Niche Markets: Joining the Crowd

Crowdfunding has come a long way in a short time in the multifamily sector.

Sacramento Square Apartments in Arlington, Va., is one of two Virginia communities acquired by Fundrise and Insight Property Group in a $58 million deal. Photo by Jeffrey Sauers

Crowdfunding has come a long way in a short time in the multifamily sector, as it has in all real estate asset categories. Rising deal volume and demand for alternative sources of capital is helping overcome initial skepticism about the platform’s long-term viability.

“The investment platform is here to stay, as many crowdfunding groups are well capitalized,” said Dean Sigmon, executive vice president & co-director of the Transwestern Mid-Atlantic Multifamily Group. Last year, Sigmon’s team completed two deals with Fundrise, and he expects more such deals “in 2017 and beyond, as smaller investors reap the opportunities to
be a part owner of multifamily properties.”

Though data specific to multifamily is hard to come by, the sector is clearly benefiting from the overall boom in real estate crowdfunding. According to Massolution, a research and advisory firm specializing in crowdfunding, the industry raised $34.4 billion in 2015 (the latest year for which data is available), more than double the 2014 total. Anecdotally, crowdfunding seemed to gain traction as conventional capital sources tightened. So as interest rates rise and underwriting tightens, crowdfunding might well earn an even higher profile in multifamily investment.

At RealtyMogul.com, multifamily assets are a major component of its crowdfunded investments, reported Jilliene Helman, the firm’s founder & CEO. That notably includes MogulREIT I, its recently introduced eREIT vehicle, which contains a major multifamily component. “We’re still bullish on multifamily,” she noted, “but we’re looking at properties more carefully now, looking for higher cash-on-cash returns, because the appreciation and value-add strategies are played out in some markets.” For multifamily assets, RealtyMogul’s bread and butter is Class B properties with upside potential in secondary markets.

Likewise, a number of Fundrise’s eREITs include multifamily assets, though as yet none focuses exclusively on the sector. “Multifamily is a core component of our investment strategy,” said Fundrise director of marketing Jordan Sale. “We look at stabilized, core urban and value-add.” Heartland eREIT, for instance, recently acquired multifamily assets in the Austin, San Antonio and Colorado Springs markets. Fundrise’s Growth REIT holds multifamily assets in Virginia, Colorado, and Florida.

New models

Another trend that could affect multifamily finance is evolving ownership platforms. Though the newest of them have only brief track records, crowdfunding players are busy devising new models.

In October, for instance, Fundrise launched three new eREITs that it described as a “revolutionary direct-to-investor crowdfunding model.” Both accredited and non-accredited investors may participate, and Fundrise reports that demand has been strong since it launched its first eREIT in late 2015. Now totaling five in all, the new vehicles will put Fundrise on track to raise a quarter-billion dollars during the coming year, according to the company. At most recent report, the eREITs had raised upward of $84 million from more than 100,000 investors.

Expect bumps along the way as crowdfunding for multifamily and other real estate assets matures. Although crowdfunding will continue to support real estate sponsors including those investing in multi-family properties, the viability of some platforms remains in question, contened Steve Cinelli, a senior fellow for Massolution.

“Certainly hundreds of millions of dollars are being invested through such platforms, yet many are realizing that living on fees alone is a challenge,” Cinelli noted. “Like the P2P lending platforms, even processing billions in transaction volume doesn’t make for a sustainable business.” He predicted that 2017 will test whether the models are truly building basic enterprise value or serving primarily as a utility franchise for others. “I’m still waiting for a successful exit by one of the platforms, real estate or otherwise,” Cinelli remarked. “The Regulation A+ filing of Fundrise is telling. “

Modest deals

Some crowdfunding players are taking on larger multifamily transactions. In December 2016, Fundrise joined forces with Insight Property Group of Arlington, Va., to buy two Class B properties in Northern Virginia. The partners paid $37.8 million for Sacramento Square Apartments, a 216-unit community in Alexandria, and shelled out $20.2 million for Lancaster Mill, a 138-unit property in Woodbridge. All told, Fundrise and Insight are targeting $200 million annually in Washington, D.C.-area multifamily assets.

But deals on that scale still seem to be the exception. Growth for multifamily crowdfunding is coming one deal at a time, and most of those deals remain modest in size, averaging between $800,000 and $1.2 million, Cinelli noted. “There are some platforms that are moving toward an average of over $2 million, and there are examples of over $5 million, but not necessarily in the multifamily segment,” he explained.

“Most of the platforms are challenged with deals over $2 million unless they have arranged some deeper-pocketed investors that are either warehousing the deals or willing to commit to a higher one-off deal.”

Successful deals will likely lead to more of the same, as illustrated by three examples recorded in recent months. Though modest in size, they demonstrate the growing diversity of ways in which crowdfunding platforms are coming into play.

In Orlando, RealtyShares raised $2.3 million to recapitalize and fund the renovation of Avesta Communities’ Bridgewater, a 344-unit apartment community. Avesta Communities recently acquired the property below its appraised value and plans renovations that will allow it to compete with higher-end properties in the market. “We think crowdfunding has significant long-term growth potential, and Avesta is committed to growing our base of capital partners through it,” asserted Avesta associate Andre Gonzalez.

Crowdfunding was also central to securing $6.2 million last year for the recapitalization and renovation of a 26-unit residential building in the seaside town of Asbury Park, N.J. The platform sponsored by iFunding provided a $2 million subordinate mortgage, while assisting with a new $4.2 million senior loan from a nationwide commercial lender. That followed $2.9 million in acquisition financing iFunding had raised in the fourth quarter of 2015 for the property’s owner, a joint venture of Regional Capital Group and a local development partner. iFunding previously raised $4 million for two other real estate projects in Asbury Park.

In Houston, PPA Group partnered with Wealth Migrate, an investment management platform based in South Africa, to acquire Cypress Ridge Apartments, a 252-unit community. The previous owner, CrestMarc, had invested in improvements, but PPA Group identified a further opportunity to add value.

“Lots of national investors are shying away from Houston because of the downturn in the oil industry, which creates a great opportunity for us,” said John Latham, PPA’s chief investment officer. “We have supportive equity partners who have allocated significant funds to us, and we’re going to continue to look at Houston to build a great portfolio.”

Global flavor

Wealth Migrate’s participation in the Cypress Ridge deal reflects a trend that bears watching. Crowdfunding will experience significant international growth during the next 10 to 20 years, predicted Dan Miller, president & founder of Myrtle Grove Ventures, whose largest holding, Rise Cos., is Fundrise’s parent company.

In January, the European Parliament passed three resolutions signaling interest in this alternative form of financing, and a recent study by the European Commission concluded that crowdfunding could become a key long-term source of financing for small enterprises and startups.

A linchpin of that growth are regulatory changes that would make crowdfunding platforms more viable. “It’s amazing to watch all the crowdfunding legislation take shape around the world,” Miller said. “Potential global hubs such as Switzerland and Singapore are now changing their regulation infrastructures … There is no other legislation being enacted like this on a global scale.”

Originally appearing in the March 2017 issue of MHN.