Real estate crowdfunding, otherwise known as online syndication, is a relatively new invention. It was enabled less than 10 years ago by an act of Congress and then signed into law by President Obama.
Dr. Adam Gower, a noted authority on crowdfunding and author of the new book, Real Estate Crowdfunding Unleashed, says that it was almost an accident that the online syndication market took off for real estate. The targets of the new law, he explains, were start-up operating companies that historically have had a challenging time raising capital.
In contrast, income-producing real estate has historically been well capitalized by most measures — the asset class has long demonstrated its ability, generally speaking, to deliver consistent returns to investors over time. That’s why the real estate sector has such a successful, long history of securing “offline” capital for private equity real estate deals. Like any investment, however, there is always the risk of loss with real estate investing and no guarantee any individual deal will perform.
But leave it to the real estate sector to discover the virtues of something new, and sure enough, the industry has. Gower, who has been tracking online syndication and crowdfunding marketplace activity since its inception in 2012, says in his book that crowdfunding has grown to represent nearly 25% of all private equity capital raises for commercial real estate in the U.S. According to his analysis of more than a million data points from the SEC, crowdfunded deals reached an all-time high of $15 billion in 2020, up from $7 billion in 2019.
Notably, Gower’s research reveals that traditional, offline syndications dropped by 15% in 2020, but the number of online syndication deals actually increased, composing 17% of all syndications in 2020. Suffice it to say, crowdfunding went mainstream during the pandemic, as more sponsors discovered and used the online channel, and more retail investors dived in. It was a meeting of supply and demand precipitated by a cutback in traditional capital sources early on in the pandemic, and an increase in interest and demand from retail investors who never before had direct access to private equity real estate investment opportunities.
Put in perspective, Gower concludes, “crowdfunding has been growing faster than traditional capital formation methods as the pandemic abates, leading the way out of the pandemic-induced downturn.”
Our experience at CrowdStreet corroborates the overall market’s growth story. 2020 proved to be our most successful year ever, with sponsors raising $641 million on the platform, nearly three times more than was raised in 2018 and almost 12 times more than just five years ago. All told, more than 250 sponsors have used the CrowdStreet Marketplace to raise more than $2 billion across 500 deals. At the same time, the average value per project on the platform has increased almost fourfold from $20 million in 2014 to $78 million in 2020.
Given the speed and efficiency with which equity capital is being raised online, Gower wonders aloud why any sponsor today wouldn’t file with the Securities and Exchange Commission to raise capital through a “general solicitation” filing, which means the offering can be marketed widely. There’s no downside to doing a Reg D 506(c) deal versus a 506(b) deal, Gower says.
Sure enough, new and seasoned sponsors are looking online to raise capital, expand their direct networks of and relationships with retail investors, and improve the efficiency and consistency of their investor relations. “Online syndication is now something we consciously consider as part of the capital stack for every deal,” says David B. Pollin, Co-Founder and President of The Buccini/Pollin Group. “But while the industry has come a long way, the industry is still in the early innings of scaling up to realize the full potential for online capital raising and investing.”
Indeed, it’s early innings, but the pace is accelerating as more project sponsors come together to raise capital with retail investors online. Don’t be left out, or left behind.
Tore Steen is CEO of Austin-based CrowdStreet, which operates an online syndication and investing platform for commercial real estate.
