Groundfloor CEO Shares Insight into Real Estate Marketplace and Investment Opportunities

 

Brian Dally, co-founder and CEO of Groundfloor, operates a unique online investment platform for real estate investors. By using the Reg A+ exemption, Groundfloor enables smaller investors to gain access to residential properties – a sector of the market that continues to experience robust demand.

In the past year or so, markets have had a bumpy ride. Rising interest rates battling persistent inflation have hit many markets hard. Yet residential may still provide an opportunity – if credit is available and developers adjust for the rising rate environment.

Groundfloor currently offers short-term debt securities, which are secured by the assets. The company promotes a historic return of 10%, stating that it is “uniquely positioned to take advantage of the current housing market.

CI recently connected with Dally to hear about the current real estate market status and what Groundloor is seeing today, and his expectations for the coming months.

Our discussion is shared below.


Recently, I saw your comment on Twitter about defaults. How is Groundfloor performing in a challenging environment? We have seen other real estate investment platforms exit or hit pause.

Brian Dally: Groundfloor continues to perform well, buoyed by the resiliency of our large retail investor base.

We have a market risk team that constantly evaluates markets. We’ve steered clear of overheated, institutionally-dominated markets like Austin, Phoenix, and Boise that are feeling more of the pinch right now. Instead, most of our volume is concentrated in the southeastern U.S. Those markets remain supply constrained and still generate excellent ROI as a result. We are seeing longer turnaround times to repayment that are stretching from what was 6 to 12 months to now 9-18 months in many cases. But that still compares favorably to most any REIT. Even Blackstone’s REIT could only fulfill 17% of redemption requests in Q1 of this year!

You mainly focus on residential real estate investments. What type of activity are you seeing here in regard to demand from borrowers?

Brian Dally: Demand is picking up after a pause in the second half of 2022. We originated a total volume of $66.7 million in Q1 2023, for a 16.8% increase over Q4 2022 loan volume of $57.2 million. The best borrowers are on the hunt for capital to take advantage of opportunities. Just a handful of capital providers are actually able to supply it. Liquidity is at a premium. Our retail investor base is a huge competitive advantage, enabling us to be more flexible and resilient as a partner compared to other capital providers. For example, we now provide equity capital for our best borrowers – and are fractionalizing that equity as a new investment product available via our Labs initiative. The first two equity offerings were hugely successful and returned over 20% in less than nine months.

What are you seeing in the Commercial Real Estate [CRE] market?

Brian Dally: We do not engage in CRE, but the pending refinances coming due in the space are certainly something to watch.

If banks are already ‘weakened’ and have to absorb large-scale defaults, clearly, that would be problematic. We don’t anticipate this growing into a broad-based credit freeze like we saw in 2008.

We do not engage in CRE, but the pending refinances coming due in the space are certainly something to watch Click to Tweet

We have seen reports on highly challenged markets like SF or Chicago while certain other markets like Miami are booming. What are your thoughts on this?

Brian Dally: Yes — the market is very segmented right now. Prices are more stable in the Eastern half of the country. Major cities in the Midwest and the South should retain price stability, given that inventory continues to be low. So far in 2023, sellers in these areas are holding, which serves as another ballast for home prices.

Migration patterns continue to favor the Southern states. We’re looking for interesting dynamics to unfold as the price points in more rural areas may draw more housing activity.

Housing prices at the end of 2023 will depend on where you live, not surprisingly. I could see a further decline (albeit minimally) out West, and a slightly positive number for the Eastern half,  maybe, on the whole, a 1% increase. Some rural areas, especially in the Carolinas, may see growth above 1%. This is obviously very favorable for investors who are taking fractional positions in our loans.

Which markets are you seeing the most demand/activity?

Brian Dally: The state of Florida is doing well. Florida had the highest domestic migration (where people moved) in 2022, creating 318,855 new Floridians, and many Florida cities have benefited from the post-pandemic boom. Cities like Tampa experienced robust growth and price appreciation; even university towns like Gainesville have seen significant growth. Jacksonville continues to show strong economic resilience with low unemployment and solid price appreciation, and it continues to be one of our top-performing markets.

What changes have you made to Groundfloor to mitigate high inflation / rising interest rates and, correspondingly, increasing risk?

Brian Dally: For starters, we tightened our lending programs, obviously increasing our rates. We are also in a first-lien position in our loans, so each investment offering gets the benefit of being secured and collateralized by an underlying real asset. We’ve beefed up our asset management teams to continue working very closely with borrowers every step of the way, so we can spot issues and intervene far earlier than institutional lenders can. All of these precautions have enabled us to continue delivering high yields net of lower loss ratios, and we expect that to continue and, in fact, improve on a net basis.

we tightened our lending programs, obviously increasing our rates. We are also in a first-lien position in our loans, so each investment offering gets the benefit of being secured Click to Tweet

Do you anticipate that rates will go higher? Do you believe that rates will start to come down later this year?

Brian Dally: If we continue to operate outside of recessionary conditions, most commentators we follow believe that rates will settle (not rise) the rest of the year. The comments from the June FOMC meeting tell us a lot. We’re moderately optimistic that rates will flatten and begin to recede in 2024. Clearly, the concern over commercial real estate defaults and bank stability remains as potential systemic interruptions that could lead to rates decreasing. The inflation picture is mixed. So, we’ll see!

Tell me about your Stairs product. What type of returns are you generating and what type of uptake are you seeing (any data info is great).

Brian Dally: Groundfloor has notified all Stairs users that we’re beginning the process of sunsetting this product. The demand for high yields with immediate liquidity is obviously very high. Who wouldn’t want that, especially in this environment?

We learned a lot from Stairs. It was very successful, and we’re actively incorporating the features that users loved into the core Groundfloor experience.

Groundfloor is just not a deposit-taking institution, and we don’t want to be confused with one or compete in that space. We’re an investment platform. Our range of investments offer high yields with exceptionally low volatility and comparatively short duration. Watch this space. We’re anticipating we’ll be able to share news soon on the regulatory qualification of a new product we’ve developed to build on and expand on this legacy.

What are your expectations for 2024?

Brian Dally:  First and most importantly, next year is shaping up to be a great one for the real estate investors and entrepreneurs to whom we supply capital. Conditions are lining up to make 2024-25 a period of peak profitability for them, and for us as well. We’re positioning Groundfloor to ensure that investors on our platform get the full benefit of this opportunity in return for providing the liquidity that is in such short supply and so critical during this period. Having capital when it’s most needed is a difference-maker. As an intermediary, we’ve shown in the past and are demonstrating right now that Groundfloor can win in every environment — whether rates are high or low, house prices are increasing or declining — thanks to our unique position to tap into the power and breadth of the crowd at scale.

next year is shaping up to be a great one for real estate investors and entrepreneurs Click to Tweet

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