Our answer to the question we’re most frequently asked as well as more thoughts on the macroeconomic environment and how Fundrise will continue to protect the interests of its investors.
I’m proud to report that Fundrise produced a weighted average return of approximately 13.0% across all of its investments during 2015. Meanwhile, the S&P 500 returned 1.37% during the same time period.* I believe that our ability to produce strong returns is a result of our use of web-based software and our careful, systematic investment due diligence.
While this combination gives us a unique advantage, there are certain things we cannot control – namely the macroeconomic environment and its effect on the real estate market. Property prices for some cities and asset classes are at historically high levels and lending standards continue to loosen. We know that we cannot control the markets. However, we can control the standard by which we acquire assets. True underwriting discipline means maintaining the highest quality regardless of outside forces.
The most common question I hear from our users is “Why aren’t there more investments available?”
The answer is simple: High Standards + Hot Real Estate Market = Fewer Deals
I’ve endured two major recessions in my professional career. I’ve watched big real estate funds in hot markets start to rationalize investing in lower-quality projects in an effort to maintain deal volume, only to see those deals underperform later.
Today, our investors want to invest more money than we have high-quality deals to accommodate. Given our belief that the US commercial real estate market is late in the economic cycle (see my white paper “The Unsweet Sixteen: The Top 10 Factors Impacting the Economy in 2016”), we will continue to be extremely cautious, even if it creates the unfortunate side effect of some frustration from investors due to the scarcity of opportunities on the platform.
A great model for this is Jeremy Grantham of Grantham, Mayo, & van Otterloo (GMO), who from 1999 to 2001 saw investors redeem vast sums of money they’d invested with his fund because he would not invest in the hot tech sector. He had the discipline not to deploy his investors’ capital even if it meant they would invest it elsewhere. Jeremy was right and the investors who stayed with him saved a lot of money when the dot-com bubble burst.
While we are confident that there will continue to be opportunities for quality investments in 2016, we will first and foremost maintain our standards of quality. We hope that this mindset fits with your own investment philosophy and greatly appreciate your continued support and patience.
Please feel free to share your thoughts with me and the rest of our team at firstname.lastname@example.org.
CEO & Co-Founder, Fundrise