First American’s Paul Hurst: Assessing Real Estate Innovation in a Rising Mortgage Rate Era

Paul Hurst, Chief Innovation Officer with First American, Santa Ana, Calif., shared his thoughts on proptech funding and the state of innovation in the real estate economy.

MBA NewsLink: How do you view the current state of real estate innovation?

The frictions we are solving for in the real estate transaction remain paramount – how to make the process better, faster and cheaper by combining the best of people and technology. The most recent generation of business models operated in a decade-long bull market and were buoyed by a zero- or near-zero-interest rate environment.

The environment is much different today, particularly with interest rates rising and uncertainty regarding how long the Federal Reserve’s fight against inflation keep rates elevated. This context hurts some business models more pointedly, namely capital-intensive financing solutions, refinancing-centric businesses, and companies using capital as a competitive weapon to grow with limited underlying innovation.

As the bullish excitement in these solutions wanes in the wake of the current macro-climate and the bursting of the SPAC and private investment bubbles, the jury is still out on long-term valuations of these business models.

MBA NewsLink: What can be learned from the last wave of venture activity in real estate?

Looking back, there are examples of areas that perhaps attracted too much capital too quickly, including refinance-centric mortgage and title businesses, cycle-specific solutions (e.g. cash offer companies), and certain brokerage business models. There was also an over-emphasis on technology that neglected the power of the agent and the people involved in the mechanics of a real estate transaction, including loan officers and escrow officers. However, that does not diminish the importance of solving for the frictions in real estate transactions and embracing the secular shift of the digitization of real estate.

The whirlwind of real estate investment over the last couple of years highlights the need for a long-term perspective and breadth of historical knowledge in the market. Everyone has been reminded how real estate is cyclical in nature, so it takes time and committed resources to build technology that can handle the complexity of these transactions.

MBA NewsLink: Where does real estate innovation go from here?

In tumultuous times like these, power tends to shift towards incumbent businesses – either startups with scale and liquidity or existing industry stalwarts who can continue innovating through the down cycle. In general, the current macro-climate sets us up for increasing industry consolidation, whether organic or inorganic. Merger and acquisition activity is likely to accelerate in the next 12 to 24 months, driven by either those incumbent businesses or private equity, or both. So far, there has been a steady flow of smaller ‘acqui-hire’ type M&A activity, but the longer the current macro-climate persists the more pressure there will be on companies to either become profitable or find a long-term capital source. This will help to narrow the bid-ask spread in the M&A market, which is currently a significant blocker to clearing transactions.