. But those are polluting industries, but they’re just so much smaller than real estate that they don’t have the energy, consumptive power of real estate. So real estate is responsible for 30 percent of all carbon emissions. The US is by far the biggest single manufacturing.

What is and which component of real estate is causing that? The use of it evidence happening inside a building. So it’s like it’s back or something. Yeah, the lights that are lighting all of our offices right now. Like that is that is costing energy. You’re spending. You’re contributing more to carbon emissions by virtue of the utilities in your offices and your homes than you are on your cars. And so the I think in the first wave of sustainability, there’s a lot of focus on things the consumer can do which are superimportant, like driving a electric car or not using a plastic straw.

But the actual impact, the actual magnitude of those changes is very small. Like, if if we want to solve the climate crisis, there is no other way than through real estate. It is the single most important space to solve. And it’s true not only on the operations level, but in the construction of real estate’s assets as as as cement cures. It releases enormous amounts of carbon into the environment, more than you could generate on a given building by driving back and forth across the US to pickup truck.

It’s just it’s dramatic the scale difference in real estate versus most other industries. So that’s the kind of table stakes is like real estate’s really important in the climate crisis. And what’s happened is that three constituents have started to really recognize this. The first is tenants. So the Googles, the Netflix as the world’s, they’re starting to ask questions of their landlords to say, well, is this a LEED design building? What are the sustainability standards like? What are the materials in this building?

That’s one side of it. Second side is capital markets. So lenders, insurance companies, major capital markets, investors are saying we will preferentially deploy capital to lower no carbon impact real estate owners to real estate owners are saying, well, we have to do this. The market is telling us to do this. The third thing that’s changed and this is been more recent is that cities have started to enact carbon neutrality laws.

So at a federal level, the Trump administration pulled the United States out of the Paris climate accord. And the Paris Climate Accord has certain carbon neutrality standards for real estate assets. So the US at a federal level doesn’t have to comply. So what happened last year was that both New York and Los Angeles enacted new carbon neutrality laws where if a building is in violation of them as early as 2024, they start to get fined and the fines are very punitive and very large.

If you look in New York alone, defines are so heavy for real estate owners that don’t comply with these new carbon neutrality laws that even in a conservative assumption, probably $400 to 500 billion with a B is going to have to go into retrofitting existing buildings to become energy efficient.

That’s in New York City alone. 

There’s an interesting thing right now, it feels like where landlords are sort of regulating office opening in a way that you’d expect almost our government to be doing. But it seems like there’s a really interesting thing going on. Yeah, it’s is.

Well, this this crisis has thrust a responsibility on landlords. They never had to actually internalize, which is the well-being of the occupants of their buildings. And that’s true of rain and the elements. And, you know, traditional security, but it’s now true of microbes as well. And so I think landlords are increasingly conceptualizing themselves. It’s like micro mayors, right? Like they have control over their building. Right. A building is a small city of all different sizes.

And so there is a real social. That goes hand in hand, I would argue, with environmental responsibility that building owners have. And this this crisis has just thrust this on them. And I think the the CEOs of real estate companies that recognize that their responsibility is a lot more grave and a lot more important than a lot more socially consequential than they ever would have imagined. They’re embracing that as opposed to running from that. And so, yeah, they’re actually taking a very proactive role in deciding how people are going to come back into their buildings because they care about their the occupants of their buildings.

They really should care.

That’s interesting.

OK. But I want to ask. I want to make sure I get some perspective on all this. This is a really interesting conversation. But, you know, you only started this, what, three or four years ago, right?

Yes. About three and a half years ago, we started Fifth Wall, that’s incredible.

It’s awesome. And someone has given you people people give you a billion dollars. It’s awesome. Congratulations, first off. Thank you. What do you feel like?

I have been some of the surprising learnings for you. As it is surprising learnings for me were. You know just how challenging it is to build a really institutional asset manager inherently. But then also to build it with the complexity that we’ve we’ve put on ourselves, which is having a strategic component to our LP base in these real estate owner operator developers and serving them and supporting them and encouraging them to adopt our new technology. That takes an enormous amount of work.

We really put our shoulder into into that to do that well. And I remember when I you know, when I first launched Fifth Wall I first went out and fundraised as a one one thing that I just remember, which was is funny now to think about. So I went out to a lot of LPs and I was like, yeah, I’m going to start a real estate tech fund. And LPs would say, well, it’s not like kind of nich isn’t that kind of small?

And it’s like, no, it’s not. And the fact that you think that is exactly why many venture funds don’t perform well, which is they missed orders of magnitude with respect to scale. Real estate is the largest industry in the United States. It’s the largest capital markets, bigger than the US stock market, the largest debt markets, largest store of consumer wealth. And it’s been one of these late adopting industries. And I think LPs is that we’re conditioned to thinking about gaming or cannabis or kind of these emerging hot new spaces oftentimes missed huge opportunities that we’re hiding in plain sight and real estate just happen to be one of them.

Does it feel up into the right? Like, do you feel like do you have the opportunity to sort of take a step back and be excited about what you’ve built?

Yeah. I mean, I’m an entrepreneur at heart. So I approached building a venture fund, very much like how I approach building companies that I founded in the past. But what’s so different about our firm is that there are these network effects and we feel them. 

What I believe is that a single solution, a single firm, and I hope its Fifth Wall that supports an industry adopting tech leads to the best outcomes.

I believe fundamentally that that is the Paredo efficient outcome in that industry around innovation and that the wrong solution is a network of smaller funds or cottage industry of corporate venture investors trying to do it on their own and entrepreneurs having no idea where to go. That was the world we were three years ago. And I think because I have that vision that there should be a single solution just in our industry. And I don’t take over every industry, but in the real estate industry, every corporate should work with us and we should be able to help all the best real estate tech companies.

And we’re very early on into that. I mean, it sounds impressive that we have a billion two and 54 real estate corporate jets, but this small percentage of the total actually is a lot more that we can do.

Well, you’re good.

I hear founder pitches all the time, and you you outline a compelling vision. David, do you have something? There’s been so many bumps in the road. Look, I started a venture fund without having ever worked in the venture industry. So, you know, that’s a challenge. I approached building a venture fund like a startup, like a startup see approach, building a startup. I think that actually gave us some advantages.

As you can imagine, and thinking about things differently. But I didn’t have a lot of the kind of requisite like how do I build an investor relations function? Like how do I built like the core stuff that I think many would is second nature to most. Most venture capital GPs wasn’t second nature to me. I had to learn it all. But I think in the process of learning it all. I always tried to reimagine what it did.

And as you can imagine, a lot of things didn’t work out of the gate. And so I, I kind of tried and failed in a lot of systems like basic stuff, how we do our CRM, how we track deals, how we support our portfolio companies, how we structure deals, how we track performance of our investment team, how we build new products, how we take them to market. I’ve iterated on all of those with models that I think to most venture funds would be very atypical.

And so in all respects, I think we’re different. But I want to be clear. The path of getting to where we are has been littered with tremendous failures.

Do you think a lot of that growth is going to come in LA? 

I think we’re going to build more of an international presence.

L.A. will always be your headquarters. And is our headquarters today. So, you know, the reason we’re in L.A. is I love L.A.. I think L.A. is a fantastic place to be. I’ll say this. I think it’s just I don’t understand why people live in San Francisco when they could live in L.A.. And think it’s crazy. It’s a testament to human irrationality. But they do. But I think more people are becoming rational and they’re moving to L.A. and I’d be surprised if this crisis doesn’t instigate more of that.

Now innovation can happen anywhere and it happens where people are and where people are happier.

And L.A. is absolutely one of those places I think that’s great. I think we agree, and I think it does a great note to end on. Yeah. Well, thank you so much.