It was all the rage in 2018. It picked up more steam during the pandemic, reaching new frothy heights. New commercial real estate crowdfunding platforms were popping up one after the other in a bid to finance all sorts of transactions. The thought was that by pooling money through small monetary investments from the average Joe or Jane via online portals, this technology could bring commercial real estate to the mainstream investor. Minimum required investments were as low as $100 or sometimes even less. Finally, the mass democratization of commercial real estate appeared to be within reach. The Jumpstart Our Business Startups (JOBS) Act of 2012 paved the way by allowing non-accredited investors to participate in crowdfunding. New firms, some of which did require individual investors to be accredited, came on the scene right away, with RealtyMogul and Fundrise leading the way with 2012 debuts right on the heels of the establishment of the JOBS Act. RealtyMogul is one of the standout success stories, as it has reeled in more than $1 billion on its platform. Fundrise, on the other hand, has gotten out of the crowdfunding game, as have many, many others.
The crowdfunding market for commercial real estate continues to grow in the United States, reaching an estimated value of $11.5 billion in 2022, according to Vantage Market Research. “More and more investors are aware that they can invest in high-quality real estate online and build a diversified portfolio from the comfort of their own home,” said Jilliene Helman, CEO of RealtyMogul. “Trends during the pandemic helped to accelerate this as more investors got comfortable working online and making investments digitally rather than needing to visit an office or meet in person with a professional.”
Cadre, which describes itself as a commercial real estate investment manager, is among the most talked about crowdfunding platforms today. Cadre is backed by the likes of such investors as George Soros, Mark Cuban, and Jared Kushner, as well as a notable list of players in the financial and real estate worlds, including Goldman Sachs and SL Green, Manhattan’s largest office landlord. Formed in 2014, the online real estate investment marketplace boasts more than $4 billion in owned transaction value.
But while a number of real estate crowdfunding platforms still exist, more than a few have dissolved or retreated from real estate crowdfunding, including Fundrise. When Fundrise announced that it had established a new single-family home funding arm in 2014, the company described itself as the country’s leading real estate crowdfunding platform. By 2022, when the company announced the launch of its Innovation Fund, a $1 billion late-stage venture capital investment vehicle, Fundrise described itself as the country’s largest direct-to-investor real estate investment platform. The company has extricated itself from the crowdfunding race, but it still holds a solid real estate portfolio, and during the first half of 2023 alone, the company acquired or invested in excess of $400 million in real estate assets. But, as you can imagine, it hasn’t been all wine and roses for Fundrise over the last few years. In August 2023, the Securities and Exchange Commission settled charges against Fundrise Advisers LLC for the illicit solicitation arrangements with online content creators between 2016 and 2021.
CrowdStreet is another firm that is eschewing its real estate crowdfunding platform for a new incarnation. In July, the real estate investing platform announced that it would launch its new broker-dealer model as part of its years-long transition from an online marketplace to a financial institution. The news of CrowdStreet’s planned transformation comes amid raised eyebrows over the company’s involvement with Nightingale Properties, which is being investigated by the U.S. Department of Justice and the SEC over claims that Nightingale’s CEO diverted funds raised through CrowdStreet for two real estate projects into his own pockets.
Fundrise and CrowdStreet are in evolution mode, but some crowdfunding companies, such as RealtyShares, have disappeared altogether. One of the early entries into real estate crowdsourcing, RealtyShares opened in 2013, and by 2018, it had raked in more than $870 million in investments to finance 1,000-plus projects. But before 2018 came to a close, the company revealed that it had ceased accepting new investments and would lay off most of its staff. More recently, Peer Street Inc. filed for Chapter 11 bankruptcy protection in June 2023. As dictated in the filing, the fintech company, which specializes in online investing in real estate debt, will pursue the sale of substantially all of its assets, including its mortgage loan portfolio.
LEX, also known as LEX Markets, took a novel approach with its crowdfunding service, offering investors the opportunity to buy and sell shares of individual commercial real estate properties, essentially taking these properties public via single-asset initial public offerings. Transactions transpired on a platform powered by Nasdaq’s Marketplace Services Platform, which allowed for access to financial market opportunities between owners and investors on a global level. In 2022, LEX raised a $15 million Series A financing round, but in early 2023, five years after its formation, Lex went out of business.
So, the real estate crowdfunding market has its inherent troubles, in addition to the issues that have dampened the real estate market in general today. The downturn could be a new opportunity for the real estate crowdfunding world. RealtyMogul CEO Helman noted, “Given dislocation in the economy due to the rapid rise in interest rates, we believe there will be opportunities in the coming months and years to acquire distressed real estate assets and play offense.”
A lot has happened since crowdfunding became a craze of sorts, but it hasn’t achieved its potential of opening up commercial real estate to the masses. Trust issues may be part of the problem, as an investor may carefully vet a crowdfunding platform but find it more challenging to identify and research the other parties who could be involved in the real estate projects. And then, there’s the issue of all the co-investors involved in fractional ownership, which can make certain decision-making efforts a daunting and time-consuming undertaking for those leading the platform. Also, there are economic headwinds that can have turned some funded projects into unprofitable investments.
But perhaps the biggest hurdle to widespread crowdfunding adoption in commercial real estate is the lack of awareness. “Regular people” who are the backbone of real estate crowdfunding may not be aware of their options in this arena. It’s quite likely that there’s a substantial percentage of the public that has no idea that they can own a stake in an office building. Regardless of the issues, there is no reason why real estate crowdfunding can’t ultimately democratize real estate as originally envisioned. “I believe real estate crowdfunding will continue to grow as an industry over the next few years,” Helman said. “We are still in the early innings, and real estate is a massive asset class.”