SoftBank’s Latest Real Estate Headache: Setbacks at Katerra

Katerra is one of a growing number of SoftBank-backed startups that have struggled despite having billions of dollars in venture capital at its disposal. SoftBank also has poured money into WeWork, fueling a rapid expansion that led to heavy losses, unnerving prospective investors when the company tried to go public. 

Like WeWork, Katerra has promoted itself as an efficient, high-tech alternative to traditional real estate companies. But Katerra was overly optimistic about how much it could drive down costs. This year, it has backed out of at least half a dozen apartment and hotel projects in the U.S. that it had committed to build, former employees and customers said. More than a hundred employees have been laid off.

JZ Rigney, a Katerra spokesperson, said in an email: “It is common for construction deals to pause or stop for a myriad of different reasons. The changes we have made are a sign of a healthy, but evolving and fast-growing firm.” 

The issues could further dent the image of SoftBank’s Vision Fund, which has invested more than $1 billion in Katerra, valuing the firm at $5 billion. Aside from likely write-downs on its investments in WeWork and in Uber, which had a dismal IPO, less prominent SoftBank portfolio companies have taken hits recently. Fair, a car leasing startup, is laying off 40% of its staff. Wag, a dog-walking startup, might sell itself at a steep discount.

A SoftBank spokesperson said in an email that the Vision Fund is “pleased” with Katerra’s performance, which includes “approaching $2.0 billion in revenue this year, fast growth and a near-term path to profitability.”

“The Vision Fund [exists] to invest in big, ambitious opportunities like Katerra,” the spokesperson said.

SoftBank has invested heavily in real estate–focused startups, an area historically shunned by venture capitalists because of the companies’ significant capital requirements. In addition to Katerra and WeWork, the fund also has significant stakes in home-selling startup Opendoor, self-storage company Clutter, smart glass maker View and residential brokerage Compass. 

Possible IPO

Katerra CEO Michael Marks, who previously ran electronics manufacturer Flextronics and, briefly, Tesla, has told employees Katerra is aiming to go public next year, which would be a way for the Vision Fund to return some money to investors. It isn’t clear if that timeline has changed in the wake of WeWork’s struggles, or Katerra’s own issues. Rigney declined to say if the firm is still planning an IPO next year, adding that “we’re focused on growing our business and accelerating toward profitability in 2020.”

The firm has many of the trappings of a hot tech company, providing daily catered lunches and other employee benefits atypical for construction firms. But most employees don’t have stock options.

Since the firm’s launch, Marks has tried to build Katerra into a hyper-efficient real estate business modeled after his experience manufacturing phones and computers at Flextronics. Central to his pitch is that, by accelerating and simplifying apartment construction, Katerra can play an important role in addressing the severe housing shortage facing some cities. The company has looked to reduce construction costs by purchasing pipes, lumber and other materials directly from suppliers, without relying on subcontractors, while building walls and roof trusses in factories to reduce labor expenses.

SoftBank has invested heavily in real estate–focused startups, an area historically shunned by venture capitalists.

On several projects, however, Katerra found it couldn’t save as much money on construction as initially thought. That led to cost overruns on dozens of projects and a reassessment of the types of projects it took on, former employees and customers said. The firm lost money on many of its early construction projects, former managers and executives said.

In an effort to improve how it assesses costs on projects, Katerra brought in executives from two traditional construction firms it acquired this year, UEB Builders and Fortune-Johnson General Contractors, to examine the parent company’s cost estimates on projects, two people familiar with the matter said. The firms found Katerra would be better off hiring subcontractors for certain parts of the construction process, a common step among conventional builders, rather than relying on their own employees, two people familiar with the matter said. 

Earlier this month, the company laid off more than 100 people in Arizona, Colorado and Washington. An exact number couldn’t be learned, but it was likely a small portion of Katerra’s total. The firm has more than 8,000 employees. 

Among the projects that Katerra offered to build but later abandoned because of cost issues include apartment buildings in Sunnyvale, Calif., and Dublin, Calif., a senior living facility in Nevada and apartment buildings in Texas, people familiar with the matter said. Even the Wolff Company, one of the country’s largest apartment developers that helped start Katerra, has stepped back from working with the firm, including scrapping an apartment project in Sacramento.

‘Enormous Challenge’

Meanwhile, Katerra is still working on some key U.S. projects, including an apartment building in Denver and a college dorm in Colorado Springs. Rigney, the Katerra spokesperson, said that by the end of the year Katerra will have completed six prefabricated projects in the U.S., spanning 950 apartment units. 

Katerra has a raft of initiatives around the world. The company has been building business in India and in Saudi Arabia, where it signed a commitment to build thousands of homes made out of concrete. It finished a factory in Spokane, Wash., to construct buildings from wood. It has considered spinning out its own software division to compete with Procore, a construction software firm expected to go public next year. And it sells Katerra-branded light fixtures out of Home Depot.

The high expectations surrounding Katerra, however, are mostly tied to its goal of upending the apartment building market in the U.S., where it has encountered its biggest difficulties. The Information previously reported that Katerra’s Phoenix factory was using less sophisticated technology than anticipated. (It is building additional factories in Tracy, Calif. and Hyderabad, India.) And turnover among managers and executives was high. Differences in local building codes around the country also has made it more difficult to create easily replicable buildings.

Construction is a “hard market to be a capital-efficient startup,” said Michael Rolnick, former CEO of Unifi Labs, a construction software firm that has worked with Katerra to build 3D models of building materials. “The folks at Katerra are biting off an enormous challenge, trying to standardize and create efficiencies. The outcome of what they are doing isn’t something you will see in three years. It will be in five- to 10-year horizons.”