Online Syndication Can Step In When Traditional Lenders Step Down
In the face of widespread economic uncertainty, some institutional capital sources are paring back their real estate lending arms. Sponsors who had all but knitted up their capital stacks may now be missing 5% or 10% of the equity they need to move deals forward.
But there is still a hefty appetite for real estate among a different crowd of backers: individual investors. These online investing platforms have found that their investors are ready and willing to pour equity into real estate deals even when traditional lenders have shrunk their stakes.
CrowdStreet, an online commercial real estate investing platform, sent out a survey in late April to a select group of accredited investors in its marketplace to gauge their willingness to put up more capital for new deals. It reported that 95% of respondents said they would actively invest in a real estate deal that made financial sense.
“Even we were surprised at their level of enthusiasm for new deals,” CrowdStreet Chief Investment Officer Ian Formigle said. “The supply of deals is constrained right now, and it’s tough going to find those great sponsors, but to the extent that they are there, there is private capital eager to back them up.”
As the coronavirus crisis wears on, online investing platforms can play a vital role in financing real estate across the country. Ryan Strub, CrowdStreet’s national managing director, said even sponsors who have great, long-term relationships with their lenders are facing gaps of $3M to $10M in their upcoming deals. Agencies, too, are being more cautious with their lending, Formigle said. Many of the deals he has seen from Fannie Mae and Freddie Mac have included six to nine months of interest reserves funded upfront, as well as capital expenditure reserves and other added contingencies.
Meanwhile, CrowdStreet investors recently offered more than $22M for an industrial property in Massachusetts, and $24M for a multifamily property in Washington, D.C. CrowdStreet investors also offered about $9M to a deal insured by HUD in Austin, Texas.
In addition to multifamily and industrial, since the pandemic struck, CrowdStreet has launched its first data center offering, a manufactured housing portfolio, a medical office portfolio and more. CrowdStreet investors committed over $60M across 28 deals in March and April alone.
While the minimum investment amount for most of the deals is $25K, the average investment is often closer to $45K or $50K. For some of the most popular deals, investor interest far outpaces sponsor needs, CrowdStreet said. When the company went out to investors to raise $5.3M in equity to finance a medical office project in Dallas-Fort Worth, the sponsor received over $15M in offers within an hour.
In the face of economic struggles, CrowdStreet is maintaining a high caliber of review for its sponsors. According to Strub, the company asks that sponsors arrive with a term sheet from a lender based on underwriting that takes the effects of the coronavirus into account.
“The deal has to be fully baked before it can go online,” Strub said. “The last thing an investor wants to do is wire money and then wait 120 days for the lender to close on the deal. It has to have been scrutinized for a post-pandemic world.”
CrowdStreet also expects its sponsors to have a strong track record of projects with similar business plans, as investors are hoping for steadiness rather than experimentation.
Once a deal is reviewed and approved, the CrowdStreet team builds out a custom page so sponsors can showcase the project’s specifications, team and project details. After letting investors review the deal for a few days, CrowdStreet hosts a live webinar for sponsors to present their deals to potential investors. During the webinar, investors have a chance to invest. Sometimes in a matter of 15 minutes, offers from investors will hit — or even oversubscribe — the total allocation amount, Formigle said.
For Strub, seeing how well CrowdStreet’s platform worked actually convinced him to switch careers.
“I sponsored three deals with CrowdStreet before coming on as an employee,” Strub said. “With all the investor demand, this is a time for sponsors to give online syndication a chance. There’s the horsepower to bridge those gaps we’re seeing.”
This feature was produced in collaboration between the Bisnow Branded Content Studio and CrowdStreet. Bisnow news staff was not involved in the production of this content.