Forecasting the Commercial Real Estate Crowdfunding Industry

Feb 3, 2017

National Real Estate Investor published an article by Adam Kaufman on how quickly the real estate crowdfunding industry is growing. He evaluates what factors will influence successful crowdfunding models. Read the full article below.


From Crawling to Sprinting in Three Short Years

When Title II of the Jumpstart Our Business Startups (JOBS) Act went into effect on September 23, 2013, few realized just how quickly the commercial real estate crowdfunding industry would develop. By removing the prohibition on broad-based advertising, Title II’s Rule 506(c) gave 12+ mil­lion accredited investors access to real estate investment on the property level.

Companies raised more than $1.47 billion via Rule 506(c) offerings during their first three years on the market. Of that total, $389 million-roughly 26.4 percent-was for real estate. That’s far more than any other industry. Consider that entertainment, with $127.5 million raised, took second place.

While the $389 million figure seems small in the grand scheme of commercial real estate, consider the pace of growth. From 2014 to 2015, the global real estate crowdfunding industry more than doubled-from $1.1 billion raised in 2014 to an estimated $2.5 billion in 2015. Furthermore, worldwide real estate crowdfunding is projected to be a $250 billion market by the end of 2020, according to research and advisory firm Massolutions.

Consolidation on the Horizon

Close to 100 U.S. real estate crowdfunding platforms have emerged since 2012. Some are fintech startups looking to raise money for property. Others are established real estate owners employing technology solutions to tap into a new source of capital. Keep an eye out for synergistic mergers and acquisitions between these two types of companies.

A second form of consolidation-one that is already widespread-is a concentration of deals. From September 30, 2014 to September 30, 2015 there were 209 Rule 506(c) offerings for real estate that saw $148.8 million in committed capital, according to Crowdnetic data. While the number of Rule 506(c) real estate offerings during the subsequent yearly time period decreased 27 percent to 152, the amount of committed capital increased 20 percent to $178.6 million.

Long-Term Keys to Success

As the industry matures, expect to see an influx of investors taking the field after a few years on the sidelines. Larger issuers will leverage crowd­funding to make up an increasingly significant component of their capital stacks. This will lead to greater awareness, and a positive feedback loop should help push the business towards that projected $250 billion figure.

Of course, no investment is without risk. There are sponsors out there raising money for mediocre deals, typically with high leverage and misaligned interests. As this cycle matures, some of these deals will under-deliver on forecast returns. Smaller players and third-party listing sites will see their investor base move to more established platforms. A premium will be placed on deals with expe­rienced partners who maintain a significant amount of equity in the transaction.

The transparency of being able to invest in an individ­ual property is part of the reason why crowdfunding is so popular. Successful platforms and deal sponsors must con­tinually strive to embrace and encourage this transparen­cy – as an educated, engaged and loyal investor community will prove to be to the true mark of enduring prosperity for this growing industry.

Adam Kaufman is co-founder and managing director of ArborCrowd, an online commercial real estate crowdfunding company. You can tweet Adam at @adamk1205.