REAL ESTATE INNOVATION
Tech sector ‘bubbles’ up As valuations rise, bears fret that a pop is inevitable BY KONRAD PUTZIER t’s the Pavlovian effect of the business world: whenever venture capital starts flowing into start-ups en masse, observers warn of a market crash. The current tech boom is no exception. As former start-ups like Twitter or Face-
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book achieve sky-high valuations on the stock market, pessimists fret that a crash is inevitable. In March, telecom billionaire Mark Cuban became the latest skeptic. He wrote a blog post titled “Why this tech bubble is worse than the tech bubble of 2000,” arguing that venture firms are piling into start-ups that offer no prospects for a payout. A tech bubble is of more concern to the real estate industry now than it’s ever been. For starters, tech firms have become important tenants in Manhattan’s office market. And unlike past cycles, the current boom has given birth to a large number of real estate tech start-ups. If a bubble pops, brokers, landlords and others in the industry stand to lose a lot of money. Thankfully, the major factor in most bubble calculations — tech firms’ stock price-to-earnings ratio — looks reassuring for now. In March 2000, the average priceto-earnings ratio (PE) of firms listed on the NASDAQ peaked at 175. At press time, it stood at a more modest 25.
The data on venture capital investment looks equally reassuring. According to accounting firm PWC, venture capital investment in the U.S. totaled $14.75 billion in the fourth quarter of 2014. That’s the Mark Cuban
lot of individual investors speculating on the market in the 1990s. Valuations as a whole were much higher. Today, companies feel more real to me. They, in many cases, have revenues.” Mark Zandi
“Today, companies feel more real to me. They, in many cases, have revenues.” MARK ZANDI, MOODY’S ANALYTICS highest figure recorded since 2000, but it still pales in comparison to the first dot-com boom. In the first quarter of 2000, venture firms invested a staggering $28.4 billion — a figure they almost matched in the following three quarters. “People have learned from their mistakes,” said Mark Zandi, chief economist of research firm Moody’s Analytics. “You had a
According to Zandi, real estate tech startups’ prospects are looking particularly solid. Unlike some other tech firms, most real estate start-ups generate income. Moreover, the overall size of the commercial real estate industry and its current growth cycle should bode well for start-ups. But even though the real estate tech start-up scene appears healthy now, there
are threats on the horizon. One is a hike in short-term interest rates, which the Federal Reserve may begin this summer. Low interest rates have helped to promote venture capital investment, since they depress returns on alternative assets like bonds. Although Zandi doesn’t expect venture investment to dry up, he acknowledged that a hike in interest rates could be fatal for some underperforming start-ups. Perhaps a bigger risk is behavioral. Venture capital firms know that a lot of the companies they invest in will fail. But their behavior is based on experiences from the (often immediate) past. The longer a growth cycle lasts and the more IPOs break records, the more likely investors are to make riskier bets. “That’s the difficult thing. Ultimately, we reach an inflection point when the failure rate begins to rise and investors update their expectations,” explained Sam Chandan, chief economist of the Manhattan-based Chandan Economics. When that happens, some firms may find themselves starved of cash. Still, Chandan dismissed talks of a bubble. “I wouldn’t say that many firms failing is a bubble, because that’s the premise on which these investments were based,” he argued. “Failures are predictable, we just don’t know which ones are going to fail.” TRD
Promising start-up, former NY governor split Real estate crowdfunder iFunding was paying David Paterson just $125 an hour, then allegedly cut him off BY KONRAD PUTZIER or an ambitious real estate tech start-up, bringing on a well-connected former governor as an adviser sounds like a match made in heaven. But in the case of iFunding and former New York Gov. David Paterson, the marriage quickly turned sour. A year after the real estate crowdfunding start-up announced the state’s former chief executive had joined its board, the two sides are no longer on speaking terms. Instead, they exchanged a series of bizarre accusations, involving questionable EB-5 deals, an alleged travel ban and supposedly dire financial straits. Taken together, they paint a picture of all that can go wrong when a fledgling start-up and a career politician partner up.
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This much is clear: In March 2014, Paterson signed an agreement to become a consultant for iFunding. A copy of the contract reviewed by The Real Deal shows that Paterson was to be paid $5,000 per month in exchange for at least 10 hours of 64 May 2015 www.TheRealDeal.com
work per week. That comes to a maximum of $125 per hour, less than what a junior attorney at a New York law firm typically bills. The agreement was a coup for the startup and seemed poised to turn iFunding’s fortunes around.
crowdfunding space. As late as March 2014, the firm claimed to be the most popular platform among U.S. investors, with more than $20 million in total investment volume raised domestically. It announced plans to fund a $250 million condominium tower at William Skelley
Former Gov. David Paterson
“Believe me, if you did anything [illegal] in China, you would know.” FORMER GOV. DAVID PATERSON Founded in 2012 by Sohin Shah and William Skelley, the New York–based firm was an early leader in the nascent real estate
90-94 Fulton Street. To the casual observer, it seemed like iFunding was poised to become a headline act in the crowdfunding space.
But, in fact, it had already begun losing momentum. The Fulton Street project quickly unraveled. Rival crowdfunding start-ups Fundrise, Realty Mogul and Patch of Land proved more adept at building ties to influential real estate executives and investors, and started clawing ahead. Wooing Paterson, with his extensive connections in politics and business, was iFunding’s shot at distinguishing itself. The former governor would build connections to lawmakers and work on affordable housing initiatives. Skelley and Shah also wanted to tap into Paterson’s experience in raising Chinese capital for New York construction projects, and saw him as their rainmaker in China. That was the plan, at least. Instead, the partnership quickly unraveled. And this is where the accounts begin to differ. According to iFunding’s initial version of events, the entrepreneurs planned to send Paterson to a conference in China, but then discovered that he couldn’t enter the country Continued on page 136