Flush With Cash And Skittish Over Stocks, Retail Investors Are Piling Into Crowdfunding
For 38 years, Jamestown has raised equity from high net worth German investors to fund its $35B of commercial real estate transactions, including the iconic redevelopments of Ponce City Market in Atlanta and Chelsea Market in New York.
But in 2019, Jamestown did something new: It started a fund designed to draw investments from Americans outside the top 1% who want fractional ownership in a real estate project — specifically, the company’s redevelopment of a former dairy plant across the street from PCM, a 2.1M SF former Sears warehouse Jamestown turned into creative offices over a popular food hall.
“People want to do their own thing,” Jamestown CEO Matt Bronfman told Bisnow. “They don't need an expert. They would rather control and make their own decisions. At the end of the day in real estate … you can point to it and say, ‘I own a piece of that building.’”
The Jamestown Invest direct-to-consumer fund raised $5.5M before its launch, Bronfman said, and bought a 51% stake in the Southern Dairies property from Jamestown in March 2020, according to a Securities and Exchange Commission filing. It raised another $2.4M in the six months that followed, and Jamestown Invest has raised $4.6M from nearly 500 investors this year.
“We see more velocity, more people interested,” Bronfman said.
A confluence of events is feeding a real estate investment frenzy. Investors are jittery about how long Wall Street’s bull market will last and rising inflation, and younger professionals with pandemic cash hoards have grown savvier with their personal investments.
These individual investors are following the institutions into commercial real estate: U.S. CRE investment volume reached a quarterly record $176.9B in the third quarter, according to CBRE, up more than 150% from the year prior.
Surging investor demand is partly due to the fact that many investors realize the coronavirus pandemic ended up not hurting commercial real estate as much as anticipated, adding a sheen to the asset class, said Charles Clinton, the CEO of EquityMultiple, a crowdfunding platform that focuses on accredited investors — those with a net worth over $1M and income of $200K or more per year — who want to buy small chunks of real estate portfolios.
“The impact of the pandemic on real estate was dramatically smaller than it was perceived to be,” he said. “If it could survive this, it could survive anything.”
CrowdStreet, one of the largest real estate crowdfunding platforms, said it has raised more than $2.2B from individual accredited investors, more than a quarter of which came last year.
"2020 proved to be our most successful year ever, with sponsors raising $641M on the platform, nearly three times more than was raised in 2018 and almost 12 times more than just five years ago," CrowdStreet CEO Tore Steen wrote last month.
This summer, fractional ownership startup Rhove launched a platform to raise money from anyone interested in fractional ownership of real estate across the globe backed by Regulation A+ sponsor Dalmore Group. A Dallas private equity firm offered fractional ownership shares of a collection of hotels open to any investor for as little as $250 each in April.
Much of the inbound interest and investment is coming from people who don't meet the SEC's guidelines for accreditation, but who nonetheless want to put their money into income-producing real estate through crowdfunding and other fractional ownership funds said Eddie Wilson, the CEO of the American Association of Private Lenders, a trade group formed in 2009 to represent the private real estate and peer-to-peer lenders.
“I think it is a lot of newly minted people,” Wilson said. “We’re seeing a lot [from] tech, those from the distribution sector. We’re seeing them come from everywhere.”
Many of these investors earned financial success during the pandemic and have money they want to preserve, Wilson said. Some may be skeptical about other alternative investments, such as cryptocurrency — real estate, on the other hand, is tangible and better understood.
“For us, it started because people asked us, ‘How do I invest in Jamestown?’ over the years,” Bronfman said. "And the answer was, you couldn't."
A 2019 Facts and Figures Research report projected that crowdfunding real estate platforms will raise $868M by 2027 from just $13.2M in 2018. Crowdfunding overall is expected to reach $114B this year, according to an EY report. Last year, 60,000 investors participated in real estate crowdfunding platforms, according to research by crowdfunding platform GowerCrowd.
“Now it really seems to be here to stay,” Wilson said. “You’re seeing a lot of big funds, which are essentially crowdfunding platforms … deploying into real estate. It’s definitely growing. It’s a small percentage, but that’s billions of dollars.”
EquityMultiple’s investors spend an average of $30K on an investment, Clinton said, but they can get in with as little as $10K. There has been a surge of new buyers since the pandemic, he said, especially among younger professionals wanting more control of their retirement investments and personal finances, a trend fueled by commission-free online stock trading platform Robinhood.
“People are wiser to their options than ever before and more comfortable about making these decisions. It's diversification. It's what pushes people into alternatives,” he said. “Everyone, of course, reads about every 20-year-old being a day trader on Robinhood.”
Many of those Robinhood novices are now gravitating toward crowdfunding and other fractional ownership vehicles out of fear over the economy, said Jerome Myers, the CEO of Myers Development Group, which owns apartment complexes across the Southeast partially funded by non-accredited investors.
Despite Wall Street stocks reaching new highs this year, many experts warn the bull run could reverse in 2022. And other experts are warning about the specter of hyperinflation in the U.S., which is driving small investors into real estate as a hedge, said Christy Keeton, the CEO of crowdfunding platform Keeton Realty Investments.
“The fear is real out there,” she said. "I'm afraid my money is just going to end up down the drain if it stays in Wall Street."
Keeton started her crowdfunding platform before the pandemic with small multifamily properties, but as interest from investors has grown, so has her firm's ambitions.
She helped raise $3.5M from 35 investors — most of whom are non-accredited, she said — to purchase a 100-unit apartment complex in suburban Atlanta earlier this year. Her funds now own five apartment complexes of more than 500 units combined in Georgia, while raising an average of $100K per investor.
“We probably have close to 50 new investors,” she said. “A lot of people are coming toward real estate.”
While Jamestown is currently raising its 31st fund from its bread-and-butter German investors that will total $600M, Bronfman said, the firm isn't satisfied with just one direct-to-consumer offering for retail investors.
“We got into this business because we believe it [over the] long haul," Bronfman said. "So we'll be disappointed if we don't do something more in this space."