Real estate crowdfunding has stimulated the curiosity of investors of all kinds. Even those with entry-level sums of money to spend can now invest in institutional-worthy projects that were once reserved solely for the upper echelons. Commercial Real Estate (CRE) crowdfunding is especially attractive to those who want to expand their portfolios, but who may be reluctant to march head-first into CRE.

One of the factors around why commercial real estate is so enticing – via online crowdfunding or otherwise – is that it manages to weather economic storms relatively well. Unlike the erratic swings in stocks or bond values, commercial real estate prices have been constant despite the economic turmoil of the COVID-19 crisis. This is especially true in the multifamily market, which continues to exceed other asset classes. Multifamily owners with capital to invest are beginning to look at how they may do so via crowdfunding platforms.

Here are some exciting real estate crowdfunding trends for multifamily investors to watch on the back half of this year.

Real Estate Crowdfunding Insights

Commercial real estate prices have been rising for several years. With that growth occurring, many interested in taking a stake — have been frozen out of many of the most lucrative deals and possibilities. 

Bidding wars have become typical, particularly as more international investors look to deposit their capital in a comparatively “safe” asset class. Unable to invest independently, many opt to co-invest alongside many others, in smaller increments, through real estate crowdfunding platforms.

Real estate crowdfunding isn’t a new approach, but it has recently realized widespread approval among investors. Early vacillation around these online platforms has since been replaced with the belief that online crowdfunding can be a potent tool for those striving to raise capital for CRE deals. We foresee that real estate crowdfunding will grow and evolve in the years to come.  

Trend #1: Institutional Capital

One of the rationalizations is that people are drawn to real estate crowdfunding because predicated on the platform’s structure and deal, folks can invest with nominal amounts like $100. This can be an attractive way for people to dabble in commercial real estate. However, such diminutive investments can create difficulty for those seeking to raise more considerable capital for larger projects.

This led to the development and appearance of crowdfunding platforms or funds that only admit accredited investors. Sponsors will often set a minimum investment benchmark, say $50,000 or $100,000, as they look to crowdfund their deals. 

Institutional investors, specifically, pension funds and life insurance companies, are now looking to get involved. While crowdfunding was initially utilized for sponsors soliciting modest sums of capital. Sponsors have now discovered that the identical means can be used to attract institutional investment in bigger projects. Rather than seeking out many $50,000 stakes, sponsors can immediately use these programs to raise millions of dollars by selling to institutional investors, who seldom invest less than $10 million at a time. 

Anticipate seeing more sponsors employ crowdfunding to draw a mixture of accredited, non-accredited, and institutional investors. When raising capital, various sponsors will start by ‘beaching’ a meaningful institutional commitment, say $20 million of the $25 million in equity required to finance a project. The sponsor may then plug this substantial assurance when pitching to other multifamily investors, who would later send smaller amounts to achieve that remaining $5 million needed. This strategy may become more commonplace, given that smaller-scale investors regularly take comfort in knowing a principal investor has committed to and believes in the project. 

Trend #2: Specialized eREITs

Fundrise will allow the average person to get in a deal for $100 and other top-notch real estate crowdfunding platforms, like Realcrowd.com, PatchofLand.com, Groundfloor.com, have started to offer online “eREITs” – or online, non-trade real estate investment trusts with various entry points. These eREITs function similarly to publicly-traded REITs. Those looking to purchase shares of real estate, which affords greater liquidity than taking a stake in a project directly, will desire to consider the eREIT model.

It makes sense to watch not only the eREIT movement but particularly the increase in specialized eREITs. For example, Fundrise offers five eREITs identified by region (West, East, Heartland) and investment style (Growth, Income). We expect this specificity to rise, especially with budding investors who desire to have more of a role in deciding how their investment is made and have more control over the assets. For example, in the wash of the COVID-19 crisis, we may see investors drive away from several asset classes, such as assisted living or hospitality, in support of a “safer” product type like multifamily.  

Trend #3: Further Merger and Acquisition Activity

Since Title III of the federal JOBS Act took effect in 2016, which allowed non-accredited investors to participate in real estate crowdfunding, there has been an explosion in the number of platforms that have come to market. There are several options for folks to thoroughly consider when investing. Not all models will survive. Some will not be sturdy enough to go the distance and scale into a sustainable business. Indeed, the size will be important when looking to recruit investors on an on-going basis. 

There are a few examples of underdeveloped models. Take RealtyShares in late 2018 is one conspicuous case that took the industry by surprise. We expect further consolidation of real estate crowdfunding platforms in 2020. Some say the definitive rules under Title III are somewhat limiting and inefficient, given their intent, cost, and requirements. 

 Trend #4: More Accessibility to All

Originally, deals backed via real estate crowdfunding platforms were only accessible to favored investors (i.e., those who have $200k+ in income or $1M+ in net worth, excluding their principal residence). In 2015, Title IV Regulation A+ of the JOBS Act took effect, which allowed sponsors to raise up to $50M per year via securities offerings – this is where we saw the development of eREITs, which offer lower thresholds for initial investments. Then, in 2016, Title III of the JOBS Act expanded permissible equity crowdfunding to include the general public, which means that now non-accredited investors can invest through these platforms as well. Non-accredited investors can allocate up to $2,000 per year to equity crowdfunded projects if the person’s salary is less than $100,000 per year and up to $10,000 per year if their pay is higher than $100,000. 

In 2020, we expect to see sponsors appeal to a broader range of investors for their deals – particularly small and mid-size deals that need to raise $10 million or less. 

Final Thoughts

Crowdfunding for commercial real estate projects is increasing in notoriety. Although still a niche market, it is unquestionably shifting to a more mainstream way for sponsors to finalize both equity and debt for their multifamily apartment projects. 

Those of us in the industry are closely watching the COVID-19 crisis, keeping top of mind how the pandemic might impact commercial real estate’s crowdfunding. If there’s a slowdown in traditional debt and equity markets, this could spark additional activity in the crowdfunding space.