Private investor contributions to U.S. commercial real estate development ballooned to over $216 billion in 2015. With a current financial market dichotomy of international distress yet continued US economic expansion (albeit modest), investors have been allocating capital into US commercial real estate. This shift is both as a means to diversify away from the international-imposed tumult as well as to profit from what most analysts project as a multi-year remaining runway in the current US commercial real estate cycle.
Private investors have long provided an important source of capital for the commercial real estate industry. Whether you label it real estate syndication, crowdfunding, private partnerships or LLCs – all apply to the same concept of private group investing.
The wild ride on Wall Street isn’t the only driver behind the surge in private real estate investing. A number of factors are fueling demand on both sides of the table, including an investor behavioral shift towards direct real estate investing and real estate syndicators who are seeking out alternative sources of financing and, as a result, embracing this behavioral shift.
Factors in the Boom
On the investor side, commercial real estate continues to be highly sought after due to the attractive yields the asset class offers in a historically low-interest rate environment as well as for the stability and diversity it provides to investment portfolios. Diversity advocates point to modern portfolio theory (MPT) and its recommendation of investment across multiple asset classes with 10% – 20% of a well-diversified portfolio invested in hard real estate assets.
On the sponsor side, operators and developers, also are looking to private investors as a supplemental source of capital in the post-recession market. Banking reforms such as Dodd-Frank and Basel III have created a challenging regulatory banking environment that has made it difficult for some borrowers to get traditional bank loans, resulting in overall Leverage is the use of various financial instruments or borrowed capital to purchase and/or increase the potential return of investment. Assume a buyer puts 20% down on a $5M property. Essentially, they paid $1M to own something worth $5M. Assuming the property appreciates at 5% per year, the sponsor’s net worth would grow to $5,250,000 in a year. Had they... More ratios and values that are more conservative than they have been in the past. Since increased investor equity is now being substituted for what previously constituted debt in a given transaction, you could argue this is a more sustainable outcome for the sector.
In addition, companies are staying private longer, eliminating the public market as a “go to” place for financing. In that regard, legislation such as the Jumpstart Our Business Startups Act, or JOBS Act of 2012, was created with the goal of promoting greater access to capital within the private sector. The legislation has benefited small businesses and real estate syndicators, and it is widely recognized as the catalyst for launching the crowdfunding industry. Crowdfunding firms have helped to raise critical financing for business operators across a variety of industries from biotech to commerce real estate. As it relates to direct real estate investing, the JOBS Act has made it possible for syndicators to directly market their deals to accredited investors.
The final piece which is bringing all of these different forces together is the technology to create an efficient online marketplace for both parties—those who are looking to invest in real estate, and the syndicators looking to tap into a larger pool of potential investors.
Pioneers in the Online Fundraising Space
CrowdStreet was one of the early pioneers of the real estate online fundraising space. In May 2015, CrowdStreet created another first – a software solution offering real estate developers, operators, and capital providers the ability to manage every aspects of investor acquisition and management from a single interface, The CrowdStreet Platform.
Comprised of the CrowdStreet Marketplace and Sponsor Direct, The CrowdStreet Platform is a technological enhancement that is enabling real estate syndicators to scale their businesses like never before.
The CrowdStreet Marketplace is an online fundraising platform that connects accredited investors directly with institutional-quality real estate investment opportunities operated by best-in-class sponsor firms.
CrowdStreet Sponsor Direct, our “private label” software-as-a-service (SaaS) solution, allows In commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More to host online capital fundraising portals and investor management capabilities via their own branded websites.
Leveraging Shared Technology
The CrowdStreet Platform runs on a common technology infrastructure, allowing investors to access the same tools and data across both the CrowdStreet Marketplace and Sponsor Direct. Many sponsors are using Sponsor Direct to bring their existing offline investor networks online; enabling their investors to view online investment offerings, complete digital transactions, receive post-funding updates and track investment performance all from the security of a private, sponsor-branded investment portal. Sponsors are using the Marketplace as another tool to better serve their existing pool of investors, as well as assist them in reaching new investors looking to grow their own portfolio of direct real estate investments.
Real estate syndications have a long tenure in the industry as a financing source and an investment vehicle. Technology firms like CrowdStreet are now using technology to bring these processes online, streamline operations for both investors and sponsors and make the existing opportunities accessible to larger numbers of accredited investors.
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