Can Commercial Real Estate Crowdfunding Fight the Market Slowdown?

David Cohn
Sep 14, 2020
Industry Insights

Commercial real estate (CRE) seems to be much stabler than stock or bond prices these days because commercial property values are holding steady despite the pandemic's economic uncertainty.

But how exactly will this crisis affect the CRE crowdfunding sector, which is now dealing with its first slump since it became mainstream in 2014? In this blog, we summarize what experts think.

Plenty of Promise

Despite the slowdown in commercial real estate (CRE) transactions, CRE crowdfunding remains interesting for investors who are serious about diversifying their portfolios.

Some experts believe the real estate crowdfunding industry still offers many opportunities for investors on the offense—those who are aggressive enough to put their money on great deals and ultimately emerge as winners when the health crisis is over.

That said, it’s not all fun. The COVID-19 pandemic affects the crowdfunding sector in the same way it is affecting the CRE landscape—some areas are doing better while others struggle.

On the one hand, crowdfunding deals manage to raise over $20 million within a few hours of going live. On the other, several property crowdfunding platforms are laying off staff to survive the crisis.

This is the first time the real estate crowdfunding industry has ever faced a downturn in the six-year short years it has been in existence.

Outstanding deals are still being made, but they are happening in a bleak backdrop of massive macro-economic dislocation. Experts agree that some crowdfunding platforms can fail.

Some might see their business models crack under pressure. Some might see their sponsor cohorts cease paying dividends, and others many lose more deals to lenders.

As usual, certain crowdfunded deals will succeed, and others will fail. Novice investors will find themselves exposed to the challenges of Commercial Real Estate investing, perhaps for the first time.

The Cost of Capital

Property crowdfunding specialists don’t see any immediate increase in the cost of capital. That said, there is will likely be an increase in risk appetite because there is more capital than there are deals to fulfill them—and this will ultimately drive the demand for higher returns.

New Opportunities Because of the Pandemic

The health crisis seems to be creating new opportunities in CRE. There is an increase in the amount of distressed CRE opportunities these days.

The flow should be steady as various government stimulus packages and other assistance come to an end. Investors who are comfortable with distressed investment opportunities will have more choices beyond the hospitality and retail sectors—they can snap up office, multifamily, and industrial properties for reasonable prices, too.

Downturns have a way of exposing the weakest investors, and at a time like this, it’s vital to play aggressive offense—not just defense. There are real opportunities in the office sector, for example, but not all investors are willing to take risks.

Tenant demand will indeed decrease in the short term because everyone is working remotely. However, offices will always be necessary. The demand will always be there—but the nature of that demand will change.

Weaker office operators who do well during good times but rely on debt, noncredit tenants, and short leases may be forced to play defense right now to keep their properties occupied and collect rents on time.

But seasoned office operators who have experienced multiple downturns and have kept recession-resilient levels of debt, longer leases, and credit tenants can afford to play offense.

They are in a better position to capture a good share of the market from weaker operators by addressing tenant issues more effectively.

Strategies can include investing in making their buildings safer and healthier work environments—something they can afford to do because they have the cash that weaker competitors don’t.

For operators on the offense, the pandemic is a great opportunity to capture a bigger market share. This also applies to multifamily apartment owners and other sectors.

The Future of Commercial Real Estate Crowdfunding

Real estate capital formation is changing; crowdfunding has certainly disrupted how things are done, and it will continue to do so.

Experts think that CRE financing will largely be done online in the future—much in the same way that flights and hotels are booked online instead of via a travel agent, or stocks are traded on the internet without needing to call a stockbroker.

A recent report by the Wall Street Journal says that thousands of small investors staying are whiling away the time they spend sheltering in place by investing in commercial properties through crowdfunding.

They’re buying “slices” of hotels, multifamily apartment buildings, and other CRE properties by putting their money in pooled capital collected from many other investors. If crowdfunding popularity these days is an indicator of things to come, the future certainly looks bright.

Are you interested in using crowdfunding for your next CRE investment?

Raising capital online isn’t much different from raising capital the old-fashioned way. You need patience—and lots of it.

When meeting a potential investor in person for the first time, you probably won’t immediately offer documents or wiring instructions.

You shouldn’t do that online, either. It’s important to patiently establish trust with a prospect before asking them to sign a check.

This takes time and finesses to do online, just as it does in person. It’s also essential to find the right crowdfunding platform for your project.