Why Developers Are Embracing Online Syndication To Raise Funds For Real Estate
The market for online syndication, an increasingly popular tool to raise passive equity for commercial real estate projects, is projected to exceed $800B globally by 2027, a staggering 85% increase since 2018.
The pandemic might have spurred some of this growth as project sponsors searched for alternative funding for their projects, particularly as institutional investors took a more wait-and-see approach.
But this trend is also being driven by technological advances and, domestically, by evolving U.S. securities regulations over the last decade, said Brendan Sparrough, senior managing director of capital markets for CrowdStreet.
“While real estate sponsors have always had an interest in passive, individual investors, there simply was not a scalable, repeatable solution available until recent technological and legal frameworks advanced to where they are today,” Sparrough said. “We seized this opportunity and built a platform that provides firms with access to passive retail capital at a scale that is now a viable alternative to traditional equity sources.”
Although it is often referred to as crowdfunding, CRE online syndication is considerably different and larger in scale than the crowdfunding platforms familiar to most people. Real estate syndication is governed by a different set of U.S. Securities and Exchange Commission regulations that allow CRE sponsors to raise equity for offerings without maximum raise limitations from a pool of accredited investors, with no limit on the number of investors involved in the project.
Sparrough said CrowdStreet is on pace to deploy $1.6B-$1.8B of equity in 2022, nearly tripling the level of passive equity the company raised only two years ago.
“The ability to raise passive equity at this scale for commercial real estate has never previously existed and is why you have seen so many top sponsors adopt the platform for their capital-raising efforts,” he said.
Joe Clauser, managing director of Foulger-Pratt, said his firm dipped its toe into online syndication when it needed to finance The Rae at Westlake, a 343-unit, mixed-income multifamily development in Bethesda, Maryland.
“It was a tough decision for us to turn down an institutional capital partner in favor of CrowdStreet, given that they were an unproven entity to us at the time,” Clauser said. “However, that has proven to be a great decision as we have now completed numerous raises with CrowdStreet and now find it to be our preferred capitalization method.”
Clauser said there are a couple of reasons his firm continues to choose CrowdStreet, including the fact that the platform allows Foulger-Pratt to involve its direct network of private investors in deals posted to the Marketplace if it wishes. He also noted that the project sponsor retains control over decision-making for these investments, which can be a concern with other forms of financing.
“We have seen instances in which institutional partners were inclined to sell an asset — even if at an inopportune time — because their priority is closing out a fund, rather than maximizing the returns on the individual property,” Clauser said.
Since its success in fundraising for The Rae at Westlake, Clauser’s firm is “often significantly oversubscribed” on projects where it has used CrowdStreet for online syndication, he said. For one of its developments, Foulger-Pratt raised approximately $20M in offers in only 20 minutes, but Closer said that sort of fast outcome does not mean corners are cut.
“CrowdStreet has a rigorous upfront deal review and sponsor-screening process,” Clauser said. “However, once a project is approved by their investment committee for inclusion on the platform, they work alongside the sponsor to make the fundraising process pretty seamless.”
Mark Lecocq, managing director of development for Cypress Equity Investments, agreed that CrowdStreet works hard to ensure deals launched on its platform are thoroughly reviewed.
“The term ‘passive’ doesn’t mean easy or unsophisticated,” he said. “CrowdStreet investors require the same care and service from CEI that we provide to institutions. That applies to due diligence, legal documentation, project management and investor relations, among other disciplines.”
Lecocq said online syndication gives sponsors like CEI access to a “huge pool of individuals who have an appetite to invest.”
One notable project was District at Celina, a multifamily development in a fast-growing Dallas suburb. Lecocq said CEI raised the majority of the equity needed for construction of the 303-unit garden-style apartment complex through CrowdStreet.
In all, CEI has worked with CrowdStreet to raise more than $80M from a pool of 1,300-plus individual investors on nine of its projects. Lecocq called the platform “an important aspect” of CEI’s capital strategy.
“Their team is invaluable throughout the process, which is part of the reason why we use CrowdStreet when the project size, location/submarket and overall capital strategy align with their platform,” Lecocq said. “We’ve gotten the biggest response on CrowdStreet for our general partner funds and apartment development projects in the high-growth submarkets of Dallas-Fort Worth and South Florida.”
Ultimately, success “comes down to our review process and belief that the sponsor has the appropriate level of experience with similar projects and has been a good steward of investors’ capital in the past,” Sparrough said.
The opinions expressed herein describe those of that individual's experience. It is not a reflection of all real-life experiences, is not representative of all of those who have used CrowdStreet's products and/or services, and is not indicative of future performance or success. The individuals quoted herein have the knowledge and experience to form the opinions expressed.
This article was produced in collaboration between Studio B and CrowdStreet. Bisnow news staff was not involved in the production of this content.
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