Canada’s steadily expanding roster of tech companies aligned with the sustainable and smart buildings market reflects growing demand from end-users and draws capital from increasingly enthusiastic investors. The recently released 2024 Sustainable Proptech Report lists 131 Canadian enterprises with some quotient of institutional backing that provide sustainability-related technologies to real estate or construction.
That’s climbed from 68 companies in 2021 when the venture capital fund, Venturon, inaugurated the report. This year’s edition primarily highlights companies at the early and growth stages, along with a smaller number that predate 2014. Collectively, they operate in four sub-sectors — asset management; analytics/research; sustainable construction; and a broader envelope labelled, smart cities, which includes energy transition, infrastructure and mobility services — and are headquartered in seven different Canadian provinces.
“The map reflects almost $3.5 billion in funding since inception of these companies to date,” Joanna Creed, director of operations and general counsel at Venturon, told attendees of an October event to mark the report’s release. “Since 2023, notwithstanding that the past 12 months haven’t been the best economic environment, we’ve seen almost $823 million in new funding flow into these entities.”
About $495 million of that has been channelled into companies operating in the smart cities niche, partly attributable to what Creed typified as a few “outsized” capital raises. The smart cities and asset management categories each account for roughly a quarter of the companies on the list, with a smaller share (about 14 per cent) tagged as analytics/research specialists. More than 36 per cent offer sustainable construction products or services, including a significant subset of 15 companies focused on some aspect of modular construction and off-site mass fabrication of building components.
Climate volatility, regulatory pressure and construction labour shortages are cited among the key drivers of end-user demand, while the opportunity for lucrative returns and requirements to comply with their own ESG mandates are seen to be luring investors. Creed and Venturon’s founder and managing partner, Deena Pantalone, touched on those themes, with contributing insights from other real estate industry insiders.
“As proptech demonstrates its value, it’s likely to become a standardized practice across the real estate industry. We’re no longer going to see little pilot projects here and there, but more of a widespread adoption,” Pantalone maintained. “But, innovation is difficult. It’s not a linear path.”
Addressing climate-related risks and labour shortages
This year’s report was released during the brief interval between Hurricanes Helene and Milton bringing death and destruction to the Caribbean, Mexico and the United States. Braiden Goodchild, who leads PwC Canada’s advisory services for mergers and acquisitions and ESG real estate deals, noted the rising concern about the risks that severe and volatile weather poses for the built environment.
Many owners/managers are now assessing the vulnerability of their portfolios and, in turn, making decisions about resilience upgrades or the sell-off of assets. Regardless of whether they’re actively responding to physical climate risks, owners/managers are also likely to encounter climate-related costs and consequences in their insurance products and can reasonably expect that lenders will soon be making similar demands. For example, Deutsche Bank is among major global financial institutions now requiring borrowers to meet climate risk criteria.
Goodchild shared some findings about sentiment in the Canadian commercial real estate industry gleaned from preparation of this year’s report on emerging trends, which PwC produces in partnership with the Urban Land Institute. That work involves interviews with about 200 senior executives.
“Climate tech convergence with the built environment was massively thematic in the responses, and this year there was strong sentiment to move from beta-testing to integrating at scale,” Goodchild reported. “With that backdrop, there’s no better time to be speaking about sustainable proptech. We do know climate tech continues to raise a large and outsized share of the VC (venture capital) fundraising pile.”
Meanwhile, weather has always influenced construction productivity, but now it’s being factored into the business case for modular construction (also known as panelization) and off-site assembly technologies. For now, modular components and emerging mass timber options typically come with upfront premiums over conventional development approaches. However, Creed gave the example of a Toronto midrise office developer who gained time savings from an uninterrupted construction schedule to counterbalance the extra costs associated with mass timber structures.
“Eighty construction days were lost due to rain last year — they couldn’t dig basements — so the industry is looking at innovation as a way to solve those delays,” she said. “Panelization costs more upfront, but the ability to centralize labour, order materials in bulk and avoid weather delays allows them to save significant time in construction and therefore reduce interest expense.”
Some of those efficiencies can also offset an already problematic construction trades shortage that’s projected to worsen with a coming wave of retirements. That labour scarcity is likewise motivating innovation, but Creed acknowledges there have also been some hiccups that have made builders wary of embracing what are still relatively nascent technologies. Nor does modular design necessarily fit comfortably with some architectural ethos.
“Designs with boxy shapes are great for panelization, but not every project is going to look good to everybody,” she said. “The thing to emphasize is that less choice doesn’t mean low quality. New concepts require a paradigm shift and we can see that the market is starting to understand that shift.”
Regulatory and competitive pressures underpin decarbonization business case
Regulatory pressures are multi-layered, intertwined and arise from the oversight of capital markets and financial instruments as well as direct government measures. A major policy shift on one level doesn’t necessarily have proportional flow-through impact in the total business case equation. Looking to the United States, for example, state, municipal and Securities and Exchange Commission (SEC) requirements will continue to hold sway despite a change in the federal administration.
Pantalone identified New York City’s local law 97 as one particularly pertinent example. As of 2024, more than 34,000 commercial and non-rent-controlled multifamily buildings must stay within a maximum threshold for greenhouse gas (GHG) emissions or pay a penalty of USD $268 (CAD $377) per tonne of emissions exceeding the limit. It’s intended that allowable annual emissions volumes will be adjusted downward as the City aims for a 40 per cent emissions cut from subject buildings by 2025 and a 50 per cent reduction by 2030.
Designated real estate owners will have to submit their inaugural emissions reports by May 1, 2025. It’s estimated that about 5,400 buildings will exceed their 2024 emissions limits, translating into what’s projected to be roughly USD $900 million (CAD $1.27 billion) in fines. That’s also occurring in the context of a citywide average office vacancy rate of 17 per cent.
“We’ve been hearing this conversation more frequently. Regulations are evolving everywhere. You really have to weigh the risk of those compliance costs,” Pantalone submitted.
Competitive pressures are also exerting force, particularly in the office sector where tenancy norms have been upended in recent years. Evidence shows that buildings with superior indoor environmental quality (IEQ), high-end amenities, capacity to support tenants’ digital connectivity needs, and high performance to minimize operating costs and safeguard against future regulatory penalties are continuing to attract tenants and hold their value — even as the broader market undergoes tumultuous restructuring.
“We’re seeing developers bake sustainability into their projects and proformas to really realize two things: 1) greeniums — i.e. a premium on valuation at exit; or 2) operational efficiency while they hold the asset itself,” Goodchild observed.
“I often wear two hats as an investor and as a developer. It’s obvious to me that, if we think ahead and stay ahead and start planning and adopting innovation, we can build stronger value for our portfolios,” Pantalone concurred.
Concurrently, investors in sustainable proptech foresee ever-increasing demand for enabling products and services. That’s also envisioned to flow through to the entire built environment as retrofit momentum builds.
The 2024 sustainable proptech report sketches out the involvement of the big Canadian banks — noting that RBC, TD Canada Trust, Scotiabank, BMO and CIBC all have committed to direct hundreds of billions of dollars toward various forms of climate-related financing by 2030 — and highlights 16 venture capitalists considered to be prominent investors in Canadian proptech. The latter group includes four firms, variously founded between 2014 and 2019, that specifically focus on proptech, six defined as cleantech specialists and six generalist investors.
Joining the presentation via video link, Michael Beckerman, chief executive officer of CREtech, a U.S.-based network that facilitates capital raises for sustainable proptech, drawing on a coalition of major climate-related venture capitalists, enunciated the opportunity as he sees it.
“Decarbonization of the built environment is definitely a moral objective, but it’s also a financial one,” Beckerman asserted. “When we decarbonize the built environment, not only are we going to transform society, we’re going to transform the economy. We are going to drive greater value and resiliency into the built environment.”
“We call this the opportunity of threats,” Creed advised. “Interest rates are coming down, tech valuations have reset and the real estate industry is seeing increasing liquidity. Now is really the time to capitalize on all this.”
