Crowdfunding Breathes New Life into Commercial Real Estate
Monday, September 28th, 2015 and is filed under Commercial Real Estate
Breathing New Life into Commercial Real Estate with Crowdfunding
The powerful rise of social networking has led to the phenomenon of crowdfunding. The popular social tool allows average individuals to pool money together in support of ideas and concepts for future products and services. Crowdfunding has helped video game developers produce games that were ignored by major developers and even launch tech gadgets. Common examples include jewelry and virtual-reality headsets.
Now, crowdfunding is quietly moving into a new sector of the economy: commercial real estate. Commercial real estate crowdfunding is breathing new life into an industry that has struggled in recent years as property values plummeted, credit lines tightened, and investors held onto their money. The rise of commercial real estate crowdfunding represents a natural evolution of the online investing platform that matches smaller-scale investors with property developers and managers looking to take advantage of a wide variety of real estate investing opportunities.
Traditional Investing vs. Crowdfunding
In a traditional setting, commercial real estate firms or entrepreneurs pitch ideas to large investment firms or banks, prove the value of their concept, and execute the idea with the hope of earning a reasonable return on investment. Or, they use their own capital and that of larger institutional partners to get a project done. Crowdfunding has opened the door to a whole new online world of investment partners, a world where both the risks and rewards of real estate investing are shared.
Crowdfunding is especially impactful for individual investors looking to diversify their portfolios into investments outside the mainstream. Commercial real estate crowdfunding allows individuals to make small-scale investments in properties; smaller investments minimize overall risk. Investors can remain passive in the project, relieving concerns related to actually managing a property. As a result of this passive role, investors can safely put their money into a commercial property whether it is down the street or across the country. Investors also enjoy the freedom to throw their money at a project that appeals to them. Whether it is a restaurant or a medium- to high-end hotel, investors can select the project they are interested in and lend financial support in exchange for sharing the potential profits.
One of the most recent evolutions in real estate crowdfunding is the introduction of professionally managed fund options. By investing in a fund over a single property, individuals can further diversify their investment dollars into multiple high-end properties with minimal investment requirements.
As quickly as crowdfunding came onto the social scene for product development, it is also making a significant impact on commercial real estate. Just this past July, a group of 85 people raised $1.5 million through crowdfunding to purchase a 15% stake in the Hard Rock Hotel Palm Springs. The infusion of cash allowed the hotel to provide the property with the capital it needed to stay on its feet.
Commercial real estate developers and managers use crowdfunding to raise thousands, even millions, of dollars to help purchase various properties. These groups use the cash to restructure debts, remove ineffective management teams and replace them, and return the business to profitability. In the end, the property can be resold for a profit.
According to the UCLA Ziman Center for Real Estate, commercial real estate crowdfunding is situated to have a massive impact on the marketplace. In 2011, crowdfunding through online platforms generated $1.5 billion in capital. By the end of 2014 that figure is expected to surpass $10 billion. Given the growth rate during the past three years, and the increasing popularity of crowdfunding in real estate, the market could see roughly $96 billion in capital raised in 2025.
That massive increase in the popularity of commercial real estate crowdfunding has developers scrambling to create new online platforms to connect investors with property development and management groups. With minimal risk for both sides and fewer hoops to jump through, the future is bright for both investors and developers thanks to real estate crowdfunding.