How Online CRE Investing Leads to Increased Liquidity—and Interesting Opportunities
- Dec 12, 2016
By A.J. Chivetta
Illiquidity has always been a staple of commercial real estate investing. When making private investments in individual properties, you head into each deal knowing that your money will be tied up for a long time—most likely, until the property is sold.
This has never boded well for those seeking flexibility in their investments—for instance, those concerned about a sudden need for liquidity due to life events such as job loss, illness, or divorce.
Publicly traded real estate investment trusts have traditionally served as the alternate route for investors who desire liquidity, but REITs simply don’t provide the same level of economic engagement as a well-performing building, and REITs typically carry fees that can be substantial. REITs can ebb and flow alongside the stock market, and recently the annual returns on private commercial real estate investments have exceeded stock market returns.
In 2015, for example, private CRE investments yielded an annual return of 12.7 percent, according to the National Council of Real Estate Investment Fiduciaries’ property index. This far surpasses both the S&P 500 and the Dow Jones Industrial Average, which had annual yields in 2015 of 1.2 percent and negative 2.23 percent, respectively.
The benefits of private CRE placements span beyond favorable returns, but the glaring lack of liquidity in this arena has plagued the industry for decades.
A new avenue for liquidity
After the passage of the JOBS Act back in 2012, online investment opportunities became more readily available for investors interested in direct commercial real estate investments. With these changes, a deeper-than-ever pool of investors is looking to these investments, and new capital is pouring into the industry through digital venues. In 2015, $2.5 billion was invested via online crowdfunding platforms, and that amount is expected to top $3.5 billion this year.
Sponsors can choose to deploy this additional capital in several different ways, and many opt to use it to meet the liquidity demands of their investors.
Via online platforms, current investors can exit through a marketplace process that could potentially yield market-based pricing for their equity. Sponsors facilitate the transaction by leveraging a large, ready pool of investors to raise capital that allows the departing individual to recoup much—or even all—of the market value of his investment.
And perhaps most important, the investors who replace this individual have a unique opportunity to join an ongoing project that features an operator experienced with the property and a documented track record of managing this particular asset.
When sponsors raise new capital to meet investors’ liquidity demands, everyone benefits. Sponsors retain control of their property while keeping former, current and future investors happy by providing liquidity.
Before the online investing era, if a partner desired to exit a deal, sponsors did not have terribly attractive options to address the scenario. They could use their personal money to buy out the partner at a hefty discount and take over their ownership position; they could see whether their current investors were interested in pooling funds and taking over the position (of course, at a discount); or they could even take out a loan that provided the necessary buyout cash.
However, all told, nobody invests in commercial real estate hoping to someday use their personal cash flow to buy out partners and pay off loan debt. Thankfully, online crowdfunding platforms provide a much more attractive way for sponsors to create mutually beneficial liquid outcomes when it comes to buyouts.
Interesting opportunities abound
Entering the relatively liquid world of CRE crowdfunding doesn’t just allow investors to reap the benefits of investing in well-performing buildings that have steady ownership; it also provides them with a holistic understanding of each individual investment they make—information from market trends to tenant details to operational and capital costs—and access to more detail regarding each sponsor’s investment philosophy and his or her plans going forward.
Online platforms for investing in CRE are still in the early stages, but changes are already occurring in how sponsors attract investors and build strong relationships with them through efficient online transaction processes and reporting. With these enhancements, they’re creating an investment experience similar to online stock trading and perhaps providing the new capital needed to solve one of the bigger issues CRE has always faced: illiquidity.
As a corporate and real estate partner with Armstrong Teasdale, a leading St. Louis-based law firm, A.J. Chivetta focused on domestic and international capital transactions. Chivetta has worked for more than 30 years across the U.S., Europe, and China and has been recognized as one of “The Best Lawyers in America.”
Chivetta served as the primary outside counsel for Cassidy Turley, leading the legal team that helped the business become one of the country’s largest and fastest-growing commercial real estate service companies. Chivetta co-founded Selequity.com, an online private placement platform for commercial real estate investment, with former clients who shared the belief that web-enabled access to real estate opportunities would transform real estate capital.