“In normal periods the U.S. is the largest, most liquid region for commercial real estate deal activity worldwide. In the second quarter, however, Europe surpassed the U.S. as a hub for investment. Trends into July are not looking favorable for the U.S.” (Real Capital Analytics, 8/31)
Discover the similarities and differences between these two commercial financing scenarios.
In the world of commercial real estate finance, many people use the terms "bridge lending" and "hard money lending" interchangeably. However, there are differences between the two types of financing and those differences can have a major impact on the way your loan is structured and how the approval process works.
“Bankers expect commercial real estate loan originations to drop 59% in 2020 because of the economic fallout from the coronavirus pandemic. Lenders are forecast to complete $248 billion of loans backed by income-producing properties — down from 2019's record volume of $601 billion, according to a new projection by the Mortgage Bankers Association.” (CoStar – subscription required, 7/20)
“The repeat sales of $39.1 billion for the first five months of 2020 fell 24.2% from the same time a year earlier. This is the first look at the year's commercial real estate pricing trends, calculated by using the price change from the pair of first and second sales of properties sold multiple times. The indices are based on 538 repeat sales in May and more than 227,324 since 1996.” (CoStar - subscription required, 6/25)
COVID-19 has significantly impacted the global economy as countries took sweeping measures to combat the spread of the virus. Halts in production, logistics activity, and consumer demand have had outsize effects on the globally intertwined supply chains many companies have built. Zencargo, a logistics startup, predicts supply shocks will generate $700 million in losses for the U.S. retail industry alone in the period from March 9 to April 20. This has led many supply chain experts to formulate risk mitigation strategies accounting for a variety of factors from labor costs, to capital investments. Many companies had one pain point in common: high supply chain concentrations in China. The effects of production halts are still being felt across many sectors. It is likely this crisis will force companies to assess the risk of reliance on one source for so many inputs and finished goods. One potential effect is the increased buildup of manufacturing and distribution capacity in the United States. A large-scale shift to domestic buildup has important real estate implications, particularly for industrial properties. From modifications to existing properties to entirely new development of custom facilities, the new demand could represent a strong opportunity to generate returns for investors that can lead and respond to these changes.
“As the current coronavirus pandemic reaches a (hopefully) peak in the U.S. and the extent of the devastation to the economy comes into focus – 22 million unemployed, thus far, with downstream impacts to everything from retail sales, sporting events, the price of oil, and the stock market (regardless of a mini bull market in the past week or so) – we have begun to think about what the recovery is going to look like, which real estate segments will be the winners and losers in the “Great Lockdown,” and what is happening in the real estate capital markets? And so we asked our client base of real estate market professionals to tell us what they thought, in this special edition COVID-19 Real Estate Sentiment Survey.” (RCLCO Real Estate Advisors, 4/21)
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
Having spent my entire career in commercial real estate (CRE), I have made more than my share of mistakes and witnessed countless others. There are literally thousands of decisions made in any commercial real estate transaction. Many of them are so small they are virtually unrecognizable. Early in my career, I was introduced to a very simple chart that I have grown to rely upon when making capital allocation decisions. It very simply shows that as time elapses, your ability to influence the outcome diminishes, and the cost to influence that outcome grows.
In simple terms, a dollar spent early in the process has a much greater influence on an outcome than a dollar spent later in the process. I’ve seen this simple truth repeatedly played out in my career. Not enough invested up front can be the difference between profit and loss. This concept leads us to the first mistake CRE sponsors make: undercapitalizing the business plan.
- Differentiators in offering refer to the regulatory offering types (accredited vs non-accredited investor offerings), which are of the utmost importance to real estate sponsors thinking about raising capital online.
- Differentiators in platform refer to both the purpose (marketplace vs captive) and the incentives behind the platform, which is a critical investment due diligence item for anyone intending to invest through crowdfunding.
To date, the most successful real estate crowdfunding websites tend to be crowdfunding marketplaces focused on accredited investor offerings. These include CrowdStreet.com, RealCrowd.com, and EquityMultiple.com. Because these sites attract multiple sponsors (a marketplace) and can bring more money to real estate transactions (no fundraising cap), they garner the highest quality deals and attract the greatest quality and quantity of investors. In addition, they protect their brand by vetting the deals and sponsors before permitting them to market their offerings on their platform.
There has been a glut of crowdfunding platforms erected with the hopes of emerging as the real estate crowdfunding market leader. However, this glut has outpaced user-adoption. As a result, numerous crowdfunding companies have closed down or consolidated as they have struggled to generate the fee income required to outpace their large overhead.
Back when we were young, fresh-faced students coming out of school and entering the real world we likely had a basic understanding of investing that was limited to publicly traded stocks. Then, as we matured, we all came to realize that investing in publicly traded stocks was only one of the many ways that we could invest our money in the hopes it would grow. Such options are now more diverse and more available than ever and are no longer the exclusive domain of large investors and financial institutions.
One such investment is commercial real estate. This investment class typically takes significant amounts of capital and historically has been a relatively illiquid investment. Over the years, however, those features have significantly changed, and now there are more ways to invest in commercial real estate than ever before.
But before we discuss the ways you can invest in commercial real estate, it must be emphasized that all investments in commercial real estate are not equal. It stands, as with all efficient markets, the greater the risk, the greater the reward (or loss). Commercial real estate is no different. And those risk profiles have designations that are common among most investment classes: debt and equity.