Since states began enacting shutdown orders to slow the spread of COVID-19 in mid-March, real estate transactions have slowed significantly. Yet some crowdfunding platforms never stopped marketing offerings to retail investors eager to leverage the stability of real estate relative to other asset classes in order to generate income.
Historically speaking, opportunities typically appear at the bottom of a real estate market cycle. Knowing with certainty, however, when we have reached the bottom of the market is not an exact science and often can only be pinpointed with accuracy well after the date has passed. While the height of the coronavirus outbreak was certainly a concerning time for the overall economy, there was a lot of uncertainty around what the financial impact would be given the uncertainties surrounding the effects of historic job losses and business closures. It was clear that this was an unprecedented situation.
It was for this reason that ArborCrowd opted to pause on launching new offerings to the crowd and to warehouse deals we invested in prior to the pandemic. While we continued to look for new investment opportunities, we believed that the time was not right to solicit our investors’ hard-earned capital without a better understanding of the state of the markets. It was the responsible thing to do.
No one can say with certainty what the coming months will bring, but as we get a better understanding of the pandemic’s short- and medium-term impacts, it’s become evident that the multifamily, industrial, and data center sectors have outperformed other real estate asset classes. The multifamily space, where ArborCrowd operates, and the fundamentals supporting it, have remained strong. In a recent report, MRI Software, a real estate software and solutions provider, noted a 15 percent reduction in vacancy rates between March 15 and April 30 compared to the same time period last year. Other reports conveyed that while landlords have prepared for the worst, the rental market has largely remained stable. The fact that millions of people were relegated to their homes throughout the pandemic led to a decline in turnover rates, as noted by CBRE. Moreover, direct stimulus checks to families and individuals from the federal government helped tenants meet their financial obligations, such as rent, leading to stable rent collections from April through June.
Following a period of palpable uncertainty, these signs provided much-needed visibility into where the multifamily industry is potentially heading. Other sectors, including retail and hospitality, haven’t fared as well.
Having carefully studied the real estate crowdfunding space before launching ArborCrowd in 2016, we have consistently warned of the industry’s inherent risks. Many platforms have proved proficient at building and implementing technology to market deals, solicit funds and administer investors’ accounts, but few possess the type of real estate background necessary to adequately analyze assets and market fundamentals to make informed real estate decisions. Moreover, achieving revenue growth by forcing a flow of deals into the market too often supersedes a thorough vetting of assets, particularly among platforms backed by venture capital.
For the past several years, these shortcomings have largely been concealed by low interest rates and steady economic growth, which together have fueled robust property appreciation and compressed capitalization rates. But today these risks are even more acute, particularly for platforms that are investing in riskier asset classes, and the economic disruption caused by the COVID-19 pandemic represents the first real test of the real estate crowdfunding concept since it began about eight years ago.
There are, of course, good actors in this space who have solid real estate experience, and the proper discipline to survive and thrive in any market environment. Ultimately, the economic downturn will expose platforms that have previously promoted ill-advised offerings or that haven’t been fully transparent concerning risks and how deals are analyzed. We’ve already seen that some crowdfunding platforms have suspended share redemptions at a time when many investors may need cash, a move that runs counter to what the shareholders were told when the platforms were marketing the investments.
With these conditions in mind, here are a few questions that retail investors should ask of crowdfunding platforms when considering an investment in the current environment:
- How selective is the platform with its deals, and does it perform its own underwriting of deals or does it rely on the sponsor’s underwriting?
- Does the platform or its leadership have extensive experience through past market cycles?
- How much transparency do investors have with the platform’s offerings?
At ArborCrowd, we have adopted a model that we believe sets us apart from other crowdfunding platforms by providing retail investors with heightened transparency. As part of The Arbor Family of Companies, which includes publicly traded real estate investment trust Arbor Realty Trust, we have decades of real estate experience and knowledge in various market cycles from which to draw.
Here are some additional details about ArborCrowd’s approach:
- We primarily invest in multifamily properties, an asset class that has generally provided stable returns over the long term.
- We prefund deals with affiliate capital before putting them on our platform, aligning our interests with those of our investors.
- We are the asset manager of our investments throughout the hold period on behalf of our investors.
- We focus on markets with strong economic drivers and real estate fundamentals.
Since our founding, we’ve applied a highly measured approach to real estate investment, a strategy that will continue to inform our decisions in these turbulent times. As previously mentioned, we made the strategic decision to delay offering investments to the crowd during the height of the COVID-19 pandemic until we had greater visibility into how it would affect our underwriting. This was the responsible way to handle the situation, but we believe we have reached a time when we can once again begin bringing high-quality investment opportunities to the crowd. However, now more than ever, it is incumbent upon every crowdfunding investor to put in a little elbow grease – ask questions about the deals and sponsors, and align themselves with platforms or individuals that have a track record of surviving various market cycles and economic downturns.