The Music Has Stopped For Once-Booming Real Estate Crowdfunding Platforms

John Austin, a retired life insurance salesman in Kansas with eight grandchildren, was looking to boost his retirement savings three years ago. That's when he invested $50K in a $166M Columbus, Ohio, development through an online real estate crowdfunding platform.

He was one of hundreds of thousands of small-time investors who funneled money into crowdfunded projects in 2021 and 2022, when near-zero interest rates made real estate deals look like guaranteed moneymakers. 

Instead, many of those investments are at risk of being completely wiped out. 

The developer Austin invested with, Kaufman Development, is now pursuing an “aggressive sale” of the office, residential and retail project, which is “facing significant challenges,” including slow office leasing and higher-than-expected interest rates, it told its investors on crowdfunding platform RealtyMogul last month.

The fate of the $14.5M in equity Kaufman raised through crowdfunding, including Austin’s $50K, depends on the sale price, as the developer must first pay back its lenders. Austin said he hopes the sale will allow him to recover at least some of his investment, but for now he is forced to wait.

“A lot of investors, myself included, can get swept up in something that sounds good and feels good and overlook some of the financial details that might have more impact on the success of it,” he said. 

Austin said he won't be putting any more of his money into real estate crowdfunding deals, and he isn’t alone. 

The once-booming sector is facing its first major downturn since federal laws changed in 2012 to allow developers to solicit small investments online, a move that spurred the creation of platforms like CrowdStreet, Cadre, YieldStreet, RealtyMogul, RealCrowd, Fundrise, Small Change and EquityMultiple.

Crowdfunding syndication jumped from $7B in 2019 to $15B in 2020 and $17B in 2021, according to crowdfunding consultant Adam Gower. The real estate syndication industry, of which online crowdfunding is a part, saw similar growth: Syndicators raised more than $115B from investors between 2020 and 2022, The Wall Street Journal reported last year.

But the number of offerings on these platforms has dropped precipitously. A Bisnow analysis found that among the five largest online commercial real estate crowdfunding platforms, none have more than a handful of current active offerings for investors.

This drop has created a crisis for crowdfunding platforms, said Ian Ippolito, an active crowdfunding investor and the founder of the Real Estate Crowdfunding Review.

“I don’t see how they can stay in business because they make money off fees from listing deals,” Ippolito said. “If they’re not listing deals, they can’t continue on.”

Crowdfunding investors tell Bisnow they were lured into investing in real estate through those platforms with flashy sponsor presentations promising tantalizing returns. But they are now facing tens or hundreds of thousands of dollars lost to deals gone sour. 

John Calabrese, an executive with Guggenheim Securities, made his first real estate crowdfunding investment in an apartment development near his home in Fort Lauderdale via CrowdStreet in 2022. More than two years later, little has been built on the site and he's been disappointed by what he says is a lack of care for investors.

“This was a generational thing for me, like driving my son to school. ‘Johnny, look at the building going up,’ you know, ‘This is your building,’ kind of thing,” Calabrese said in an interview. “And instead, it's like the biggest meltdown disaster I think I've ever experienced.”

Gower, who said he has raised more than $300M for sponsors on crowdfunding platforms since 2014, said today's real estate environment, with falling values and high interest rates, is “new territory” for the platforms and many of the sponsors who raised money.

“For the last 10 years, up until a year and a half and two years ago, everything was rosy. It was like being in Vegas and winning all the time,” Gower said. “Then suddenly the music stops.”

When The Floodgates Opened

Leyla Kunimoto, an accredited real estate investor who dipped her toes into online crowdfunding deals between 2020 and 2022, said she remembers how quickly the offerings would get oversubscribed.

“Sometimes I wouldn’t open the email before getting a second email that read, ‘Oops. Everything is full,’” she said.

The period between 2012 and 2019 saw the formation of several crowdfunding platforms and a gradual increase in money invested on them. But it wasn’t until retail investors were stuck at home looking online for places to put their money that it began to skyrocket. 

CrowdStreet said $1.2B was invested on its platform in 2021, surpassing the $1B total between its 2014 founding and February 2020. It boasted that year that developers could raise millions of dollars “in seconds” on its platform and that it had to turn down investors who didn’t sign up fast enough. 

EquityMultiple said its platform closed $115M of new investments in 2021, its biggest year “by far,” and its distributions to investors that year surpassed the combined total since its 2015 founding. 

The influx of money that year helped finance a range of developments, such as a $185M multifamily project in West Harlem, a $173M office development in Southeast Washington, D.C., a 165-room Moxy hotel development in Miami and a 369-unit apartment tower in Nashville, which raised $10M in 24 hours in September 2021 on RealtyMogul. 

Sponsors who came to the platforms lured investors with ambitious projections on the money they could make over the life of the scheme, with predictions of double-digit returns in some cases. 

Nightingale Properties, the firm at the center of the misappropriation scandal that rocked the crowdfunding industry last year, told CrowdStreet investors they could net an internal rate of return of 35.5% in five years from the acquisition of a 1M SF Atlanta office complex.

The presentation was wildly effective — it led to the biggest funding campaign in CrowdStreet history when the round closed in spring 2022. But it proved too good to be true. 

The deal never closed, and a year later, it was discovered that Nightingale CEO Elie Schwartz had taken off with the money, leading to a contentious bankruptcy and accusations of fraud that are still being investigated.

“It’s all rosy,” said one investor, speaking on the condition of anonymity, who previously worked for a real estate syndicator. “It’s just like anything else, you wouldn’t want to sell yourself short. It has to be realistic but good enough for people to want to take a look.”

Gary Kremen, the founder of Match.com, invested in real estate deals that were syndicated on crowdfunding platforms and said investors got sucked in by the language in offering memorandums, both from online platforms and real estate syndicators who target wealthy individuals like doctors and lawyers.

Kremen said in an interview he lost a total of $1M in combined syndication deals in his lifetime, some of which also had CrowdStreet investors as limited partners.  

“Hindsight is always 20/20. Now I know [the offering memorandums] are much more aspirational. I mean, I should have known better. I’m an entrepreneur. I’ve raised money,” Kremen said. “You’re in a group, CrowdStreet for example. You get sucked into the psychology of the crowd.”

As sponsors projected the highest possible returns to woo investors, they often turned to floating-rate debt. This type of loan seemed safe as rates had stayed near zero for the prior decade, but that all changed in the spring of 2022.

The Federal Reserve’s aggressive campaign of interest rate hikes, 11 increases between March 2022 and July 2023 that brought the benchmark rate above 5.25%, came as a shock to both developers who had raised money on crowdfunding and the investors they courted.

Gower said all the sponsors and investors who came into the crowdfunding industry in the past decade jumped in when times were good, and it appeared as if those good times would never end.

“They drank their own Kool-Aid. They were taught to believe it by the gurus who came into the market, like the blind leading the blind,” Gower said. “They believed that this time was different. That this was how you build long-term wealth. And there was no experience, on either side, of a downturn.”

‘A Recipe For Disaster’ 

For Austin, the first sign there was a real problem with his Columbus investment came on March 26 when he received an email from the developer asking investors to put in more money. 

In the request, known as a capital call, Kaufman Development said it needed a total of $7.5M, including $2.6M from RealtyMogul investors, to stabilize the deal and secure permanent financing. Austin said he believed the developer’s pitch that this would help bridge a short-term gap and keep them on a path to eventually turn a profit. He was worried that if he didn’t answer the capital call his share would be diluted, so he invested another $8,900. 

“I didn’t want to get watered down and have it work out and be upset,” he said. 

The gambit failed. Kaufman told investors in an April 25 letter that it received less than half of the $7.5M it needed and would be returning the new money it raised. It is now trying to quickly offload the development, dubbed Gravity 2.0.

Kaufman CEO Brett Kaufman told Bisnow the project is facing the same economic headwinds as real estate developers across the country, but he remains bullish on the Columbus market and has seen “very strong interest” from potential buyers of the property. 

“We are very encouraged and optimistic about the marketing process to date,” he said in an emailed statement. “The marketing of Gravity Phase II for sale has no impact on the other projects in our portfolio, which are performing well in a challenging environment.”

These capital calls have become more common over the last year in deals that raised money on platforms and through traditional syndication, investors and experts say. 

When deals start to go south, the first step sponsors take is to stop making distributions to investors because they need the money to make their debt payments. Then, as their financing gaps keep widening, sponsors ask investors to put in more money, typically a set percentage of their initial investment. 

Investors are then left to determine whether they believe the additional funding will bail out the deal and save their initial money, albeit with a lower return than first projected, or whether they would be “putting good money after bad,” Ippolito said. 

“Either enough of them do it to save the deal, or if they can’t, they basically lose the property to the debt holders,” he said. “It’s a catastrophic event.” 

These situations aren’t unique to crowdfunding. High interest rates have squeezed the finances of many developers and buyers who syndicate money from investors, forcing them to seek more money to save the deal. 

A number of real estate syndicators — those who raise money from individual investors without using an established third-party crowdfunding platform — this past year have faced the need to raise additional capital to salvage deals, The Real Deal reported in December. They included Dallas-based Elevate, which initiated two capital calls for Houston properties in 2023.

Last month, Ashcroft Capital asked every limited partner in its purchase of a 312-unit suburban Atlanta apartment property two years earlier to pony up an additional 19.7% of their initial investment, according to an email from the firm to investors posted on the investor forum website Bigger Pockets.

Ashcroft executives said it needed the money to replace the building's interest rate cap that expires this year, resume renovations, maintain loan covenants and buy time for the multifamily market to stabilize so it can sell when prices are higher. 

The New York City-based syndicator doesn’t appear to have used a crowdfunding platform for the deal, but it raised money through its website with a minimum investment of $25K. A frequently asked questions page for Ashcroft’s fund says “We do not anticipate making capital calls.” The email it sent to investors said this was its first. 

An Ashcroft representative didn't respond to a request for comment.

“There is definite distress from a lot of operators,” said Derek Carroll, a Rochester-based capital markets broker with High Peaks Capital. “Many of them smaller or maybe newer haven’t been through the cycle multiple times or even once before, so they’re over-aggressive on a lot of the projections … It’s a recipe for disaster. So a lot of these deals are definitely struggling.”

‘The Bottom Has Fallen Out’

Activity among crowdfunding investors dried up last year. By Gower’s estimation, online crowdfunding platforms that focus on real estate are fielding as few as 10% of the deals they were offering at the peak. 

While there is no definitive data set that details how much business has fallen, a Bisnow analysis found that the number of new offerings available on the major sites is way down from peak years.

EquityMultiple has the largest number of investment options on its platform, with eight open offers in a mix of single- and multiple-asset investments and funds, including DMG Capital and EM Investment Partners seeking to raise $4M to purchase a 47-unit Chicago apartment property. 

That would mark a decrease from its past years. EquityMultiple has raised $5.2B for 115 sponsors since 2015, according to its website. Sixteen of its campaigns from 2021 have liquidated, after 13 in 2020 and 29 in 2019. 

RealtyMogul lists just two open real estate crowdfunding campaigns on its platform, as does YieldStreet. EquityMultiple, RealtyMogul and YieldStreet didn't return messages seeking comment. 

“If you look at the crowdfunding websites, the ones that had a dozen or more deals at any one time, they only have one deal on that platform,” Gower said. “Basically the bottom has fallen out of the market.”

CrowdStreet, which has hosted nearly 800 crowdfunding campaigns totaling more than $4B, has just a single crowdfunding deal on its platform.

“While current expectations call for a ‘higher for longer’ environment with respect to interest rates, we believe that a market that is currently trending sideways, inflation that continues to gradually migrate downward, and a Fed dot plot that still forecasts two rate cuts in 2024 may create additional opportunities for investors on our platform in the months ahead,” a CrowdStreet spokesperson told Bisnow via email. 

The decline in deals mirrors the broader commercial real estate landscape. Investment sales volume was down 51% in 2023 from the year prior, according to MSCI data. But even before the malaise affecting commercial real estate, there was upheaval in the crowdfunding sphere. 

One of the first platforms born out of the JOBS Act, iFunding, ceased operations in 2016. A year later, the SEC sued its co-founders, William Skelley and Sohin Shah, for misappropriating more than $1.7M from over 40 investors to pay for personal expenses. RealtyShares, another early entrant into the crowdfunding universe, ceased operations in 2018 after it failed to raise enough capital to fund operations. The platform’s portfolio has since been taken over by IIRR Management Services.

Other names that once dotted the crowdfunding landscape are no more. PeerStreet filed for bankruptcy in 2023 and is attempting to sell off its portfolio to pay creditors. RealCrowd, Patch of Land – which rebranded as Patch Lending, but its website has since ceased working – and Prodigy Network all have shuttered operations. Cadre was acquired by YieldStreet in January for an undisclosed sum.

Then there's the fallout from the Nightingale scandal. Schwartz is still under federal investigation and failed to make good on a settlement deal to pay back the investors whose money he misappropriated. A group of those investors has filed an arbitration claim with the Financial Industry Regulatory Authority seeking to shut down CrowdStreet for failing to conduct proper due diligence.

Ippolito said many crowdfunding veterans view that ordeal as an outlier that scrupulous investors could have avoided. But this ongoing real estate recession is putting many deals that had no improprieties at risk of total wipeout.

“Nightingale was one sponsor, and there were red flags,” Ippolito said. “The downturn affects everyone.”

RD Advisors Managing Director Sean Kelly-Rand, who raised money on CrowdStreet this year for a private credit fund, said his firm spoke to prior crowdfunding investors in November and December after the Nightingale scandal made headlines. He heard they were still interested in putting money into crowdfunding deals, but that they “want to go back to fundamentally safer investments, not shoot for the highest IRR deal.”

“We did our homework. We spoke to our investors from CrowdStreet. We had conversations and got their view. Was there still demand? How did they feel about the platform?” he said. “Our research came back and said ‘Hey there’s still demand there.’ And there’s especially demand for our product, which is essentially a lower risk profile. And it turned out there was actually a lot more demand than we had expected.”

At one point, various marketing studies predicted robust growth for the crowdfunding real estate industry, with projections of the industry reaching $250B by 2030. Now some operators are simply hoping that their platforms become more active again this year.

On the Small Change crowdfunding platform, the fundraising goals on all of the deals it listed last year added up to $18M, but it has already surpassed that this year with $26M, CEO Eve Picker told Bisnow.

“What we saw last year was a complete disaster. We had very little activity. The capital markets were closed in all respects, not just [due to] interest rates,” Picker said. “Starting in January of this year, we have gotten very busy.”

To get through the downturn, Picker said the company's response “was to lean down our team to make sure we broke even.”

While the industry is weathering its biggest slowdown to date, Gower said crowdfunding isn’t going away. Instead, he said that many of this generation of crowdfunding investors, even those who have lost money, will continue to be lured into commercial real estate for the promises of lucrative returns.

“There’s going to be a purging or culling of the herd. You’re going to see a lot of sponsors go under. Their investors will lose a lot of money. They’ll go into litigation,” Gower said. “But people will have short memories, and the cycle will begin again.”