Is commercial real estate really such an illiquid asset?

One of the common worries about making direct investments in real estate is the concern that the money can be locked up for years at a time. Now, New York-based fintech company Cadre is changing that.

The company has created a secondary market which pairs investors who wish to exit Cadre estate deals mid-cycle with eager buyers.

“Generally speaking, we do a pretty good job of matching people,” says Javier Benson-Glanz, General Manager, Core Business at Cadre.

Cadre’s breakthrough means that at least part of the direct investment real estate market is beginning to resemble the stock market. Billions of stocks change hands each day on the New York Stock Exchange and the Nasdaq [1]. The exchanges provide liquidity for people to buy and sell their investments when they choose to do so.

Historically, however, there has been no such organized secondary market for private real estate. At least until the introduction of Cadre’s secondary marketplace. Of course, the Cadre Secondary Market is nowhere near the U.S. stock market. But it is a step in that direction.

It works like this: “In general, Cadre buys buildings with a target holding period of five to seven years,” says Alyssa Anderson, Director of Business Operations and Growth at Cadre. That’s sometimes adjusted based on changing market conditions [2].

However, every investor who comes to Cadre has different financial circumstances. “Needs arise that you can’t always foresee,” Anderson says. “Maybe you need home repairs, or to care for a relative. There can also be surprise medical expenses.” In other words, investors may need to access the money before their full investment period is up.

That’s where the Cadre Secondary Market can be particularly helpful. Once a quarter, the company assesses the net asset value of each investment and allows current investors to potentially sell all or part of their stakes. It also invites accredited investors to buy those stakes. “Our platform matches those looking to purchase shares mid-cycle with investors looking for liquidity,” she says.

Investors can choose to sell a portion of their position or the whole amount, which might be as little as $10,000 [3]. Historically, those trades represented a relatively small number of positions being traded each year through the Cadre Secondary Market. “It’s not as if we are seeing half of our investors cycling out of investments each quarter,” Anderson says. “But the potential option for liquidity is an incredibly valuable benefit for investors.”

There is a cost to gaining access to the liquidity. Investors are asked to take a modest discount to the value of their stake. This is typically a small fraction of the value, Benson-Glanz says. That compares favorably to far higher discounts for other illiquid assets in private equity.

“If you look at how private equity trades its large bulky transactions, it’s not unusual for people to take sizable haircuts in their positions,” Benson-Glanz says. “The Cadre Secondary Market aims to be more efficient and cost-effective.”

Benson-Glanz says that typically, most people trading their positions for a discount have usually already received cash flow and potential tax benefits from their initial investment, and some of the investments might have appreciated over the holding period. “So people are a bit more willing to accept a discount for that liquidity,” he says.

In fact, since the Cadre Secondary Market is such a success, sometimes Cadre investments are priced to trade above their fair value, Benson-Glanz says. “For one of the first times ever, we actually have an asset right now that’s priced at a premium to Net Asset Value (NAV),” he says. “The hope is to get the Cadre Secondary Market to trade more like the stock exchanges.”