“Not in My Backyard”: Real Estate Crowdfunding and Community Development
Crowdfunding can help address our nation's housing shortage. Here's how.
An NPR report last week discussed the rental property shortages throughout the United States. Redfin CEO Glenn Kelman appeared on the program and addressed a recent Commerce Department report finding that rental prices have reached historic highs. Kelman attributed the high rental prices to a lack of new construction, noting that “rents and housing prices have been rising over the past three or four years, but inventory has been extremely low over that time.”
Why are the basic laws of supply and demand not resulting in new housing inventory? Kelman gave three reasons for rental property shortages:
- Developers have lacked enough confidence in the economy to take on the leverage needed for larger projects. While some smaller projects are being built in city centers (“urban infill”), developers have been reluctant to borrow the amounts needed for larger projects in outlying areas;
- A lack of skilled labor due to Congress’ failure to pass immigration reform; and
- “Not in my backyard folks” who use zoning laws to stop dense housing projects before they even begin.
Statistics support this pessimistic outlook. While homebuilder confidence has slightly increased over the past year, new home construction is still well below historical demand levels. On the labor side, 2.3 million workers left the construction industry between 2006-2011 as the housing market declined, and only roughly half of them have returned.
Zoning restrictions obviously vary from city-to-city, but large cities in particular have had a difficult time meeting the demand for housing. In San Francisco, for example, the median rent for a one-bedroom apartment has risen to $3,530/month, Despite this acute demand for housing, only 1,500 units a year have been built in the city over the past 20 years, while the city’s population has increased by 200,000 over that time. The reason: projects “can be approved and can languish for years, tied up in lawsuits and as developers wait for permits from city staff.”
The Potential of Crowdfunding
While immigration is a national issue, access to capital and community opposition to new housing are theoretically much easier to address. In fact, I think real estate crowdfunding has the potential to help address both of these issues at the same time. We’re still in the nascent stages of the crowdfunding era, but as the industry matures, I believe we’ll see savvy real estate developers use crowdfunding as both a fundraising source and as a tool to enlist community support for new housing.
On the capital side, the growth of real estate crowdfunding as a fundraising tool has been well documented. Massolution predicted last year that real estate crowdfunding would be a $2.5 billion industry in 2015. This would be a 150% increase over 2014. While this number is still a small proportion of all real estate capital, it includes virtually no money raised from non-accredited investors. In May, when Title III of the JOBS Act takes effect, we should see a sharp rise in non-accredited investors participating in real estate crowdfunding.
I realize that opinions vary on the impact that Title III will have on the equity crowdfunding industry. I’m optimistic - not so much about the immediate impact of Title III, but more for the potential that it holds over the next 3-5 years. Once Title III takes effect and retail investors start to invest in crowdfunding offerings, policymakers will see that none of the worst-case scenarios predicted by critics of crowdfunding will occur. We’ve already seen this phenomenon in state after state over the past several years. While the passage of the JOBS Act on the federal level in 2012 was controversial, few of the intrastate crowdfunding bills passed since that time have been (the Illinois intrastate crowdfunding legislation last year was actually passed unanimously - a rare occurrence in that state). Once Title III takes effect, I’m confident that groups such as the Crowdfunding Professional Association (full disclosure: I’m the Treasurer of the CfPA) will work to educate policymakers about ways to improve Regulation Crowdfunding. As a result, I believe real estate crowdfunding will be a much larger source of capital for developers in 3-5 years.
Crowdfunding in my Backyard
This leads me to what I think is the more interesting use of crowdfunding. In short, I believe that politically savvy real estate developers can use crowdfunding to enlist support from community members for new housing and construction projects. It’s true that the “not in my backyard folks” (or “NIMBYs”) in many communities place a lot of pressure on zoning boards to oppose high-density housing. However, what if the NIMBYs themselves stood to gain from a new development project?
By allowing community members to fund local real estate crowdfunding projects, developers can reduce local opposition to new housing construction. Let’s face it: it’s a lot more difficult to oppose a project when one has the opportunity to potentially profit from it. If a community helps fund a project (or even indicates a commitment to funding it via a “testing the waters” campaign), local zoning boards would face a lot of pressure to approve the types of projects that they have rejected in the past.
We’ve already seen a few communities begin to take direct advantage of crowdfunding. In 2014, Denver successfully crowdfunded $12 million in municipal bonds, intended to upgrade roads and buildings. The offering was only available to Colorado residents, and sold out in 16 minutes.
While real estate developers are understandably critical of local politicians and zoning boards for spiking high-density housing, the fact is that both have very sensitive political antennae. In the long run, these projects will require the support of the local community in order to be built. Crowdfunding is one way to give local residents “skin in the game” and an incentive to support new housing.
This can take a number of forms. Perhaps sponsors can “reserve” 10% of a crowdfunding offering for investors residing within 50 miles of a project. Another alternative might be to conduct a separate, smaller Title III or intrastate offering for local residents to invest in (this would also help get around the smaller offering limits of these regulations). This is more of a long-term strategy than a short-term tactic, but I encourage real estate developers to consider it. We do have a shortage of affordable housing in the country, and crowdfunding offers the potential to help address it.