The DST Market is Bifurcating

RIAs Should Zero in on Sponsors with Deep Experience and Financial Strength

The Delaware Statutory Trust (DST) has become a popular vehicle for investors seeking tax-deferred real estate investments, particularly for those involved in 1031 exchanges. DSTs enable investors to hold fractional interests in otherwise hard-to-acquire income-generating properties while deferring capital gains taxes—a compelling combination that continues to attract the interest of RIAs and their accredited investors.

However, as the DST market grows, it also becomes increasingly segregated, with capital concentrated among a few top sponsors. This trend toward bifurcation—where experienced sponsors with strong financial positions lead the market—has implications for advisors seeking reliable, stable DST investments for their clients.

Understanding the Current State of the DST Market

DST fundraising in 2024 is on track to reach $5 billion1. While this is a decline from the 2022 record of $9.2 billion, it remains an indicator of investor confidence as the real estate industry begins to recover from the downturn of 2023-2024. 

Despite fluctuations in overall capital raised, 53% of the DST market is concentrated among a small number of established sponsors, underscoring the importance RIAs and investors increasingly place on sponsor experience and financial strength. This trend highlights a bifurcated market, where a select group of sponsors with strong balance sheets and years of industry expertise attract a significant portion of the available capital.

Why Sponsor Experience Matters

A DST sponsor’s experience plays a critical role in the stability of an investment. When you recommend a DST to a client, you’re endorsing not just the property itself but the sponsor’s ability to effectively manage and maintain it over time. Sponsors with an experienced property management and acquisitions team are better equipped to handle operational demands, tenant issues, and economic challenges, all of which can directly impact your clients’ investment outcomes.

Experienced sponsors are not only able to tap into more favorable lending relationships but are also more likely to attract high-quality tenants who execute long-term lease agreements. This is particularly valuable in a DST structure, where investors rely on rental income for returns and typically have no active management role. 

Conversely, newer sponsors with little understanding of actual real estate intricacies or few offerings in the market may face challenges, such as increased vulnerability to economic shifts or tenant turnover, which can introduce added risk for investors.

Key Indicators of Strong Sponsors

Knowing how to identify a stable DST sponsor is essential for advisors looking to protect their clients' interests. Here are several key indicators to look for when evaluating sponsors:

Lender Relationships
Look for sponsors with multiple lender relationships.  These relationships can be with banks, insurance companies, or other financial institutions.  Sponsors with these relationships often have the ability to make financial decisions quickly to acquire and place properties into the DST market. 

Portfolio Diversification
Sponsors with a diversified portfolio are better positioned to manage risks, as they aren’t dependent on the performance of a single investment offering. A diversified portfolio can provide more reliable revenue streams for sponsors, even during periods of economic uncertainty.

Experience in the Market
Sponsors with years of experience managing DSTs typically understand the intricacies of the market and have refined their acquisition, tenant vetting, and management processes. For instance, CAI Investments, founded in 2011, has managed over 1,000 real estate assets for hundreds of clients, ranging from large institutional funds in New York City to high-net-worth family offices. CAI has also worked with national brands such as Marriott, Westin, Del Taco, Walgreens, and Starbucks, overseeing over 5.4 million square feet of assets under management.

Transparency and Reporting
Transparent reporting practices reflect a sponsor’s commitment to informing investors. Transparent, timely reporting on financials, tenant changes, and property performance helps advisors and investors understand how the DST is performing.

Questions RIAs Should Ask DST Sponsors

When evaluating a DST sponsor, advisors should ask questions that reveal the sponsor’s commitment to long-term performance. Here are a few questions to consider:

• 1) What lender relationships do the sponsors have? Understanding these relationships can provide insight into a sponsor’s capacity to handle economic fluctuations.
  
• 2) What is the sponsor’s track record with previous investment offerings? Don’t just review the sponsor’s closed investments; ask about an offering that didn’t perform well and why.
  
• 3) How often are financial reports provided? Regular reporting is essential for monitoring a DST’s performance. Sponsors who commit to consistent and transparent updates demonstrate a dedication to earning and maintaining investor trust.

Conclusion

As the DST industry continues to witness a bifurcation among the 50 - 60 active sponsors¹ currently participating in the market, experienced sponsors with strong balance sheets are likely to lead the industry forward. For advisors, selecting an offering among top sponsors provides added client protection by ensuring that DST investments are managed by financially stable, reliable partners. 

In a market where economic pressures can impact even the most promising real estate investments, choosing a sponsor with a strong foundation can make a meaningful difference in a client’s success.

¹https://thediwire.com/dsts-fundraising-remains-on-sluggish-pace-through-the-first-half-of-2024/