David Kessler, national director for commercial real estate at accounting, tax and advisory firm CohnReznick, has studied the relationship between commercial real estate and crowdfunding carefully.
He points to the old formula of supply and demand as one of the main reasons why crowdfunding has become such a viable option so quickly for commercial real estate investors.
And he doesn’t see the growth of commercial real estate crowdfunding slowing anytime soon: The benefits of this way of investing in office, multifamily and other commercial buildings are just too strong.
“On the supply side, you have a lot of sponsors who are looking to buy into commercial real estate,” he said. “They want to rehab these properties, create some value in them or develop a real estate project. They need the capital to do this. Maybe they don’t have enough access to capital from friends or family members. Maybe their deals are not large enough for the institutional investor or the private equity funds. But they can get this capital from crowdfunding campaigns.”
That is fueling the supply side. And on the demand side? There are plenty of smaller investors who are eager to participate in the commercial real estate market, Kessler said.
“People are seeing that they now have access to invest in these real estate transactions that were out of their reach before,” he said. “A lot of the crowdfunding platforms have 10,000-plus potential investors, people who have logged onto their sites and looked at their deals and have been cleared as accredited investors. We are always hearing in the media about how great the returns are with real estate, while at the same time we’re hearing about how the stock market isn’t doing so well.”
As Kessler puts it, why would you invest money in a CD and earn 1 percent when you can earn from 7 percent to 15 percent on a fairly safe real estate investment?
Kessler said that crowdfunding works with all commercial property types, but that it works best with properties that are income-producing.
“You always have risk when investing in commercial real estate,” Kessler said. “There’s the risk that you invest in properties and the tenant moves out. There’s the risk that a new building will open up across the street and everyone will move to that property and leave yours behind. But the risks are definitely higher with development properties than they are with an income-producing property.”
Kessler said that commercial real estate crowdfunding has come a long way toward earning respect from investors and sponsors in a short time.
“When crowdfunding came out, no one thought it would work for commercial real estate,” he said. “They thought that commercial real estate was too sophisticated for crowdfunding. But not only is crowdfunding working, it is a viable solution for investors and sponsors.”
The biggest trend now in real estate crowdfunding? Kessler said that institutional-quality investors, those who can access capital through private equity companies, life insurance firms and other traditional means, are now participating in crowdfunding, too.
These investors aren’t turning to crowdfunding because they need to. They’re doing so because they recognize that crowdfunding is an efficient way to source capital to real estate projects, Kessler said.