Real estate investing has been impacted by the ongoing COVID-19 health crisis – as it has many other industries. In the online investing sector, many platforms have reported a rapid decline in activity during the early days of the Coronavirus only to be followed by a resounding rebound in investment activity.
Real estate is even more interesting because of a drop in interest in some urban centers hit by COVID, rioting/rising crime, and questionable politics. But sometimes when one door closes, another one opens. Perhaps this is the case with real estate crowdfunding.
Crowdfund Insider reached out to CrowdStreet for their perspective on the real estate investment sector. CrowdStreet offers direct investment into individual properties as well as several funds.
According to the company’s website, over $1.3 billion for more than 400 offerings. has been raised since launch. The current stated average IRR is pegged at 23.1%
CI spoke with Ian Formigle, Chief Investment Officer for CrowdStreet. Formigle has over 24 years of experience in real estate private equity and is a key decision-maker for all of the offerings listed on the CrowdStreet marketplace. Our discussion is below.
When COVID first hit the economy how did CrowdStreet investors react?
Ian Formigle: Understandably, investors wanted to hear from sponsors–had their business plans changed? We reached out to sponsors and strongly encouraged more communication along the lines of; What were rent collections looking like? Would distributions be impacted? When things are uncertain, there is almost no such thing as over-communicating. Investors want to know how their investments are performing and what sponsors are doing to steward that capital.
They also wanted to know how we felt COVID would impact commercial real estate. Which asset classes would be hit the hardest and why? How are we evaluating deals now? Where do we think the biggest opportunities might be down the road? We doubled down on our investor community initiatives, launching live stream events with industry experts and our Street Beats video series, connecting with investors and sponsors from around the country on what they were seeing and thinking.
We also heard that the shocks to the stock market reminded investors how important it is to diversify their portfolios into alternatives like commercial real estate. We’ve definitely seen an uptick in investor demand since March.
What about issuers? Did they hit the pause button?
Ian Formigle: During the beginning of the pandemic, the pullback from issuers tracked fairly consistently with debt markets as nearly all operators or developers still relied on a loan in order to acquire or develop their project. This means that we saw eligible deal flow drop by nearly 90% from mid-March to early April. But since then we bounced back, having launched 30+ deals and raising roughly $200 million in equity.
Since the early days – post lockdown, how is investor demand?
Ian Formigle: Even though deal flow slowed during the early phase of the pandemic, investor demand did not. Our investors funded $12.5 million for a D.C.-based apartment project in May, but there was easily more than $25 million of demand. During this period, we generally saw our deals rapidly oversubscribe.
From March to June, we raised over $185 million from investors. And we had one of our best weeks of 2020 in July.
One industrial deal, in particular, received $19 million in subscription demand in the first five minutes after it opened for investment, eventually hitting over $27 million in just five hours. August was similarly strong and, if things in the debt markets continue to normalize, we expect to see a strong Q4.
What about deal flow?
Ian Formigle: From March to May, we saw a substantial drop in eligible deal flow. Some of this was attributable to deals simply failing to transact, but most of it was driven by the additional scrutiny we placed on deals during our review process. Every eligible post-COVID deal must have a compelling answer to the question, “Why this deal right now?”
From May to August, eligible deal flow rebounded to roughly pre-COVID levels, but with a notable increase in overall quality. We mainly attribute this to our ability to grow market share during the pandemic–sponsors are looking for new sources of private equity as lenders slow down.
We feel that we are experiencing our “Zoom” moment if you will, where sponsors are quickly realizing that all-digital, online syndication has become critical to their capital strategies. Provided that our quality and quantity of deal flow remains at current levels, we anticipate launching eight to ten new deals per month during Q4 2020.
CrowdStreet recently closed on a $22 million raise for an office tower in Florida. Is this indicative of shifting demand to low tax states? Is there a bigger thesis here?
Ian Formigle: There were multiple factors at play for that deal in St. Petersburg, FL.
First, we saw investors gravitate towards a growing secondary market that had tremendous momentum prior to the pandemic. There is little doubt that the deal’s location in a non-income tax state contributed to its desirability.
Next, the asset was 97% leased and, arguably, the single best office tower in St. Pete. So even though as an asset class, office, is currently experiencing disruption, there’s something to be said for acquiring the best asset in a great, growing location.
Finally, the deal was sponsored by a local group that is one of the largest owners and operators of office properties in Tampa / St. Pete. At the end of the day, many folks invest because of the strength of sponsorship.
Which markets are you seeing the most interest from issuers? And how is specific deal flow?
Ian Formigle: These are the cities and number of deals that have come into our pipeline for review since April (only included cities with 3+ deals).
What are your expectations for 2021? Has COVID permanently altered the real estate market?
Ian Formigle: COVID has forced us all to re-evaluate our priorities–including how we use and navigate physical places–and we believe that people across the country are thinking about where and how they want to spend the next phase of their lives. Commercial real estate will need to evolve to meet changing demands for space, amenities, and logistics.
Some of this will translate into lasting effects on the commercial real estate landscape that will play out over the current cycle. First, we see a shift towards increased demand for both office and housing in our inner suburbs. Second, as the nation just doubled its rate of online purchases, we expect a lot of that to stick which means we need much more logistics real estate. And while there is no doubt that office space located in central business districts have come under fire in the short term, but we believe that office will recover over the mid-term.
As the pandemic is brought under control, hopefully in early 2021, we believe that COVID will ultimately serve to accelerate certain trends that were already well-established prior to 2020. The biggest trend being the growth of our nation’s secondary markets. Mid-size cities that were already experiencing above-average job and population growth prior to COVID look better than ever when it comes to affordability and quality of life. We recently published our Investment Thesis that talks about this in more detail.