Crowdfunding: Boom or Blip? – A Guest Post from Llenrock Group
Jul 22, 2015
This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog.
Back in May, I published a completely subjective ranking of the “Top 10 Disruptive Forces in U.S. Commercial Real Estate.” These disruptors included such usual suspects as energy sector vagaries and the growth of the tech sector, but also included one or two items that are relatively recent to such rankings. Most notably, we included (at #10, but still…) crowdfunding as a dynamic and important disruptive force in 2015’s commercial real estate sector.
But as I said, that list was totally based on the views of one (self-described) expert. Do you agree with all of the list’s claims? Do you agree, for instance, that real estate crowdfunding truly is a disruptive force in today’s commercial real estate industry?
I may be a (self-described) expert, but I acknowledge there are a great number of CRE professionals who don’t feel that crowdfunding is such a big deal when compared to an international asset class valued at trillions of dollars worldwide. Consider this poll from Commercial Property Executive (they ran it back in June, but I saved it because its results are interesting):
As you can see, there is a great deal of enthusiasm behind crowdfunding in general, but many (32%) believe large institutions will manage to adopt this structure and steal this business away from the start-ups, which would essentially mean the status quo would be preserved, even if the capital is raised and managed in a slightly different manner. Others (16%) feel that crowdfunded capital is a drop in the bucket (it is) and will continue to be for the foreseeable future.
Of course, this is a poll of 19 votes, so it certainly doesn’t represent the CRE community at large, but it nonetheless shows that the issue of just how much of an impact CRE crowdfunding is really having remains controversial. (Reg A, by the way, has to do with investment offerings, and is the part of the JOBS Act that has made crowdfunding a reality for so-called “non-accredited investors”–which is to say, those who do not qualify as high net worth.)
In just the few years since Obama signed the Jumpstart Our Business Startups Act into existence, the altered investment/fundraising regulations have engendered a slew of new (you guessed it) start-ups doing exactly what the legislation permits: raising capital. And they’re doing it for real estate in a very big way. In fact, there are now so many crowdfunding options for investors that major media and research hubs like CrowdCrux.com have emerged, and there are so many CRE crowdfunding spots that Crowdcrux was even able to publish its ranking of the Top 10 such crowdfunding platforms–some will be familiar, some not. I reproduce the ranking below:
10. Patch of Land
9. Prodigy Network
8. iFunding
7. CrowdBaron
6. GroundBreaker
5. Collaperty (worst. name. ever.)
4. CrowdStreet
3. RealtyShares
2. Realty Mogul (⇒check out this great video interview featuring RM’s Elizabeth Braman)
1. Fundrise (⇒read more about Fundrise in this Llenrock interview with co-founder Ben Miller)
As Vanessa Grout of Forbes pointed out last spring,
A recent study from Massolution reports that crowdfunding investors injected $1 billion into the U.S. real estate market [in 2014]. By the end of 2015, that number should climb to $2.5 billion. Advances like $100 investments, debt participation and availability to foreigners are contributing to this projected surge.
This is interesting news. After all, the CRE crowdfunding space is already fairly diverse in terms of each fund manager’s expertise, geographical strategy, risk tolerance, and diversification goals. Moreover, as Ms. Grout points out in the quote above, we have the increased presence of foreign capital in crowdfunding (not sure this makes sense for foreigners; if you can’t afford to get your money into a hedge fund or PE fund or higher-barrier investment vehicle, maybe you should not send your limited funds so far from home) as well as–and I believe this is going to be a game-changer for this space–the availability of investment options on the debt side as well (Fundrise started a debt platform this year, and others are pursing this avenue as well).
Okay, I know this brief conversation on CRE crowdfunding in 2015 won’t resolve the controversy over just how disruptive a financial force crowdfunding will ultimately prove in this industry. Ultimately, it seems, the efficacy and profitability of this strategy will only be proven through time. I’d guess we won’t have a clear picture of this sub-sector’s role in the CRE field until about 2020, when we can adequately measure some of the properties’ year-over-year performance; by then, probably some of the smaller fundraising platforms will have gone belly-up, which is sort of what happens in any industry’s start-up phase.
Author: Raymond T. Cirz