By Meghan Hall
Commercial real estate is the third largest asset class behind stocks and bonds, and the introduction of the JOBS Act in 2012 allowed companies to receive funding online from non-accredited investors, who account for the majority of American investors, in an effort to further encourage the funding of smaller businesses. As more of the real estate industry has moved online, platforms such as CrowdStreet are helping to connect individual investors with portfolios to diversify their investments. The Registry caught up with CrowdStreet’s founder, Tore Steen, on how the platform helps projects raise additional capital.
Can you tell me a little bit about yourself and your role at CrowdStreet? How was the concept for the platform formed? Does the platform operate in any specific geographic market?
I co-founded the company with Darren Powderly in 2013, [and] I came out of financial services and technology. Darren had transacted hundreds of millions of dollars of commercial real estate investments. We teamed up to launch CrowdStreet. The national marketplace went live in 2014.
CrowdStreet provides a platform for real estate investment sponsors to raise capital and for individual investors to invest directly in commercial real estate in ways that never existed before the Jumpstart Our Business Startups Act (JOBS Act) opened the door to online investment offerings and solicitations. Before the JOBS Act and CrowdStreet, you had to know someone who knew someone who knew about a real estate investment deal, and maybe you could get in on it. Today, it’s a different world!
Why did you feel that CrowdStreet was a needed and necessary tool for investors in the industry?
CrowdStreet enables project sponsors and investors to build wealth together.
CrowdStreet serves real estate sponsors and developers by enabling them to tap a wider pool of investors to help fund their projects. Many of these sponsors have had a more challenging time raising capital since the recession, because the market they serve is largely under the radar of institutional investors who have gotten bigger and bigger, and simply are less interested in participating in deals under $50 million. At the same time, debt has become more challenging to obtain for these projects, which are just as economically viable as much larger projects.
Bringing these offerings to individual investors through the CrowdStreet marketplace gives Main Street investors direct access to institutional-quality commercial real estate investments to diversify their portfolios outside of stocks and bonds. This is a big new opportunity for individual investors to achieve diversification and build wealth; the returns on CrowdStreet have consistently topped 30 percent.
How does CrowdStreet fit into the numerous other funding methods (traditional bank financing, crowdfunding, other alternative forms of lending) that make up the commercial real estate market?
CrowdStreet is a platform for raising equity capital and for investing equity capital. Equity is a critical part of the commercial real estate capital stack. Real estate investment projects cannot succeed without sufficient equity.
Why do you think investment offerings remained inaccessible or shrouded from view for most investors?
There are many reasons, including the fact that people simply became accustomed to doing business primarily with people they knew. The Internet obviously allows for people to identify each other and share information in ways that were unimaginable a generation ago. And the JOBS Act, from a public policy and legal point of view, opened the door to marketing real estate investment opportunities more widely with a prescribed level of disclosure and transparency.
How has CrowdStreet helped its users to maximize their investment?
There are more than 100,000 investors managed on the CrowdStreet platform, served by project sponsors who use our software for investment management and investor relations across over $9 billion in investments.
CrowdStreet helps people maximize their investments. We provide a high level of scrutiny to offerings even before they are accepted on the marketplace. Fewer than 3 percent of the offerings we see make the cut.
We also provide a high level of transparency, so investors have the information they need to make investments that suit their risk-return profile, to manage their investments, to diversify their investments across product types and geography and to generate returns in line with their goals, be it cash distributions that may be ongoing, or asset appreciation that may result from longer-term holds.
CrowdStreet allows investors to invest in opportunities beginning at $10,000 — ten times more than other CRE investment platforms? Why is the minimum higher?
The traditional participant in offline real estate investment, also known as syndication, has typically invested at a higher level, be it $10,000, $25,000 or more. The private market is accustomed to serving those investors, who have an expectation and a sophistication that goes along with the higher level of investment. Also, project sponsors typically would rather raise more money from fewer people, which supports the notion of more sizable individual investments.
CrowdStreet has sought to serve the same community of project sponsors and investors and to expand the community online.
While CrowdStreet has focused on the high-end of the market since inception, at some point we may offer financial products with lower minimums to serve a different segment of the investor market.
Now that the platform has been live for four years, is there anything you would do to change the way it functions?
There is always room for improvement, and we strive always to enhance the experience for individual investors and project sponsors. Our user interfaces improve by the quarter, and we continually add functionality to help investment managers and investors track cash distributions even more precisely.
We also continue to launch new products, such as CrowdStreet’s new Blended Portfolio offering, which enables investors to achieve instant diversification with one-click. In other words, they can now invest in a portfolio of properties that we’ve curated versus having to invest on an individual property basis. Investors with less experience evaluating offerings have sought this approach, as have investment advisors we’ve heard from.
What’s next for CrowdStreet? Where is the platform headed in the future? How do you think it will impact CRE investment in the coming years?
Approximately $300 billion of new equity capital is raised annually in the U.S. to support economically viable commercial real estate investments, be it for new development or the recapitalization of existing assets.
CrowdStreet is on track to see $1 billion of real estate equity capital raised on its platform annually.
Potential for additional growth is virtually unlimited as real estate investment sponsors move their fundraising operations and investment management activities from the offline world to the Internet, and as more individual investors discover the benefits of diversifying into commercial real estate. It’s an exciting time!