Site logo

Estimating Proptech TAMs

Eliminate Disruption from your Proptech Vocabulary

Proptech founders, repeat after me. Real estate is not a 300 trillion dollar market for you to disrupt. Nor is it ripe for disruption. I’m not being a pessimist- there is no startup that can disrupt real estate. So don’t you dare put down a T for trillions in your pitch deck slide on TAM.

I cringe every time I hear a founder or VC say that real estate needs to be disrupted; or even worse– that they will lead the disruption. It’s an immediate red flag that signals that they don’t understand the sheer size and segmentation of the industry.

Disrupting real estate would require causing a global change across the entire life cycle of every asset class in real estate. Look at the visualization below to get a sense of how large the market is when you consider geography, specialty, and asset class (and I wasn’t even able to visualize asset classes here!).

Real Estate’s Segmentation

The Most Disruptive Proptech Companies Haven’t Made a Dent

WeWork has caused waves in how office space is utilized, and they have locations in 23 countries. But Co-working is such a small segment of the total real estate industry that I didn’t give it its own section. And they only operate in the office asset class. They failed miserably in residential. Ok, they also failed pretty badly in office. They have little to no disruptive effect on Pre-development, Construction, Transactions, or any other asset class. WeWork’s TAM is that tiny blue sliver in the illustration below.

Compass is a VC backed brokerage that quickly grew to one of the largest in the US and is now in 40 countries around the world. They only operate in residential brokerage. And most brokers I’ve talked to have told me the technology doesn’t even differentiate it from a regular brokerage. Aside from taking market share in brokerage, they have had little to no disruptive effect at all. I didn’t visualize their TAM, but it’d be very similar to WeWork’s.

AirBnb is probably the most disruptive proptech company ever. It’s pretty much global, and they have definitely disrupted hospitality by turning millions of single family homes and apartments into short term rentals. It has a market cap over 60 billion.

But their TAM only represents a small sliver of ‘brokerage’ (since they’re essentially a listings site), and they only operate in the residential and hospitality asset classes, which is around half of the building stock. They have little to no disruptive effect on Pre-development and Construction, Office, Retail, or Industrial.

Estimate Proptech TAMs by Choosing the Correct Segment

It should be clear now that even the largest proptech companies in the world can’t make a dent in real estate as a whole. But it’s also possible to create enormous businesses focusing on a single asset class in a single segment. So cast aside the urge to ‘disrupt real estate’, and think more in terms of ‘evolving [insert segment and asset class here]’. That’s the first step in properly estimating proptech TAMs.

I’ve categorized over two thousand proptech companies around the world into segments for my Global Proptech Directory. This directory is designed for proptech customers looking for the appropriate products for their real estate businesses. Since customers cluster naturally into these segments, these also make a lot of sense for estimating TAM.

Here are the segmentations you should think about:

  • Customer Type: Home Buyers, Tenants, Landlords, Developers, Contractors, Sub-contractors, Architects, Engineers, Brokers, Lenders, Insurers, Municipalities, Investors
  • Asset Class: Single family homes, Multifamily, Office, Industrial, Hotel, Retail, Educational, Healthcare, Infrastructure, Other
  • Life Cycle: Pre-development, Construction, Property Management, Transactions.
  • Segment:
    • Pre-development:
      • Appraisal & Valuation, Architecture, Interior Design, Cost Estimation, Due Diligence, Entitlements, Real Estate Data, Structural Engineering, Tax Rebates and Incentives, Underwriting, Zoning Analysis
    • Construction:
      • 3D Printing, Modular/PreFab Construction, Construction Equipment, Construction Management, Construction Robotics, Construction Safety, Contractor Marketplace, HVAC Systems, Inspections, Landscaping, Procurement
    • Property Management:
      • Accounting & Budgeting, Amenities, Clean Energy, Co-living, Co-working, Delivery Services, ESG, Event Space, Home/Building Automation, Maintenance, Pop Up Retail, Property Management Platform, Property Performance Analytics, Rent Collection, Security, Security Deposits, Short Term Leasing, Tenant Communications, Tenant Screening, Wellness & Fitness Services, Sustainability, Industrial Logistics, Legal
    • Transactions:
      • 3D Mapping, Brokerage & Leasing, Closing Legal, Co-ownership, Debt Financing, Equity Financing, iBuying, Insurance, Investing Platform, Title Services, Transaction Management
  • Regions & Countries: This is self explanatory. After all, real estate is by its very nature about location.

Each combination of these categories is an industry in itself that could likely be disrupted, albeit slowly due to real estate’s long life cycle.

For example, most of the work I’ve done as a developer (customer) was on multifamily buildings (asset class) in NYC (location), where I’ve worked on the entire property life cycle. I understand my needs as a proptech customer in that segment extremely well.

But I do not consider myself an expert in what insurers want for healthcare facilities in the Netherlands. Or the nuances of looking for a pop up retail space in London. Most of these combinations would take at least a decade to truly become an expert in. And the TAM for some of these are so small that you’ll reconsider raising VC money, let alone think about disrupting real estate.

Customer Value

Narrowing down the segment you operate in is half the battle. It identifies how many customers there are. The other half is identifying what each customer will pay you annually. From there, you simply multiply the number of customers in the segment by the ARR (Annual Recurring Revenue) to get your TAM, which is itself an annual figure.

So if you haven’t started thinking about your pricing model yet, you should. Otherwise, the next best thing is to figure out how much the incumbent product’s ARR is. You can do that by figuring out the average transaction cost and multiply it by how many times you think that transaction will happen for most customers.

Examples for Estimating Proptech TAMs:

  • A vacation home rental management platform based in the US:
    • There’s about ~140mm single family homes in the US; much more than any other building type.
    • BUT, the Census Bureau estimates only 5.7mm are used as vacation homes.
    • It’d be foolish to assume 100% of these owners rent out their homes when not using them. Suppose we’ve done some research and discovered 1mm owners want to rent it out. This is the total number of customers.
    • Next, how much would each customer’s ARR be? Again, suppose we do some research here and we arrive at Annual Occupancy of 50% and ADR’s of $150. And the platform will average 10% in fees. So the annual revenue would be: 50% Occupancy * $150 ADR * 365 days * 10% fees = $2,737.5 annually per potential customer.
    • TAM = $2,737.5 x 1mm customers = $2.7B. Not a dent-in-the-universe number, but pretty healthy if it achieves 5% market penetration!
  • Performance Analytics Software and IoT hardware for optimizing hybrid office utilization in Canada:
    • A cursory search showed that Canada has about 7.6B square feet of office space.
    • Suppose research has yielded that 25% of all offices now have a hybrid policy in place. That’s 1.9B SF.
    • The product is priced at 25 cents per SF per year.
    • TAM = 1.9B SF x $0.25/sf/year = $475mm. Meh, it’s not a game changer for most VC’s.

The biggest “A-Ha” moments in TAM estimates tend to come from creating new customer groups where they didn’t exist before. AirBnB did that with the first example by turning home owners, not just vacation home owners, into short term rental hosts. It essentially created hotel inventory out of thin air. Hoteliers called this phantom inventory for a while before they admitted AirBnB was disrupting their space.

Notice that in most cases, the underlying real estate value has very little to do with proptech TAMs! (Did I just hear a $300T balloon deflate?)

Need Help Refining your Pitch?

Estimating proptech TAMs, SAMs, and SOMs are parts of the early process in developing your product and refining your pitch. If you want a real estate developer and landlord in your corner, contact me on LinkedIn for advisory services and I can guide you towards PMF.