Crowdfunding Is Lowering Barriers to Commercial Real Estate Investment. Here's How to Get the Most From It.
Prior to the 1980s, commercial real estate (CRE) assets were rarely prioritized by institutional investors -- entities that hire financial professionals to manage pooled investment funds. CRE did become slightly more popular during the '80s and '90s, but it never accounted for more than 4 percent of institutional investors' aggregate portfolio until 2000.
And while bonds and equities continue to dominate most portfolios, a number of institutional investors have carved out a not insubstantial niche for CRE assets in the 21st century. In 2010, CRE accounted for 5.6 percent of institutional investors' aggregate portfolio, in 2013, it accounted for 8.8 percent of the portfolio, and in 2015, it accounted for 9.6 percent of the portfolio. Considering that institutional investors in the United States control over $25 trillion -- roughly 17 percent of all domestic financial assets -- CRE's portfolio share is nothing at which to balk.
That said, CRE has yet to see a parallel popularization in private individuals' investment portfolios. "When you look at the typical individual investor's portfolio ... there's often a big hole where commercial real estate is concerned," explains Nav Athwal, the founder and CEO of RealtyShares. "In fact, for many investors, this particular asset class is a relative unknown."
However, thanks in large part to the rise of crowdfunding, this may finally be starting to change.
Individual investors express interest in CRE, but question its accessibility.
Congress laid the groundwork for this uptick in individual CRE investment in early 2012 when it passed the Jumpstart Our Business Startups (JOBS) Act. Among other things, the JOBS Act nullified provisions of the Securities Act of 1933 that restricted the advertisement and sale of certain securities to the general public.
Under the new legislation, companies -- including CRE crowdfunding platforms -- could freely market their investment opportunities to any accredited investor (defined as an individual with a net worth of at least $1 million or an annual income of at least $200,000). In October 2015, the Securities and Exchange Commission approved a rule change to Title III of the JOBS Act that extended this privilege to non-accredited investors, as well.
These developments have paved the way for individual investors to dip their toes in an asset class in which they've long demonstrated interest, but which has often seemed prohibitively expensive. According to one survey of 2,000 Americans, 53 percent of respondents would like to invest in CRE assets in their communities -- including 67 percent of those aged 18 to 34 -- but 61 percent believe they lack the necessary funds.
The rise of CRE-centric crowdfunding platforms promises to help individual investors overcome this barrier to entry. Whereas traditionally, CRE investment has been reserved for those who could afford a five- or six-figure minimum buy-in -- hence institutional investors' dominance of the space -- crowdfunding enables an individual to get started with as little as $5,000.
Moving beyond REITs
In decades past, the only way for such small-scale investors to secure a stake in CRE assets was to buy into a real estate investment trust (REIT). REITs can take a number of forms -- publicly listed securities traded on various stock exchanges, non-traded public trusts, private trusts -- but for the average investor, they function more like a mutual fund with a CRE focus than a direct investment in CRE assets.
That's not to say that REITs are always a bad option -- far from it. U.S. News reports that, "since 1971, the average total annual return for the FTSE Nareit REIT index, which tracks the performance of all U.S. REITs, is 9.72 percent." Of course, as is the case with any mutual fund, individual investors in REITs have little to no say over which CRE assets their money is used to purchase.
For passive investors looking only to diversify their portfolios with CRE, this lack of control isn't an issue. For individuals looking to take an active role in strategic decision-making, however, REITs have never been particularly appealing. It's this latter class of individual investors that stands to gain the most from crowdfunding -- but only if they're able to make well-informed decisions.
The importance of data-driven decision-making
In CRE, the best-informed investment decisions are those that use historical data to determine the likelihood and degree of long-term profitability. In this regard, the democratization of data facilitated by emerging CRE data integration platforms has been a necessary condition of effective crowdfunding-based CRE investment.
Determining which crowdfunding campaigns are likely to generate the largest, most reliable returns is next to impossible without easy access to real-time CRE market data -- data that, until recently, was either hoarded by massive brokerage firms or filed away in fragmentary records in various county offices.
Armed with this newfound access, individuals now have the power to make informed decisions about market conditions and, through the mechanism of crowdfunding, direct what resources they have to promising investment opportunities.
Ultimately, CRE crowdfunding represents an exciting opportunity for individual investors to take back control of their portfolios from REIT (and other mutual fund) managers who might not always have their best interests in mind. Of course, in doing so, individuals are taking on an immense amount of responsibility for their own success, which is why they must do everything in their power to ensure they have access to the right information at the right time.