Post written by Ian Formigle
Vice President of Investments at CrowdStreet, overseeing the company’s online commercial real estate investment marketplace.
The private investment landscape is experiencing tremendous growth and investor demand for direct access to passive commercial real estate (CRE) investments is exploding. Investors are seeing the benefits of exposure to alternative assets, and commercial real estate is leading the way as a favored asset class.
Also referred to as “operators” or “developers,” the sponsor is the company or CRE firm that is acquiring or developing the proposed asset. Sponsors act as a fiduciary to investors and are charged with executing asset business plans. Sponsorship is easily the No. 1 consideration for any passive investor. Not all sponsors are created equal, and selecting best-in-class groups can position investors for upside in a deal while mitigating downside risk. Here’s why:
First, experienced or “tenured” (as my firm categorizes them) sponsors know how to appropriately set investor expectations. In general, the most experienced ones lean toward conservatism when it comes to forward-looking statements. Such sponsors have enviable track records that they zealously seek to maintain. Less-experienced or “emerging” sponsors may be more optimistic and, thus, underwrite deals with rosier assumptions. This may translate into higher targeted returns, all things being equal, and generate significant investor interest. However, investors who chase outsized underwritten returns while overlooking sponsorship are accepting a higher probability that an emerging sponsor may miss its target.