Adam oversees ArborCrowd’s corporate growth strategies including business development, digital technology and sales initiatives.
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2020 is shaping up to be a year that most people will want to forget. It has been particularly challenging for the nascent real estate crowdfunding industry, which — like many others — has been affected by Covid-19. This resulted in diminished deal flow, layoffs and suspensions of share redemptions. In June, we also saw the collapse of an early and significant player in the space as they faced lawsuits from investors due to failed investments.
In times such as these, it’s natural to question, what will be the future of the industry? In my opinion, the answer to this question is the future is very bright. However, the last few months have reinforced that the industry needs change to protect itself and investors.
I’ve long stated that the real estate crowdfunding industry would be due for a correction in the next downturn because of inherent flaws in some platforms’ business models and questionable underwriting often rooted in a lack of real estate investing experience. What nobody could have predicted was that this correction would start to occur due to a global pandemic, or that the resulting market volatility would be this significant.
Where are we now?
Real estate crowdfunding platforms are being tested in ways that many may not have been prepared to handle. In addition, staff reductions and share redemption suspensions indicate a broader disruption in the space. Platforms are doing everything they can to preserve cash and weather the Covid-19 storm, and some unfortunately may not survive the fallout. This is to be expected for a nascent industry facing its first economic downturn.
To be sure, the pandemic has led to a material decrease in commercial real estate transaction volume as valuations have come into question and many sophisticated investment managers have taken a pause on investing in the asset class until the uncertainty clears up. While this industry-wide slowdown has trickled down to crowdfunding, we have been surprised to see some platforms continue to offer deals as if nothing has changed.
To be clear, good deals can be found in all stages of the market cycle. However, such deals have been hard to come by as the market was peaking, and until the Covid-19 dust settles, additional scrutiny on deals is imperative. On the surface, many deals may look good, but experienced real estate investors would be able to spot the holes in these offerings. Over the years, we’ve seen and passed on a number of deals that didn’t satisfy our underwriting criteria eventually listed on other platforms, and some deals may have become even less compelling post Covid-19. Herein lies what we believe to be a fundamental flaw in many real estate crowdfunding platforms’ business models. To remain economically viable, many are required to actively offer deals regardless of the market environment, putting investors at greater risk.
It is exciting to see that despite the current environment, demand for real estate crowdfunded investments persists. However, as fundamentals supporting even the most attractive deals may have shifted, it is more critical than ever for platforms to conduct extensive due diligence prior to offering opportunities to the crowd. This is why the more responsible real estate crowdfunding platforms opted to warehouse deals they invested in prior to the pandemic. While many of those investments likely remain sound — and the time to launch them may be near — the sudden market disruption due to Covid-19 necessitated additional time to fully understand how certain markets have been impacted.
Where do we go from here?
While unexpected, we see Covid-19 as an opportunity for industry introspection. It is impossible to ignore our peers that have not survived and those that may be teetering on the edge. Our industry is nothing without investors, and so we must evaluate what can change for the benefit of current and future investors. If we don’t squander this opportunity, we can create a much stronger industry and generate greater levels of trust between platforms and investors. Thankfully, we have seen some real estate crowdfunding platforms begin to adjust the way they operate.
Real estate crowdfunding has the opportunity to help sponsors get important projects off the ground by serving as a source of capital, filling a void left by lenders that have slowed origination activities. We have already seen an uptick in inbound inquiries from sponsors looking to fund projects, and we know other platforms are experiencing this as well. Moreover, history has taught us that market downturns tend to create distressed buying opportunities over time. Platforms that are positioned to invest in quality assets at the bottom of the market stand to realize significant upside when the market normalizes.
While we don’t know how long the pandemic will last, the demand for real estate investment should remain strong given its historical stability. If platforms want to continue to share in the upside of the global real estate crowdfunding market, which in 2019 was projected to reach $9 billion by 2021, we must prioritize the end-user over all else.
While a growing number of investors seek to increase exposure to direct real estate investments in light of the pandemic and the resulting downturn, the real estate crowdfunding industry is at an inflection point. The decisions that are made in the near term have the potential to influence a positive long-term outlook that benefits investors and platforms alike. In some ways, the companies that have failed to date can act as a warning sign that now is the time to strengthen the industry’s foundation and reputation to build trust within the investor community. I know my peers are as passionate as I am about the way crowdfunding has impacted — and continues to impact — the entire real estate industry. That is why I know the real estate crowdfunding industry has a bright future ahead.
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