Real estate crowdfunding platforms that came of age in an improving market and growing economy following the approval of the JOBS Act in 2012 are being put to the test in the wake of the COVID-19 recession. Although crowdfunding still represents a fraction of the overall capital flowing to commercial real estate, they are credited with bringing tech efficiencies to fundraising and making it easier for individual investors to participate in direct real estate investment offerings.
NREI recently talked with three industry leaders—Jilliene Helman, CEO of RealtyMogul, Adam Kaufman, co-founder and COO of ArborCrowd and Tore Steen, CEO of CrowdStreet—to hear their views on the challenges and opportunities ahead.
This roundtable has been edited for style, length and clarity.
NREI: What kind of growth trajectory was the crowdfunding sector on pre-COVID-19?
Jilliene Helman: There is a significant growth trajectory. What started in 2012 as a nascent industry has now been responsible for probably over $3 billion in equity invested would be my best guess. If you look across the top players, the total real estate property value that has been involved in real estate crowdfunding is over $10 billion at this point. At RealtyMogul alone we’ve invested in more than $2 billion in real estate.
Adam Kaufman: It is hard to nail down the exact numbers, which has to do with the nature of the industry. It was born in the Jobs Act, which allowed a lot of different people to create a website and crowdfund for their own investments or investment opportunities for other sponsors. The crowdfunding market is still a small piece of the overall real estate pie. But with that said, it is a growing piece and multiplying quite quickly. There was public data around 2015-2016 that the market went from about $1 billion to $2.5 billion in a year. As recently as the end of last year, we saw new data that showed the market between $6 and $8 billion.
Tore Steen: CrowdStreet had an amazing 2019, raising over $511 million, with the top five deals raising $102 million in capital. This January we officially crossed the $1 billion milestone for total online investments by individual investors.
NREI: The commercial real estate industry saw second quarter investment volume drop by about 70 percent as investors pushed pause. How did crowdfunding investors react?
Jilliene Helman: There was a lot of uncertainty in Q2, and we were no exception to that. We took a breath in Q2 and we didn’t do any new transactions in March or April. We wanted to see what was happening in our world and our economy and really recalibrate our investment thesis in light of COVID-19, but we started doing deals again in June. We invested $8.5 million in a triple net office investment that was fully leased to NV Energy in Nevada, which is a fully owned subsidiary of Berkshire Hathaway. We also closed on an acquisition of a medical office building in Texas, which is a sector that we feel will hold up well during COVID-19.
One of the benefits of crowdfunding is that we do have a very diversified capital pool. There are over 200,000 members of RealtyMogul. Some of them are not going to feel comfortable making investments, while others are going to continue to make investments. So, we have seen all types of reactions, but we have seen demand for these new investments that we did.
Adam Kaufman: You had platforms taking different stances in the market. Investment sales were down a great deal, and there was just a tremendous amount of uncertainty in the economic climate. What platforms did was either decide to pause on launching new opportunities or continue to launch opportunities and leave the decisions up to investors. Some platforms that frozen redemptions have since opened back up. But overall, where the market is today, volume is just starting to pick up, and I think volume drives the investor interest.
Tore Steen: Even as our deal flow slowed in the wake of COVID-19, investor demand for the deals on our marketplace has grown. From March to June, we raised over $185 million in equity for offerings, including for several first-time sponsors who decided to leverage the power of online syndication as a new source of equity.
NREI: What has the climate for fundraising been in more recent weeks, and what do you think is ahead for the second half of the year?
Jilliene Helman: Our fundraising climate in July and August has, surprisingly, been stronger than ever. We’re actively working on new deals and we have a bigger pipeline of new deals than we have ever had. Part of that is because other traditional sources of financing are out of the market. I do think it is going to be strong in the second half of the year based on what we are already seeing.
Adam Kaufman: We decided that it was the responsible thing to pause launching new investments. Our investment model is one where we close on the transactions and then write the check for the equity through one of our affiliates before we syndicate out to the crowd. That gives us the ability to warehouse deals. We are still on pause, because I think the climate right now is still in flux. In order to feel confident, we want to see what the next round of aid looks like from the government to then make a decision to start pushing deals onto the platform.
Tore Steen: We had a remarkable July – including one of our best weeks of 2020. Our investors committed nearly $11 million in offers in the first five minutes for an office property in the Southwest. An industrial property also saw $19 million in offers in the first five minutes and eventually hit $27 million+ in just five hours. August has been similarly strong and if things continue to recover in the debt markets, we expect to see a strong second half of the year lining up.
NREI: Have you noticed any shift in strategies on where investors want to place capital?
Jilliene Helman: We continue to see really strong demand for cash flow. With interest rates where they are, investors are struggling to find the cash-on-cash yields that they want, and we find that deals that have strong cash-on-cash returns tend to sell faster.
Adam Kaufman: Yes, I think there are winners and losers in terms of asset classes. Hospitality is facing a lot of issues. Retail is fundamentally changing. Then you have industrial, single-family rentals and multifamily that are performing better. Investors are noticing that just as much as we in the industry are seeing that. So, I think appetite is shifting towards what assets are performing today.
NREI: Are investors concerned about how their existing crowdfunded investments are performing?
Jilliene Helman: We are definitely communicating more frequently, not because we have to, but because we think it is the right thing to do. Every investment and every asset class is reacting somewhat differently to COVID-19. The majority of our book of investments is concentrated in apartments, which has held up relatively well, especially when compared to other asset classes. I don’t think those investors are concerned. I think they realize that it is a blip in the radar when they are thinking about a 10-year investment cycle. Hopefully, this will only be a small piece of it given that collections have held up relatively well in multifamily.
Adam Kaufman: Absolutely, especially in the beginning of COVID-19. We are lucky in that we focus on multifamily and workforce housing in particular. People are not leaving their homes due to a lot of the restrictions in place. Therefore, you’re seeing it survive and perform comparatively. When this all began and investors started aggressively reaching out, we were able to articulate that to our investors and continue to do so. Those platforms that are not communicating well and don’t have a good grasp of what’s happening in their investments are going to be in trouble. When things do start to bottom out, I think we will see who the winners and losers ultimately are for those deals that don’t perform and haven’t communicated.
Tore Steen: Of course, and we have doubled—maybe even tripled down—on our requests to sponsors to keep investors updated on their projects via their online investor rooms. More information is better. At the same time, our asset performance team is relentless in analyzing how investments are performing.
NREI: Overall, how do you think the crowdfunding sector as a whole will be impacted by COVID-19? Do you see any particular challenges or opportunities ahead?
Jilliene Helman: There was always this fear about the next big downturn and how investors would perform. I think this is a pivotal time for our industry to show that we are legitimate real estate professionals who have teamed up with brilliant technologists, and not a group of brilliant technologists who don’t have real estate skills. That was the big fear. Are these crowdfunding businesses going to be able to withstand the test of time and withstand the recession? I can’t speak to the whole industry, but we certainly are.
Adam Kaufman: You were already starting to see platforms go out of business, like RealtyShares, prior to this pandemic. A lot of the issues are the costs of running a platform. At the end of the day what it comes down to is the experience of the platform and the experience with the product. I always looked at technology as the facilitator, but ultimately the product is the most important thing. Not everybody is adopting the strongest practices, and they don’t necessarily have the experience to prepare. I continue to fear that a lot of deals will go south. A lot of investors will be upset and lose money. Platforms will go out of business and there will be consolidation. That will give birth to a new industry coming out of this, where the ones who have survived and thrived can lay testament to their experience in real estate and being responsible and transparent actors. I do think there is a lot of promise and potential for this industry, and we have yet to scratch the surface of that potential.
Tore Steen: For sponsors, we see online becoming a preferred channel for capital. Firms can cut out the middleman and get access to high-net-worth investors looking to move real money. And investors are even more keen on finding alternatives to the stock market, looking for ways to diversify their portfolios as much as they can.
