We are in the midst of a digital transformation of all aspects of the real estate industry, including development, marketing, transactions, financing and management. The convergence of property and technology, known as “proptech,” presents exciting opportunities for industry stakeholders, along with distinct legal considerations that need to be addressed.
Canada is a leading proptech hub, hosting more than 500 active proptech startups that are reshaping the landscape of commercial real estate, residential real estate, and construction technology. While 40 percent of these startups have been founded in the last five years, the industry is entering a phase of maturation, with the top 25 startups raising at least $30 million in funding.
Five Top Considerations in Dealing with Proptech in Canada
1. The Digitalization of Real Estate is Due to Certain Disruptive Factors
These factors include (1) an explosive growth in technological innovations—particularly the Internet of Things (IoT) and artificial intelligence; (2) the pandemic, which accelerated the adoption of digital solutions and remote work, and introduced entirely new health and safety concerns in commercial spaces; (3) a surge in construction costs; and (d) a push on a global scale to reduce the emissions intensity and energy consumption of the built environment. The appetite for smart green buildings has intensified accordingly, and proptech solutions are critical to their effective implementation in Canada.
2. Key Technologies are Improving Buildings and Processes
Smart building technology integrates IoT devices and sensors to optimize building operations, including HVAC systems, lighting controls and occupancy monitoring. Energy management technologies optimize energy usage in buildings through smart meters, energy monitoring systems and demand-response strategies.
Fintech solutions and blockchain technology are playing a growing role in proptech. Blockchain would allow for things like the tokenization of real estate, enables the use of smart contracts, and facilitates convenient and instantaneous payments to be made between tenants and landlords, using embedded and third-party payment solutions.
The deployment of AI-powered generative design and building information modelling systems allow for critical items such as energy use, construction costs, and emissions to be modelled and real time, data-driven decisions made for any project.
Canada's Budget 2024 has recognized the growing role of technology in the building sector, as Bennett Jones has reported on in a previous blog, New Funding for Proptech in Canada's 2024 Budget.
3. Proptech Poses Challenges for Data Privacy, Cybersecurity and Intellectual Property Rights
Proptech solutions rely heavily on and generate significant amounts of data, including personal and financial information and behavioral data. To address concerns about how such information may be collected, used and disclosed, privacy considerations need to be proactively embedded in the design and architecture of any such solutions, along with other steps to ensure compliance with privacy and other data protection laws.
Proptech companies are potential targets for threat actors given the significant amount of data that they accumulate in connection with their service offerings. As a result, the implementation and maintenance of appropriate cyber hygiene will continue to be of paramount importance.
Proptech companies are often built on innovative technologies, including proprietary software, algorithms, databases, construction methods, and business models. Protecting these innovations through patents, copyrights and trademarks is crucial, but can be challenging given the fast-paced nature of technological advancement, and the inherent difficulties of patenting AI.
Nevertheless, given the importance of protecting an organization's IP rights, agreements with technology providers, architects, engineers, and subcontractors should clearly address intellectual property, including any ownership or licensing considerations. Ongoing issues include: (1) ownership of IP rights in work products—particularly in the context of AI-generated works; (2) who, as between the property owner, property manager and resident, will actually be the licensee; and (3) the allocation of liability (including in the context of failure of a proptech solution to perform as anticipated, and IP infringement).
4. The Regulatory Landscape Continues to Shift
By some estimates, the real estate sector accounts for nearly 40 percent of all annual greenhouse gas emissions (primarily due to the energy used in space and water heating). There is a concerted effort on a global scale to decarbonize the built environment, and regulations are becoming more stringent in response. Across Canada, levels of governments are creating and implementing net-zero emissions strategies for new and existing buildings. Most are aiming for net zero by 2050, with some sooner. There are numerous targets and actions already in effect, with amendments to building codes (for new buildings and retrofits) and new incentive programs expected to advance sustainable construction and operations. Smart green buildings are only possible through the deployment of the technologies described above, and these technologies will be fundamental to achieving—and demonstrating—regulatory compliance.
5. Proptech as Conducive to Net Asset Value Growth
Proptech innovations contribute to net asset value growth in several key ways:
- data analytics and predictive capabilities allow for accurate forecasting of property values and rental incomes;
- the automation and digitization of property management processes streamline operations, reduce costs and enhance efficiencies;
- tenant satisfaction is improved through better communication channels, personalized services and superior amenities, leading to higher occupancy rates and rental incomes;
- sustainable building practices—increasingly valued by investors and tenants alike, as smart green buildings command higher rents and lower operating costs—are more easily incorporated; and
- by offering the opportunity to generate alternative streams of revenue—data can be monetized, subscription fees can be charged for use of certain platforms, and renewable energy generated on-site can be sold back to the grid.
The world's largest banks are recognizing that "dumb" buildings risk turning into stranded assets that cannot be sold or leased, and leading businesses are utilizing proptech to both stay ahead of their competitors and differentiate themselves in the market.
Protech’s future in Canada is promising with over 100 incubators and accelerators ready to support the next startup. As the industry matures, strategic partnerships, integrations and consolidation of companies through mergers and acquisitions will be top of mind for founders and investors. Alongside these advancements, a new set of legal challenges emerge.
The authors are grateful for the assistance of Pamela Clark, student-at-law, in connection with the preparation of this article.
