REAL ESTATE IS A LONG-TERM HOLD.
BUT IT NEEDS EQUITY TO MATCH
When I was an analyst working in real estate private equity, I was amazed at how few options were available to owners of real estate wanting to raise long-term equity capital. These owners had owned and managed their properties for years, adding significant value through leasing, capital improvement plans, and repositioning assets to be more competitive in their local markets. Some owners built the assets from the ground up. But despite the knowledge and expertise they had amassed about their properties – and from what I could see, they were clearly the best stewards for these assets – they inevitably confronted a need to create liquidity for their investors. The eventual sale would transfer title to another entity and all of that accumulated knowledge and potential for scale went out the window, along with any participation in future upside.
At the same time I saw this playing out, I also lamented how few opportunities there were to gain direct exposure to commercial real estate investments. Limited partnership interests were only available to a select group of accredited investors and often came with high minimums and limited options for liquidity. LP capital is usually tied up for many years, and if there is any opportunity to liquidate prior to a sale, it comes at a steep cost.
In 2017, my partners and I set out to solve this two-sided problem. With the regulatory framework of the JOBS Act as our guide, we built our own alternative trading system (ATS), partnered with NASDAQ, and began the painstaking process of vetting various structures. We hoped to give owners another tool to monetize a portion of embedded value without losing control by raising perpetual, passive equity. For investors, accredited and non-accredited alike, we aimed to expand access, reduce costs, and enable the buying and selling of direct ownership interests via a fully connected financial marketplace. Owners never have to replace the equity, and investors own securities with tickers, CUSIPs and can be held in any brokerage account.
Fast forward to today where there is a significant amount of embedded equity tied up in commercial real estate after years of increasing cash flows and asset appreciation. Over the past few years, there have certainly been winners and losers. Owners of industrial, self-storage and multi-family assets have seen strong demand for space and rising rents, especially in the sunbelt and other markets benefiting from positive net migration in the wake of COVID. Losers have been business-oriented hotels, non-grocery anchored retail and lesser quality office properties in the urban core, especially in cities that suffered population declines.
In my conversations with owners, I hear aspirations of creating generational assets for their families and returning capital but still wanting control. The platforms that have been built over the years have become local sharpshooters able to recognize and create value as they expand their footprint with each new acquisition or development. To maximize value, owners need access to more equity recap tools so that asset sales aren’t the only option.
At LEX, we have heard the growing demands of owners and investors and are quickly expanding our reach. In March, we closed on our first public IPO of a single asset – a three-story mixed-use building in New York City. The building at 286 Lenox Ave is fully leased to a Wells Fargo retail branch and two established non-profit office tenants. The building is across the street from a Whole Foods, a quick walk to a subway station and in a vibrant residential and commercial area. Through an IPO with LEX, the owner is taking some equity off the table to redeploy into other projects while maintaining control and participating in additional gains. On the other side of the trade, over 500 investors are participating pro-rata, pari-passu with the owner on all future cash distributions.
Our next IPO to launch is a fully leased multi-family property in the Capitol Hill neighborhood of Seattle, one of the strongest employment markets in the country. The building has been built to Passive House standards, allowing the owner and tenants of the building to achieve significant cost savings while drastically reducing its carbon footprint. Investors will soon have the opportunity to participate in future growth alongside the owner.
These are just some of the real estate stories that resonate with investors – good cash flow in established markets, experienced sponsors with future upside potential. Rising interest rates may put pressure on property cash flows and, at certain levels, will dampen transaction volume. But property fundamentals are strong and are expected to strengthen further.
Over time, there will be opportunities to create more investment options that cater to all appetites, not just core/core plus. And there will also be opportunities to put money behind other strategies such as with our upcoming deal in Seattle, a vote for Passive House standards. Investors will be able to put money behind their passions. But regardless of the asset type or submarket or socially responsible strategy, the experience will ultimately be the same – investors can walk by an asset they own or buy a coffee at a business leasing space in their building. This is the tangible engagement that makes commercial real estate unique.
There are so many great real estate stories out there, and I hope to introduce some of them into the public markets. Owners stand to benefit by partnering with investors and raising long-term equity better suited to match the long-term decision-making required to maximize value.