One of the surprising repercussions of the pandemic has been the rise of the so-called retail stock investor. A combination of time off, stimulus money, a lack of entertainment options, and the easy, free trading platform Robinhood has made stock investing the new national pastime. All of this has to create tens of millions of first-time investors that are now actively trading stocks.
Unlike stocks, investing in commercial real estate has been largely off-limits to most small-time investors. Without significant resources and connections, breaking into commercial real estate investing can be extremely difficult. Expanding the investor base has been a goal of the commercial property industry for a while but this uptick in retail investment, along with new regulations and technology, might be the catalyst to bring more investors into the sector.
One of the companies working to create a new avenue for commercial property investment is LEX Markets. LEX recently partnered with NASDAQ to help them use the same technology that they use for the securities for commercial buildings. I spoke to Dean Sterrett, co-founder, COO, and Head of Product for LEX about why they founded the company and how they see the future of “retail” commercial property investing. “Our fundamental thesis was that commercial real estate, one of the largest asset classes in the world, is still basically an illiquid and inefficient market,” he said.
To alleviate this problem the team at LEX looked for ways to create “shares” of buildings that can be easily bought and sold by anyone just like stocks of a company. They found their path using an SEC regulation called Reg A+ that does not have the accreditation requirements for investors. But just opening up investments to unaccredited investors isn’t enough to fulfill the dream of creating a liquid commercial property market. Many other companies have used this same regulation to allow them to accept fractional ownership but they have only been able to open their investments to people that come through their website.
This is where the NASDAQ partnership comes into play. “By leveraging NASDAQ’s technology we will be able to offer equity in these buildings to anyone that uses a stock trading platform like E-Trade or Charles Schwab,” Sterrett explained. This has been a big sticking point for fractionalized ownership of property. Most companies creating these shares only have so much reach so the amount of demand that they can generate is limited. By making these investments available to anyone with a trading account the hope is that the number of investors that it will attract will skyrocket.
Being able to invest in real estate through a stock trading exchange isn’t new. Real Estate Investment Trusts, or REITs, have been doing this for decades. The difference is that REITs are comprised of large portfolios of properties and have rather stringent rules about how they invest and the dividend that they must pay out. “I think that REITs are heavily dependent on management. You are trusting them to make the right decision, you are buying their vision and their ability to execute,” Sterrett said. He thinks that the properties that will be coming onto the market will compete with REITs for investors, changing the very nature of them. “I think that REITs will still be around but they will be much more visionary, not just an aggregation of a property portfolio.”
Creating fractional ownership can help increase the pool of capital that can be invested in it, but it isn’t the only benefit of this new development. Commercial real estate has been a great way to grow wealth, one that has often been unattainable to those that are not well connected or capitalized. By packaging ownership in a way that is available to those outside of the industry and/or with lower net worths, it can help the masses participate in the steady growth that the sector has shown. That is the hope of another entrepreneur innovating in the space. Phillip Michael runs NYCE, an investment firm that has created fractional ownership for two of their properties, including a student housing development near Temple University. “I didn’t need the capital,” he told me. “I wanted to create this investment channel so young people like myself can get into the industry.” Many young investors have jumped on the opportunity, he said that around 95 percent of the investors in his student housing project were first timers.
Michael admitted that bringing in this many partners to a project has always been a challenge, “It often isn’t worth having a lot of investors with smaller amounts. We have 2,000 investors so it would be daunting to do this in a traditional offering,” he said. But by creating an easy, automated way to split share ownership of his property he has been able to help bring fresh blood into a very gray industry. “It is important to help people understand these investments, no fancy lingo. Just break things down to what people can easily understand: expenses versus revenue.”
The growth of stock trading during a hard economic time is proof that the general public is getting more proactive about their investments. Surprisingly, these “retail” traders have actually done rather well in the bull run after the initial pandemic shock where professional money managers and even algorithmic traders have struggled. This could lead to more retail investment in other sectors, such as commercial real estate. It is important to remember that low-cost trading platforms have been around for a long time. It wasn’t until Robinhood made a mobile, intuitive interface that first-time investors were enticed to wade into the murky waters of stock investing. Companies that want to create fractional ownership for buildings will have to remember that just being able to invest in something isn’t enough, it needs to be convenient, understandable, and transparent, three things that commercial real estate has never been in the past.