January 30, 2018 |
Senior Vice President, RealtyShares
Real estate crowdfunding has had an effect in cities of all sizes throughout the nation by harnessing technology to reshape project financing. With networks of individual and institutional investors, these marketplace investing companies can offer flexible capital far faster than traditional sources.
From a wealth-building perspective, real estate crowdfunding offers some unique opportunities for both individual and institutional investors, as well as the real estate sponsors who are using these platforms to raise debt and equity capital for their investments. Real estate, although a very important asset for building wealth, has historically been inaccessible for many individual investors due to the high barriers to entry. Gaining access to private investments frequently was a matter of having the right connections and a substantial amount of capital readily available.
Sponsors faced their own set of obstacles when trying to secure funding. Traditional bank loans for investment properties have become more difficult for sponsors to come by as lending restrictions have tightened since the Great Recession. Hard money lending has long been an alternative, albeit a costly one, due to the higher interest rates these loans carry. Real estate crowdfunding has filled the gap left by banks and at a more attractive cost than hard money. Accordingly, real estate crowdfunding has allowed for the establishment of a symbiotic relationship between investors and sponsors that is beneficial for both. It offers better efficiency, accessibility and transparency than existing alternatives.
Last year marked an inflection point for burgeoning platforms. Courtesy of consolidation and optimization, we’re seeing a new sophistication emerge among the crowdfunding industry; early adopters are joined by the early masses, with operations scaling up to focus on investment quality.
Some find their focus shifting away from coastal markets, which are seeing more competition around fewer assets, toward the U.S. heartland areas where there is less activity despite equal or better investment potential. Given the flexible structures and national footprint of these crowdfunding firms, they wield a definite advantage.
Secondary markets continue to offer value and marketplace platforms have pounced on their unique dynamics. These smaller cities offer a lower amount of incoming supply and less extensive leverage on projects, providing investors a higher chance of weathering temporary softening barring unforeseen economic circumstances. This translates to a protected downside as well as a stable, longer-term upside.
Many secondary- and tertiary-market investors were burned after the last economic downturn, but their reluctance to re-approach these markets may be ill founded. We’re seeing different fundamentals around supply and demand and new economic drivers that are changing the value of this real estate. These secondary markets have a supply of infill Class A and B commercial assets that offer more value than many investors realize.
Minneapolis is one of these secondary markets. It has more than 3 million residents and performed relatively well during the downturn. Peak-to-trough, the city fell only 29.7 percent as compared to 39 percent in the San Francisco Bay Area, yet it is often overlooked as a viable place for investment. By capitalizing on this reduced volatility and taking advantage of the yield relative to debt cost, while not over-leveraging the asset, investors will find good value in markets like Minneapolis that offer this type of risk-reward tradeoff.
While some Sun Belt secondary markets often see more peak-to-trough turbulence, they also feature positive drivers including a migration of retired baby boomers to warmer locations and an influx of millenials, many of whom hail from high-cost coastal cities, seeking a better lifestyle and similar employment opportunities. The Phoenix metropolitan area certainly benefits from this trend and enjoys an active crowdfunding market. The key to making a smart investment here is identifying pockets of development that are protected from the threat of new supply and the application of prudent leverage.
Secondary-market trouble may come at the suburban fringe, where there’s an abundance of land and a pro-development mindset that quickly leads to overbuilding. When newly built assets must compete for tenants to reach leasing targets, one can see a race to the bottom – a willingness to drop rents below market rate to fill the space.
Investors in Class A- and B assets must ensure that this type of activity will not impact cash flow. The best hedge against this threat is to ensure the asset has distance from new supply and proximity to employment, retail and transit centers.
With fresh capital pouring into these secondary metros thanks to marketplace platforms, we could very well see real estate crowdfunding emerge as a trendsetter as they continue to grow and leverage their vast data to find value very soon.
Javier Benson is the Senior Vice President of Strategy and Implementation at RealtyShares, an investment platform transforming the real estate investment landscape by connecting borrowers and sponsors to debt and equity capital from accredited and institutional investors. Javier is responsible for developing strategic partnerships and building financing relationships with institutional capital partners. Prior to joining RealtyShares, Javier served as a Vice President of Acquisitions and Dispositions at 643 Capital Management, and held roles at Barclays, Accenture and Diamond Management & Technology Consultants. Javier has a BSE and MBA from the University of Pennsylvania.