Crowdfunding has captured the imagination—and money—of investors throughout the United States. While it is used for everything from charitable campaigns to launching startup businesses or paying legal fees, commercial real estate may be the largest online investment opportunity for crowdfunding to date, according to a panel at the 2018 ULI Fall Meeting in Boston.
“The U.S. is home to the world’s largest and most liquid commercial real estate market,” noted panel moderator Brian Korn, partner and co-chair of financial services for Manatt, Phelps & Phillips. “This $14 trillion market is the nation’s third-largest investment asset class behind stocks and bonds. Crowdfunding allows real estate firms to reach beyond friends and family to investors anywhere,” he said.
Real estate crowdfunding—a popular term for online syndication—began to take off after 2012 following passage of the federal JOBS Act. Regulation A+ of Title IV of that law allows private companies to raise up to $50 million from the general public, not just from accredited investors. It was not long before about 100 firms popped up to facilitate investment in property development and ownership.
Now the number of active firms in this space is down to six, according to Darren Powderly, cofounder of CrowdStreet. Nonetheless, options can be confusing for potential investors. Publicly traded real estate investment trusts (REITs), which are regulated by the Securities and Exchange Commission, spread investors’ money across various holdings. Other crowdfunding platforms, like FundRise, also deploy funds to a diverse portfolio, but are unregulated.
CrowdStreet and Cadre, both represented on the panel, limit participation to accredited investors, targeting their contributions to individual projects. While these two firms are market leaders in real estate equity investment, there also are online options for investing in various types of debt.
“Online investment platforms like CrowdStreet and Cadre are revolutionizing how accredited investors build wealth in real estate while proving real estate operators and developers a viable fundraising channel,” said Powderly. “Online syndication as a means to capitalize middle-market deals is a reality today, with sponsors raising up to $5 million per deal. By 2023, we project that over 50 percent of middle-market commercial real estate equity–up to $20 million per deal–will be raised via online platforms.”
“In the past, it was typical for us to partner with institutional investors,” said Chad Cooley, cofounder of AWH Partners, which has amassed a billion-dollar U.S. property portfolio since 2010. Now, however, the firm realizes the advantages of connecting with a crowdfunding platform to raise equity.
“Even our smaller deals are of institutional quality,” Powderly said. “Our underwriting process mirrors that of a private-equity real estate fund. Beyond closing, we continue our involvement throughout the hold period, helping sponsors with ongoing reporting, distributions, providing K-1 tax information, and making sure the sponsor is reporting to investors regularly.”
Cadre takes a similar approach, said partner and managing director Greg Rush, who has 25 years of experience in institutional real estate investment. “We provide certainty to our sponsors, co-investing with them so we have skin in the game. Our investors have online access to all of the documentation provided to our investment committee.”
Not everyone in the commercial real estate industry is bullish on the crowdfunding trend. Remarked one leading economist who attended the Fall Meeting: “Crowdfunding is like the bitcoin of real estate, in that it’s nascent and not well understood. While the deals are transparent, the market as a whole is opaque.” Said another: “These investments are unregulated. Everyone’s happy when the market is good, but when there’s a downturn, it will be a different story.”
Whatever the future may bring, online real estate investing is destined to grow and evolve over the next five to 10 years, the panelists agreed. They foresee unique new investment vehicles similar to exchange-traded funds (ETFs), private managed accounts, and more robust secondary markets that allow investors to sell their shares before the end of their hold terms. In addition, the industry is looking at new ways to streamline transfer of asset ownership, potentially bypassing the local courthouse.