Interview with an Economist: Market Impacts of Real Estate Crowdfunding

Oct 7, 2016

The ArborCrowd Team recently sat down with distinguished economist and professor Sam Chandan, who is the Silverstein Chair of NYU SPS Schack and Founder of Chandan Economics. We used the opportunity to get Chandan’s take on where crowdfunding and multifamily real estate investing is headed.
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Apartment properties — also known as multifamily — have been the most popular asset class for commercial real estate investors coming out of the Great Recession. The property segment has also found popularity amongst crowdfunding investors. Why do you think apartments resonate so well with crowd investors?

Chandan:There are two major factors driving interest. First, we have seen tremendous strength in the multifamily sector over the course of this expansion. The rebalancing between homeownership and renting has contributed significantly to the strong operating characteristics within this sector. There is a critical mass of demand supporting the sector. You would be hard pressed to find a U.S. market that has not experienced growth in demand for high-quality rental housing over this cycle. Abstracting away from potential supply-side issues, this all makes for a very attractive opportunity on a risk-adjusted basis.

Secondly, apartments are an easy asset class for investors to get comfortable with. While most accredited investors might own a house or condo now, at some point in their lives they were likely renters. So unlike office, retail or industrial assets, there is an innate familiarity with multifamily.

We’ve seen interest rates go up a full percentage point by certain measures in 2017. How do you expect the real estate crowdfunding sector to respond to a rising interest rate environment?

Chandan: Some are arguing that increases in interest rates will not have a material impact on cap rates, that interest rate increases will be absorbed into spreads. This could present something of a challenge to crowdfunding equity investments in meeting yield expectations. In any case, my view is that upward pressure on cap rates will be non-trivial.

That is unless operating fundamentals offset higher costs of capital. Crowdfunding investors will want to focus on properties and submarkets with strong income growth potential.

How do you think traditional real estate capital sources — banks, life insurance companies, etc. — view crowdfunding? Do you see some of them trying to get into the space?

Chandan: Every lender that we encounter is paying close attention to how crowdfunding develops as a source of capital. Certainly, the flexibility afforded by the JOBS Act allowed for some creativity in navigating the regulatory constraints these larger institutions face.

Ultimately, as a source of financing, crowdfunding represents a very small share of overall capital for investment activity. With most raises falling under $5,000,000, the crowdfunding sector is operating on a smaller scale than what the insurance companies would typically look at.

But I think crowdfunding has captured a lot of attention because of its potential for growth in niches of the market. In secondary or tertiary markets, for example, crowdfunding could serve as a competitive source of capital for commercial real estate borrowers. I imagine that community and regional banks are paying attention.

Some news outlets and economists have painted commercial real estate as an asset class that is poised for some form of a correction. What are your thoughts about where we currently stand in the traditional real estate market cycle of recession, recovery, expansion and oversupply? 

Chandan: Obviously there’s a lot of multifamily construction coming down the pipeline. But there’s also the demand to back it up. Of course, you can find parts of the country and cores of metropolitan areas that are faced with challenges in absorbing the new supply.

It is not just limited to apartments. There are markets like New York where there is a significant new supply of high-quality office space coming online. The dynamics of absorbing new product will be unique for each market.

In the case of multifamily, while we do have a larger pipeline of deliveries now than we may have seen in the previous cycle, the numbers are not staggering at the national level when evaluated in context. The majority of new product coming online is highly urban and highly amenitized. What we have not seen — and I hate this term — is much activity in the “Surban” markets. These areas that are not quite urban, and not quite suburban, but possess traits of both locations that are attractive to renters.

I think these particular locations — which offer access to urban employment corridors, have more options for schooling and still have restaurants and retail often within walking distance — will see demand from renters. The upside potential can play well with crowdfunding, which is typically going to be connecting investors with smaller-scale apartment communities.

Still, we are now at a point in the cycle where you can make mistakes. There are going to be real differences that emerge between haphazard investment choices and those that are made carefully. As the market becomes a little bit more challenging, the return to the basics of being a skilled multifamily investor and underwriter becomes more apparent.

Multifamily has remained the most sought after commercial investment class coming out of the recession. Nothing lasts forever — what’s the next multifamily?

Chandan: Given the nature of some of the challenges being faced by the retail sector, and even some of the changes in the supply-demand dynamics of the office sector, I think there has been a great deal of interest in industrial assets — in particular for urban fulfillment centers. That being said, if you take a long-term view, a carefully balanced multifamily portfolio will tend to outperform most other property types on a risk-adjusted basis.

About Sam Chandan

Sam Chandan is the Larry & Klara Silverstein Chair in Real Estate Development and Investment and Associate Dean for the NYU SPS Schack Institute of Real Estate. In addition, Dean Chandan is partner, global head of strategy, and a member of the investment committee at Capri Capital, a multinational investment management firm with $3.8 billion of assets under management in the United States and additional investment platforms in Sub-Saharan Africa and India. He is also founder of Chandan Economics, a provider of multifamily and commercial real estate mortgage data and risk analytics to banks and bank regulators, and co-host of the Real Estate Hour on SiriusXM Business Radio.