I’ve been getting a lot of good feedback about my new Amazon guide: Real Estate Crowdfunding Explained. Hope you enjoy it!
By Joanna Schwartz, CEO & Co-Founder, EarlyShares & Property.com
Since its debut in late 2013, the real estate crowdfunding industry has seen immense interest, activity, and growth in just two years. With over 100 platforms now offering real estate capital raising and investing opportunities to the public, the sector is poised for some market-defining shifts as it reaches its projected $2.5 billion in volume by the end of 2015.
Investor preferences, technological advances, economic swings, and commercial real estate (CRE) development trends will undoubtedly impact the future of the industry for years to come.
But several more imminent forces are at play, and these three are most likely to guide the evolution of real estate crowdfunding in coming months.
1. The Mini-IPO Opportunity
Over the last two years, the growth potential for real estate crowdfunding has been inherently limited by the regulations under which it operates. Since September 2013, the only way for real estate developers and sponsors to publicly crowdfund their commercial real estate deals has been to conduct Regulation D Rule 506(c) capital raises under the rules governing the public advertising (or “General Solicitation”) of private investments.
Under those guidelines, only accredited investors have been eligible to invest – limiting the pool of potential ‘crowdfunders’ for online deals to those with income exceeding $200,000 annually ($300,000 joint) or net worth of $1 million or more.
But a new option is now in play. The rules implemented in June 2015 for “Regulation A+” now allow for capital raising, with some stipulations, of up to $50 million in a 12-month period from both accredited and non-accredited investors.
This new “mini-IPO” exemption is an update to earlier ‘Reg A’ rules that allowed issuers to only raise $5 million per year and came with onerous compliance obligations, including state-by-state filing requirements.
Reg A+ was enacted to help inject investor capital into private companies – not necessarily real estate projects or firms – but the same could have been said of General Solicitation when it took effect in 2013. The ability to publicly raise funds from non-accredited investors presents a great deal of value for many real estate developers and sponsors, so we’re likely to see dealmakers clamor to capitalize on Reg A+ in Q4 2015 and beyond.
2. Demand for Data
Since it brings both the debt and equity capital stack online, real estate crowdfunding is one of many technological innovations that’s disrupting commercial real estate – and it’s an overdue disruption. To the detriment of the industry at large, the CRE sphere has spent decades dominated by offline transactions, insider knowledge, and outdated, paper-based processes.
What has made those norms so detrimental is the dearth of verifiable data they produce. Commercial real estate professionals – be they developers, brokers, investors, or sellers – are largely driven by numbers, but the data available to them is typically costly, flawed, or both.
“Practically speaking, there is no universal set of data tracking the entire inventory of buildings, whether at the neighborhood level, by property or asset class,” writes Tim King, Co-Founder and Managing Partner of CPEX Real Estate, for Commercial Observer.
“Even data pulled from services such as CoStar—which is more comprehensive than most research services—in reality provides a non-objective data set, relying on self-reported numbers from participating brokers, owners and tenants.”
CRE developers are clamoring for more credible data to help them better understand buyer and lessee preferences, investment transactions, market dynamics, and more. The winners in the real estate crowdfunding market will be the players that not only provide technology-based products and services to CRE sponsors, but deliver valuable data to them as well.
3. Segmentation and Aggregation
With so many real estate crowdfunding platforms now active in the market, some are expecting the industry to consolidate; for smaller platforms to merge (so they can contend with the larger, better-known players) or else fall out of the market due to lack of traction or recognition.
The understanding that platform-on-platform competition is healthy for a growing market, however, lends itself to a slightly different prediction: That the number of platforms in the market will continue to expand, but their service offerings will grow increasingly segmented to specific investor and capital-raiser preferences.
Today, the term “real estate crowdfunding” encompasses a large umbrella of deal types open to accredited investors, including but not limited to: equity offerings; debt deals and ‘peer-to-peer lending’ opportunities; underwritten offerings (which are pre-funded by a platform, then syndicated out to investors); direct-to-investor private placements; and capital raises for real estate portfolios and other funds. In the months to come, Reg A+ will join the mix as well – further broadening the scope of available investment structures.
Each of those different deal types appeals to a certain kind of real estate investor, and some appeal to more than one. As the market expands and platforms increasingly specialize in niche focus areas, their segmentation will breed the need for aggregation, since experienced real estate investors and rookies alike will need centralized entry points into the larger market. Aggregation, and enhanced data, will also add legitimacy and scale to the real estate crowdfunding industry – helping spur increased adoption of this promising (and rapidly growing) young sector.
Joanna Schwartz is the CEO and Co-Founder of EarlyShares, the trusted real estate crowdfunding platform that connects accredited investors to vetted, return-driven commercial real estate investments, and its flagship brand Property.com, the first open global marketplace for commercial real estate transactions. Under Joanna’s leadership, EarlyShares and Property.com are transforming of commercial real estate investing into an online, transparent, accessible, data-driven experience. Follow Joanna: @EarlySharesCEO.
