While our goal is to make investing in the highest quality alternative assets as simple and straightforward as possible, one of the trade-offs of trying to build an easy-to-navigate, intuitive platform is that the depth and complexity of the business can, at times, go under appreciated.
We will occasionally get questions from investors which highlight the fact that we may not be fully communicating the volume of execution that goes on in our day-to-day real estate operations. So in an effort to help pull back the curtain a bit more, we wanted to share more broadly the below update which was previously shared with a smaller group of investors.
Real estate is the heart of our business
Our real estate team includes more than 60 individuals who are focused entirely on the ownership and operations of our real estate portfolio which is invested in about $7 billion worth of property. This is in contrast to our venture capital portfolio (our newer asset class offering) which consists of roughly $120 million of private investments, representing approximately 5% of our total AUM. We own nearly 20,000 residential units and several million square feet of commercial and industrial property. By all measures, real estate is by far our biggest business.
Since the launch of the Innovation Fund, we have heard some occasional investor concerns that investing across multiple asset classes could be a distraction. We firmly believe the opposite is true.
Success in real estate, especially over the long-term, is about getting the big trends right. Over the past decade, this has meant getting out of retail and into industrial as e-commerce grew, moving out of office and into residential as the internet, remote work, and eventually work-from-home took over, and shifting from large coastal cities to the Sunbelt as the cost of living rose and Millennials aged. All these big insights came from spending a great deal of time looking and thinking across sectors and asset classes to try and identify the major macroeconomic drivers going forward. Being active in tech, credit, public and private markets makes us a better informed and more well-rounded investor, allowing us to see these big trends early and ensure we are moving off one wave before it dies and onto the next as it gains steam. With the advent of AI, this has never been more true than today.
To a hammer, everything looks like a nail. The danger of being active in only one asset class (as many real estate operators are) is that, no matter the weather, they can only do one thing: buy more of whatever it is they specialize in.
On-the-ground operational management
In terms of rolling up our sleeves and getting in the trenches, the leadership team, including the CEO and other co-founders, spends significant time traveling around the country, visiting properties, and meeting face-to-face with partners. This includes making unannounced visits to our projects across the country, personally walking our communities unit-by-unit, and ensuring our property managers (PMs) are meeting the strict operating standards we set for them.
Our real estate team is truly top-tier. We know this because some of the largest private equity owners and executives of the largest public residential REITs in the world have come to our offices to ask about our build-to-rent (BTR) operations or our home builder financing program. Both are investment strategies that since 2020, we have played a small part in pioneering and now have now become very popular among traditional institutions.
While we’ve tended not to share every story or detail of the operations out of concern that the sheer volume of content would not be what most investors want to browse through in their dashboards, we thought it might be helpful to share a few additional examples of the recent work done by the team as an illustration of what goes on day-to-day:
> Gulf Coast property turnaround - Several years ago, we purchased a newly constructed build-to-rent community on the Gulf Coast from one of the country's largest homebuilders. After closing, we found that despite receiving the relevant permits and sign-off (it turns out some of the local inspectors were not actually visiting sites that they were signing-off on), much of the work had not been done up to code.
There were significant drainage, flooding, and grading issues; the electrical was not wired properly; and the road and driveways had not been poured at the appropriate depth to prevent cracking. We also discovered that there was outright fraud being conducted by one of the on-site property managers. These issues led to the community becoming one of our worst-performing.
To fix this, our BTR operations team became maniacally obsessed with micromanaging the property – everything from reviewing all payments invoice by invoice to ensure that we recovered any funds that were spent fraudulently, to firing and hiring (and then firing and hiring) multiple on-site property managers. Not only did several members of the team travel to the site on a near-monthly basis, but we even had a team member pick-up and live on site for a period of time to ensure that every detail was being managed correctly and problems were being addressed quickly and effectively.
In short, over the span of a year, the team was able to take the asset from one of the poorest-performing to one of the best, reaching 100% pre-leased this summer. And most importantly, in doing so, protect arguably millions of dollars of value for investors.
> West Coast squatter wars - While a relatively small percentage of the overall portfolio, we do own a collection of homes (about 25 homes out of nearly 20,000 residential units) along with some ‘creative office’ space near Culver City in Los Angeles, which pre-COVID was experiencing significantly outsized growth in property values as online streaming drove more demand for production studio space. However, since COVID, we’ve had to contend with what has become a serious industrialized squatting challenge.
On a near-daily basis, squatters break into homes and properties, very often with a fake lease in hand. When we call the police to intervene, they are unwilling to take action because the so-called “tenant” has a “lease”, even if it is obviously fake. Instead, they force us to go through civil eviction proceedings to remove the individuals (often a year-long process). In what is now an unfortunately elaborate game of cat and mouse, we will board up properties daily (even welding them shut) only to have vagrants show up at night with their own welding tools to break back in.
We have regular physical security checks, installed virtual security systems with alarms, tried guard dogs, utilized bright lights, music, and public art, and even had workers sleep in the vacant properties, all to deter these individuals from attempting to break in. We’ve met with local council members, the police, as well as representatives from local religious organizations in an attempt to address the issues more broadly. We’ve even had an instance where we demolished one property only then to have someone pitch a tent on the dirt in an attempt to be able to claim squatters’ rights.
Fortunately, the housing market in LA has held up despite these broader challenges, and we’ve continued to be able to sell off the portfolio while generating positive returns. However, doing so has largely only been possible because of the near round-the-clock work by several members of the team to ensure that the assets are not occupied by a squatter and therefore unable to sell in market, or worse, significantly damaged in a manner that would lead to us incurring painful losses. While ensuring that our properties are secure is a fundamental part of property ownership, the work our team has taken on here is next level.
> Adding value through active construction and development - We’ve talked at length about why we feel so bullish on our build-for-rent strategy. What may be less clear is the difficulty and complexity that goes into developing a great build-for-rent community, let alone thousands of homes. One example of this is a 153-unit townhome community that we developed in Charleston, SC. While the market is excellent, we found that the location, set off the main road with little visibility, was making it difficult to attract drive by traffic. At the same time, we concluded that our lack of amenity center was making it hard to achieve what we believed could be top-of-the-market rents when compared to other competing apartment communities (which have smaller units that do not live like houses, but do have nice amenities offered).
At the same time there was a vacant parcel of land near the entrance to the community that was in the process of being developed into a tire center. We recognized the win-win of both having the ability to provide a top-tier amenity center as a means to attract the best tenants and achieve higher rents, while also preventing our welcoming entrance from becoming a turn-off for those interested in living there. We spent the better part of a year negotiating with the seller and working with the local government to obtain the necessary permits to develop the amenity center—with a fitness club, event space and office, pool, mini splash-pad, fire pit and social space—which will break ground imminently and we expect will result in a higher total return for investors from the asset.
There are dozens of stories like the one above. And all involve some combination of intense (some of our PMs even say fanatical) micromanagement by the team along with a willingness to go far above and beyond to drive value at the properties.
And that doesn’t include just the standard day-to-day operations and asset management: meeting weekly with our PMs, reviewing monthly performance, setting annual budgets, conducting regular site visits to all our properties, overseeing construction and development, executing financings, closing on new acquisitions and dispositions, driving property marketing performance and tenant relationships, and the hundreds of other items that the team would simply describe as doing their job.
> Insourcing rate cap executions - Owning and operating a nearly $7 billion portfolio of real estate means having to execute a large and complex volume of financings. We work with dozens of the largest banks and lenders in the country including Fannie Mae, Freddie Mac, PGIM, Keybank, Regions Bank, Truist, US Bank, Capital One, Allianz, PIMCO, MetLife, and Benefit Street Partners. Not to mention a $700M acquisition facility with JP Morgan Chase and another $400M approximately with Goldman Sachs.
One of the details of executing financings of this type and on this scale is that we are required by our lenders to purchase “rate caps”, which limit the upper end of the interest rate we pay on the debt. Many borrowers simply purchase them from the bank they are working with, while others outsource that work to a capital markets broker who will create a market (meaning they achieve lower costs) but charge a fee to do so.
As is common across much of the work that our real estate team does, we chose to do this work in-house. This requires experts on our team to first develop relationships with a number of different Wall Street trading desks and then, on a regular basis, solicit bids for our rate caps, creating our own marketplace (aka auction) to drive down costs but without having to pay a broker fee to do so. This is nuanced work that requires a high level of expertise but also saves our investors, on average, tens of thousands of dollars per transaction — which, in turn, goes directly to the bottom line returns.
As mentioned, we share these examples to do a better job pulling back the curtain so that our investors can see the day-to-day work of the real estate team. And while we could go on and on about the work done by the team (and share an endless list of colorful stories), any one of them would also say they are simply doing our job for our investors.
We do hope that this helps highlight the extreme level of focus we put on our real estate business and the Fundrise business more broadly. We’ve referenced before the saying that “real estate is always in motion” meaning that it is an operations business. And, we believe that obsessing over these types of details in our property will lead to compounding returns across the portfolio.
While higher interest rates led to negative returns in 2023, we believe that the positive returns from property operations experienced so far through 2024 combined with the benefits of the Fed lowering rates has the potential to lead to a period of outperformance for real estate more broadly.
As always, we deeply appreciate the thoughtful questions we received from our investors and will endeavor to continue to earn their trust through our unwavering commitment to excellence.
