“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.