Between commercial real estate markets and Wall Street lies an unsteady relationship. New investment vehicles that are based upon commercial properties are created — some use the term “innovated” — by the street from time to time, with mixed results for the wider market. The unsteady relationship stems from a basic conflict. On one hand, Wall Street likes liquidity and abstraction, but on the other, commercial real estate just isn’t very liquid, and a commercially developed plot of land is anything but abstract.
The name for what Wall Street is doing when it “innovates” is financialization. How innovative any one example really proves we leave up to history to judge, but one thing that financialization always brings is liquidity to an asset class. And this is where the mixed results come in. The repackaging of commercial real estate bonds into mortgage-backed securities (CMBS) saw many billions worth of terrible outcomes in the last economic downturn, albeit nowhere near the amount of national damage that was done using similar packaging techniques on residential mortgages.
Enter The Building IPO (Almost)
Despite a splashy arrival, the latest commercial property innovation from Wall Street – with promises aplenty of capital liquidity – is having trouble getting off the ground.
In October of last year, trading technology maker Etre, LLC announced they had developed a new method for investing in individual real estate assets. Their system would allow a new trading model, where a shares in an individual property could be offered and traded.
In other words, Etre had devised a way to allow single buildings to enter the stock market just like companies undertaking public trading. The kickoff of trading in a building’s stock shares could now be conducted using the same frenzied, irrational psychology that marks a stock’s initial public offering (IPO).
At least that was the pitch.
Etre needed a property to pilot the idea, and signed a contract to acquire one: Washington DC’s 1201 Connecticut Ave., sometimes called the Longfellow Building. But the contract just expired without the deal being done, as WaPO’s Johnathan O’Connell reports:
It was supposed to be a first of its kind, an initial public offering for a single building.
But it didn’t pan out.
Etre Financial LLC, based in New York, had been attempting to create a way to give investors the chance to buy shares in specific buildings via the Nasdaq. Its test case was 1201 Connecticut Avenue, known as the Longfellow Building.
Etre inked a contract to purchase the building and hoped to launch an IPO this week, but the offering never took place and as of Friday, the contract to acquire the building has expired.
Paul Frischer, president and chief executive of Etre, said that because the idea was so new to investors, management didn’t have sufficient time to answer all of the questions raised about the idea in the time allotted by Securities and Exchange Commission rules.
“We just ran out of time,” Frischer said . “The truth is that everyone thinks it’s a cool idea. And we just didn’t have enough time in five days to talk about it.”
He said he still believes in the business model and that Etre will choose another building to acquire and bring to market. Now that more people understand the company’s idea and business model, he thinks it will be easier the second time around.
So What Problem Is Being Solved, Again?
While it’s probable that this concept isn’t going away and Etre may well get its building shares platform off the ground, one has to wonder what is the exact problem this innovation is here to solve.
The illiquidity of commercial real estate isn’t in and of itself a problem in a general sense. In fact, as an investment class, commercial property’s characteristics of “finance with a roof” is already serving a multi-trillion dollar need to produce returns on a real economy. Additionally, the existence of REITs has long allowed public trading of commercial property portfolios, so it’s not as if the trading floors are without commercial real estate plays.
In my more cynical moments, I see this effort to trade individual buildings not as any innovation in general capital allocation but as a quick way to extend the exuberance and ballyhoo of the IPO to the relatively staid and stable commercial property sector. It could be seen mainly as a way to tie the fortunes of notable buildings to the vagaries of equity traders and add to the ever-expanding pools of commission income the Street lives to pocket.
If making stockbrokers and underwriters not being rich enough was the problem, this sure looks like the solution.