The Changing Dynamics of Real Estate Crowdfunding
The sector is shaking off its ill-fitting “crowdfunding” label and gaining recognition for simply what it is – online real estate investing.
Real estate crowdfunding has experienced explosive growth and transformative change since its debut in late 2013. One of the most notable shifts is that the sector is shaking off its ill-fitting “crowdfunding” label and gaining recognition for simply what it is – online real estate investing.
To its credit, crowdfunding has unlocked the financial power of the crowd. Masses of people around the U.S., and around the world, are now investing in a wide variety of business start-ups, new ideas and innovative technologies via online platforms. There is no doubt that crowdfunding is flexing some financial muscle, with global capital raising capabilities forecasted to reach $34.4 billion in 2015, according to Massolution, a Los Angeles-based research and advisory firm.
The same legislation that opened the doors to crowdfunding has also helped launch the rise of online real estate investment marketplaces. The Jumpstart Our Business Startups, or JOBS Act, that was passed in 2012 removed a key obstacle by allowing private real estate offerings to be directly advertised to accredited investors.
Since September of 2013, platforms such as CrowdStreet have been able to present institutional-quality real estate offerings backed by best-in-class sponsors and a solid business plan designed to deliver an attractive return to investors. Case in point, CrowdStreet’s first Marketplace offering, Mainstreet - Bloomington, which was realized in August of 2015, delivered a 10% annualized current yield to investors, paid quarterly, with an additional 4% annualized accrued return paid at redemption; a return exactly in line with Mainstreet’s original pro forma.
While the JOBS Act paved the way for the creation of online real estate investing marketplaces, there is nothing new about private real estate offerings. Commercial real estate is an established industry that has been relying on private investment capital for centuries. U.S. commercial real estate investment sales alone topped $435 billion last year while billions more went to new construction, renovation and redevelopment projects. Online real estate investing is a small, but rapidly growing part of the broader commercial real estate capital markets - one that is expected to play a significantly larger role in the future.
Driving this shift is the fact that the fundraising activities, which real estate sponsors and syndicators used to execute offline, are rapidly transitioning online. A combination of legislative changes and new technology platforms such as the CrowdStreet Marketplace are enabling accredited investors to invest online in real estate in much the same way as they buy stocks and bonds from an online brokerage account. The days when real estate operators had to rely on raising investment capital at the golf course or over drinks at the country club are slipping into the past. For investors, the end result is that private real estate investing opportunities, that have traditionally been highly exclusive, are now more widely accessible to individuals.
Technology is also transforming private real estate investing by bringing greater efficiency and transparency to the process. The CrowdStreet Marketplace gives accredited investors access to online investing tools that allow them to view offer information, complete offer transactions, receive post-funding updates and track investment performance. Investors aren’t the only stakeholders to benefit - sponsors are seeing transformative gains from these tools as well. In addition to the Marketplace, CrowdStreet also offers a private label software-as-a-service (SaaS) solution with its Sponsor Direct portal that allows sponsors to offer online real estate fundraising and investor management capabilities on their own branded websites, allowing sponsors to provide the same streamlined online investor acquisition and management solutions directly to their own existing investors.
CrowdStreet has created a powerful online solution for what has traditionally been a brick-and-mortar business model. Just as Amazon and other online firms are revolutionizing the retail industry, CrowdStreet is transforming the commercial real estate playing field by drastically simplifying the online funding process for direct real estate investment.
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