Aaron Halfcare is the CEO of Modiv, a pioneer in the direct-to-consumer commercial real estate product industry. The company has created one of the largest, crowdfunded, public non-listed REITs, which raises funds through crowdfunding technology.

Modiv is an innovative real estate, fintech and proptech asset manager that manages its non-traded REIT. The goal is to do better for investors and be more investor-friendly with low fees, all with more transparency and an experienced management team.

It’s not news that most individual investors have traditionally not been able to access CRE. If so, many have traditionally been designed to benefit the sponsor (not the investor).

That has changed with Modiv, which is aiming to make the environment more beneficial for investors. Halfcare has spent over 25 years in CRE and the investor realm, having been involved with over $12 billion of capital markets transactions. He’s the former president of RealtyMogul, a firm that guides investors to investing in CRE, and has held senior roles at Cole Real Estate Investments, BlackRock and Green Street Advisors.

He spoke to lev.co about how the pandemic challenged the commercial real estate industry to innovate and be more tech-forward, and shared his predictions for the key areas of growth in the CRE space post-pandemic.

How is Modiv changing the game?

It’s a crowdfunded equity REIT. It’s the only one of its kind, certainly the largest out there. I came into the tech crowdfunding space three years ago from the institutional real estate place. I wanted to get into crowdfunding because there’s so many emerging trends.

MODIV is a real estate crowdfunding platform that combined two different smaller portfolios to create this large equity REIT that’s fully internalized. We have a board of directors, and a manager who works for the REIT. We don’t have fees. We’re on the edge of being vanguard of real estate.

Why did you want to get into crowdfunding equity REIT?

I wanted to get into crowdfunding because we’re seeing the shift from non-traded REITs. The demand from individual investors for CRE has never been satiated. It just shifts its form. Who is making it available to them and what kinds of structures?

I think crowdfunding is that new wave. Volumes are significant. It’s growing. The growth rate is expected to be around 16 to 20%. The ability to remove fees is pretty impressive.

Why has this never been done before?

There’s a lot of crowdfunding models out there and they’ve all taken different business models. Many have started out as tech entrepreneurs. Then they go to real estate secondarily. I started with real estate. How do you align interest with investors? I came at it from a real estate perspective and saw the opportunity that crowdfunding afforded. I didn’t get enamored with crowdfunding as a Fintech unicorn, but as a capital markets solution to help facilitate the asset class. That’s why we took a different approach.

Why has there been such a slow adaptation of tech in real estate today?

Real estate, as one of the larger financial assets has been one of the slower ones to adapt to technology. It’s partly the nature of some of the participants. But in the past, it was a private market, a lot of money, it worked. You didn’t need a lot of tech, so a lot of people didn’t see a lot of opportunity with it. But increasingly with proptech, and fintech, we’re starting to see scale.

I liken crowdfunding to the discount brokerage business that came about from regulatory change in May, 1975. You saw all these discount brokers and better access to trading stocks. Nowadays, it’s easy to trade stocks online, but 30 years ago it wasn’t. The same phenomenon is happening now with real estate.

How do you think we got here?

Unlike the crisis of 2008, where real estate took a hit because of excess leverage, we didn’t see excess leverage this time around. We saw a disinterested third party being a government, at a municipal or state level, mandating that a physical co-location of a tenant and its customers not be open. Whether it was office or retail, this was happening. When you think of CRE, it’s co-locating a business and its customers or employees. When you tell businesses they can’t do this, it really puts a shock on the system.

To provide context, the legal and economic relationship of a commercial building has historically been between the owner of the property and the tenant of the property. The tenant’s economic purpose for paying rent is to enable it to have a physical presence to co-locate its employees (as is the case for industrial and office buildings) or interact with its customers (as is the case with restaurants, retailers, hotels, etc).

When an economically disinterested government entity — last year it was most typically at the state level (but not exclusively) — mandated that the intended economic use of a building (and thus its contractual rental/lease arrangement) could not be carried out due to shelter in place mandates, it threw a wrench into the proverbial gears of the real estate capital system. If a tenant is unable to use the building by which it is economically liable to pay for, and it has no real clue as to how long it will be unable to do so, then tenants begin to question their ability (and in some other cases, desire) to pay rent.

Equally, landlords, who purchased the properties with the known rental income (and likely financed the properties based on the income) were unable to ascertain the property’s worth or financeability during the same time. This caused a freeze in the capital markets and led to a period of high risk. This can be seen very succinctly in the massive equity sell off of publicly traded REITs in April of last year.

Arguably, even though the worst is seemingly past, there remains a bit of “edginess” in the market knowing that certain state governments might be more willing, politically or otherwise, to once again limit access to commercial properties should the COVID pandemic, or the fear of it, rise up again. This was the phenomenon that led to the price dislocation in real estate capital markets last year.

In contrast, the real estate sell-off in 2008-2009 was credit related — both in terms of excessive leverage and a frozen debt market following the Lehman bankruptcy — and not use-related.

We saw a pause. We’re seeing a pandemic recovery with those who have resilience.

Are office spaces still empty, in your eyes?

The long-term problem is offices. I remember living in Manhattan after 9/11, and people said there would be no high-rise offices ever again. But in three or four years, offices had been fully occupied. Cities like New York are going to rebound, but rents might change. The marginal properties are not going to be the same as before, but I don’t see a ghost town in places like New York City.

But in suburban markets, it’s a different story. We see large corporations have 5,000 to 10,000 square feet of space in cities where people like to work, like Nashville and Austin. And they have tech-enabled centers to convene a day or two a week, versus people going to the office five days a week. The verdict on offices is still out.

What about hotels?

Hotels have always been a volatile asset class. On the positive side, there’s a daily lease. I think the extended stay hotels were hit the hardest. Luxury hotels were not hit as hard. People are back on planes and want to have that vacation again. COVID, just like 9/11, was a massive blow to hotels. You’ll see a lot of hotels changing hands. I don’t think it will lead to a lot of hotel development. There’s probably too much supply on the margin. Hotels have always been a tricky asset. When you go into that as an investor, you know you’re going to have volatility.

What are your thoughts around retail, is there a revival of retail space?

Retail, it depends. If you’re in a high traffic area like an airport or Fifth Avenue or a mixed-use stadium environment, it’s going to be questionable. With a large number of people, quick service restaurants and sit down are going to be fine, but drive throughs are in demand, so is Doordash. Industrial assets are doing well. Part of that is manufacturing is going to come back to the U.S.

They’ve been priced to perfection. Self-storage assets have become fairly immune to it. People lock their stuff in storage and it hasn’t impacted their ability to pay rent. Home prices have shot up. It’s changing the market. All real estate has been affected.

Real estate as an asset class will adapt to what the environment is — I just don’t know if we know what the full environment is. We’re not out of the woods yet.