There's been a lot of discussion over how the Coronavirus pandemic has impacted real estate, from crashing retail and hotel values and revenues to booming rental demand, housing prices, and industrial commercial real estate. But real estate crowdfunding platforms and projects have been slightly overlooked. In early August, Jeff Holzmann, chief executive officer (CEO) of IIRR Management Services (IRM) chatted with me over the phone to discuss the current state of the industry for crowdfunding projects and where he sees the market heading.
Can you tell me a bit about IIRM?
IIRM Management Services is one of the largest crowdfunded real estate investment management firms in the world, with $1.5 billion under management. In 2018, IRM was founded by iintoo and RREAF with the intention to take over RealtyShares portfolio, which was one of the first crowdfunding platforms in the market that failed. Now two years later, IRM's management has helped resolve a number of deals that had gone south while providing clear and accurate communications to thousands of investors that were left in the dark when RealtyShares ceased operations.
How have the assets and crowdfunding projects under IRM's management fared during the initial impact of the COVID-19 pandemic?
There are mixed results. There are people in the portfolio, investors, about maybe 50%, that could not be happier. They've made money on the investments, and they're getting award- winning customer service treatment. It's very easy to deliver stellar results because our dollars are focused on customer services and communication with clients. No money under IRM goes toward sales, marketing, or underwriting of new deals. We're here to manage and help repair the assets that were under management by RealtyShares.
The other half are getting service and distributions, but it's not what they expected. What was forecasted to happen isn't what happened; not every real estate deal works out as planned. Maybe market conditions weren't right; maybe it was an execution error; maybe there were problems with vendors, timelines, with permits. But legitimate reasons; things just didn't work out.
There's definitely certain projects that have been impacted by COVID-19 directly, like a hotel or office space. Certain policies that were put in place by the CARES Act helped us out during the initial impact of the pandemic, specifically the forbearance program and additional $600 additional compensation per week for the unemployed. This allows a number of our sponsors and projects to have some time and liquidity during challenging times to help keep operations moving, maintain and keep 100% of the properties we oversee, not losing any projects to foreclosure.
The additional unemployment benefits have been very helpful for our tenants and ultimately us. A lot of our tenants are in class B or C complexes that work blue-collar jobs. The current crisis may have caused their jobs to be furloughed or ended all together. So having additional funds was huge. This money went directly to our tenants, which allowed them to pay their rent, flowing up to us.
How do you think the second round of stimulus funding is going to affect the real estate crowdfunding sector, specifically assets under management by IRM?
We put together a task force that meets every week to deliberate and discuss the intervention from the government. It's very hard to predict what would or could happen. I think policies will be put in place to help the general populace, putting money and policies into place to support the ability for tenants and homeowners to pay for housing.
I think multifamily will be very resilient; because they're leased by multiple tenants, it's unlikely all tenants will be impacted in the same way. It's one reason we're focusing on this asset class, specifically in the Sun Belt area. Other sectors, like hotels, malls, or retail centers, for example, are going to have a tough ride for the next year or two. It's not that they won't rebound; it's just not the areas to invest in right now. I think crowdfunding projects will be shifting their projects to reflect the opportunities and resilient asset classes in the current economy.
How can investors participating in real estate crowdfunding investments best hedge themselves against risk or prepare for the future during uncertain times?
We have every type of asset class undermanagement under IRM across the world, and the one thing that has become apparent is that the single family residential market is struggling the most. When we dug deeper, we realized that it was mostly attributed to the sponsors. The real risk in a crowdfunding opportunity is execution risk. We have enough data points to understand if markets are headed in the right direction or not, so the factor that almost always comes into play in a failing project is due to the execution by the sponsor or the sponsor's team. It's often not due to lack of integrity but lack of knowledge or experience.
If you want to hedge risk, only work with professional-grade developers who have been doing this for several years in that market in that asset class. Don't give your money to someone who is just getting started in the field and has little experience managing a project of that size or scale. Even though fees may look heavier and you may just be a number when you're working with larger companies, you're reducing your risk exposure.
What are the most important metrics investors should look for in a crowdfunding platform?
I don't know that there is just one metric to look for. I would actually caution people from only looking for one metric. Instead, I would suggest you look for consistency. One metric can skew future performance. Look for stability. How many of your investors returned and reinvested with the company? Where are the properties located? Are they all in one area or are they diversified?
I would look at the caliber of the people who work with the company. This tells you a lot about the reputational risk. Anyone can make an impressive-looking website, so it can be hard to distinguish how big the company is, how legitimate it is, and how their performance is. Look at who the people are behind the platform and project. When we look back at RealtyShares' inception, they didn't have anyone in their management that knew about real estate; it was started by two guys in tech.
Working on a large scale, doing real estate in well-recognized brands for a long time. Shy away from someone who is sharing past data as a potential projection.
Where do you see crowdfunding going post-COVID-19?
In the long term, I'm optimistic. I think the crowdfunding sector, which allows investors like you or more to participate in higher-quality investments, is great and here to stay. But I think we were kind of in the wild west for crowdfunding. The outcomes of the past few years and current economic situation will consolidate those who operate in the real estate crowdfunding space. I think this industry is maturing, the business models are becoming more clear, and I think we're going to end up with a much better, more interesting, and more successful industry.