Back in 2006, few commercial real estate professionals could have foreseen the industry-altering events ahead: the imminent economic crisis, the presidential election of then-senator Barack Obama or the piece of recession-era legislation signed by Obama that legalized general advertisements of securities. And in the days after the Jumpstart Our Business Startups (JOBS) Act became law in 2012, few could fully imagine the transformative effects it would have on CRE investing.
Now, as we approach 2019, the results of the JOBS Act have fully crystallized. The capabilities of online tools have grown far beyond what they were in 2013 or even 2016. These days, CrowdStreet and other digital commercial real estate syndication platforms offer robust features—such as personalized investor communication, automated transactions and branded private portals—that don’t simply mimic but exceed the offline investment experience.
Rather than continuing to look back, growth-minded CRE 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 should take a cue from the last six years (and the six before that) and think about what lies ahead. Here are a few reasons firms that embrace online syndication now are setting themselves up for success in 2024:
Enormous Risk—and Opportunity—Is on the Horizon
Online syndication couldn’t have reached maturation at a better time. Conventional sources of capital are tightening: the Federal Reserve is raising interest rates, and economic analysts expect this trend to continue into the foreseeable future. Meanwhile, rental rates are increasing around the country.
The commercial real estate market, however, has maintained largely the same level of liquidity and capital. As a result, capitalization rates (the initial rates of return investment properties are expected to generate) are not quite following larger economic conditions. Doug McKnight, Chief Operating Officer at RREAF Holdings, told us he believes this will make it more difficult to “maintain the spreads and squeezes,” and that members of the industry start looking toward Properties are considered value-add when they have management or operational problems, require some physical improvements and/or suffer from capital constraints. By making physical improvements to the asset that will allow it to command higher rents – remodeling the kitchens in multi-family, installing more energy efficient heating systems in a medical office, etc. – improve the quality of tenants and increase... More assets and second- and third-tier markets.
“We are not going to ease our underwriting standards,” he says, “but we are going to look for more Opportunistic real estate investments are the most high risk/high reward investment opportunities, requiring major development work. Opportunistic properties tend to need significant rehabilitation or are being built from the ground up. They have the chance to reach the highest rate of return for investors, but they little to no in-place cash flow at the time of acquisition and have the... More buys in the market which will likely involve heaver value-add capital expenditures in order to create more Market value is the price an asset would fetch in the public marketplace. In commercial real estate, market value can be impacted by the location of the property (major market versus rural), demand for that asset type (multifamily, office space, storage, etc), installed amenities and more.... More and help offset the potential The capitalization, or “cap”, rate is used in commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. The calculation is based on the Net Operating Income the property generates divided by the Purchase Price. Lower cap rates (3-5%) generally point to safer / less risky investments and are... More squeeze..”
Online syndication may help alleviate this economic downturn by providing greater flexibility to sponsors. With access to a broader group of investors, firms can lower their risk by expanding their networks and reducing their reliance on a single capital source, such as a bank.
It’s not hard to see how this could benefit non-institutional investors, as well.
“Investors are looking for less risky, but higher-achieving investment options,” says Doug. “CRE gives them access to an expanded selection of investment opportunities and allows for better risk diversity, both among a larger universe of sponsors and CRE asset types and geographies.”
It’s not just RREAF predicting that businesses that do not adapt to online syndication will be left behind. As analysts at Deloitte predict in a report entitled “Commercial Real Estate Redefined: How the Nexus of Technology Advancements and Consumer Behavior Will Disrupt the Industry”:
“We believe the nexus of technology advancements and consumer behavior changes has the potential to redefine urban planning and fundamentally change the CRE demand-supply dynamics and business model, including real estate usage, site location, development, design, valuations, leasing, and financing. …
While there is no certainty about the extent of disruption in each of these trends, CRE companies will have to be agile and flexible in embracing technological innovations to keep pace with their new competitors and maintain their edge.”
Investors Looking to Diversify are Embracing Technology
Most people now bank, view their stocks and manage other investments online. Your investors are no different. We can’t repeat it enough: online syndication is no longer an untested idea or a fledgling space, but the dominant, mainstream way today’s firms do business. Investors expect some form of digital functionality—and the more tools they have to manage their money online, the better.
At the same time, the CRE marketplace is growing faster than ever, as many investors look beyond stocks and bonds toward alternative assets. A 2014 report by McKinsey & Company, for instance, predicted that “retail alternatives will be one of the most significant drivers of U.S. retail asset management growth over the next five years, accounting for up to 50 percent of net new retail revenues.”
Other professionals in the business of serving investors have picked up on this trend: according to the 2017 Trends in Investing Survey, a joint report by the Financial Planning Association , Longboard Asset Management, and the Journal of Financial Planning, many advisers (47 percent) are currently looking for new ways to diversify clients’ portfolios.
The investment professionals at RREAF are keenly aware of these trends. They estimate that online syndication encompasses 25–30% of the firm’s current business, and they anticipate advertising more and more offerings online.
“In many ways, investors have embraced online syndication through technology more quickly than sponsors and other market participants,” said Kip Sowden, RREAF’s CEO and President. “It’s inevitable that raising capital online becomes commonplace. As investors form more online relationships with sponsors, there is more potential capital ready to be deployed than ever before. It’s important that other market participants be more proactive using this method of syndication.”
Kip and Doug predict a virtuous cycle of growth for online fundraising: as the technology evolves and becomes more inclusive, more investors will show up and invest greater and greater amounts. And a broader investor base, of course, makes it easier for sponsors to diversity.
“This is the future of real estate investing,” said Doug. “It levels the playing field for investors whose participation have been greatly limited in the alternative asset class of CRE, and the model also makes it easier to get to know a sponsor. Firms that embrace online syndication now will benefit the earliest and the most.”
This article is adapted from the CrowdStreet’s Raising Capital Online: The Keys to Conquering Online Syndication. For more insights, case studies and expert advice from RREAF, download the Playbook for free here.