New Fundamentals: Liquidity

Executive Summary

Private investments in commercial real estate (CRE) are traditionally illiquid. The Cadre Secondary Market offers investors the opportunity to:

• Potentially shorten their CRE investment time horizon
• Select deals that more closely match their risk tolerance
• Diversify their portfolio across markets and property types

Commercial real estate (CRE) is traditionally an illiquid asset class. An investment platform for investors to enter or exit CRE deals further along the investment lifecycle is an idea whose time has come. In the Cadre Secondary Marketplace, investors are provided rigorous due diligence for institutional-grade opportunities which can potentially shorten their time horizon, better align their real estate investments with their preferred level of risk and diversify their existing portfolio.

What is the Cadre Secondary Market?

The Cadre Secondary Market matches interested buyers of commercial real estate with sellers looking to exit their positions. For existing investors, a secondary sale may offer opportunities to liquidate earlier than the usual CRE investment timeline. The secondary market is currently available to accredited investors seeking access to Cadre’s deal-by-deal investment platform, and is expected to eventually be available to trade shares of the Cadre Direct Access Fund. While liquidity is based on marketplace dynamics and is not guaranteed, our goal is to democratize access to the asset class by making opportunities for liquidity available to a greater number of investors. All investors are encouraged to review the offering materials when making an investment for specifics on how the marketplace operates.

This marketplace also opens unique opportunities for buyers. Investors who missed out on the opportunity to get in on the ground floor of a Cadre deal, wish to reduce the time their capital is locked up in a single deal, or who prefer to come into a project once its business plan has shown results may now have the opportunity to purchase a position closer to the deal’s exit on the Cadre Secondary Market.

Is the Secondary Market for You?

Throughout the lifecycle of an investment, each property’s value and projected cash flows are regularly updated. With improvements being made to the property over time, and with trends shifting both within a region and as part of the broader real estate market, the risk levels and potential for price appreciation and cash yield can also change as the deal progresses through its timeline.

Some investors may prefer to take a “wait and see” approach by investing in a business plan that has already begun its execution phase. At the same time, a seller may prefer to exit a deal once its earlier phase has wrapped up. The potential liquidity provided through the Cadre Secondary Market is a unique feature on our platform. It can help open up private real estate to more investors, and may align both buyers and sellers more closely with their specific investment goals.

The relatively long time frame required for full-cycle investments in commercial real estate can be a deterrent to potential investors. It’s a valid concern; many commercial deals take between five and 10 years from acquisition to disposition.

The Cadre Secondary Market allows investors to acquire or exit positions in a time frame that is more customized for their personal risk tolerance and need for liquidity. Entering into a deal closer to the property’s stabilization decreases the time commitment involved for buyers. Sellers, too, may be able to exit deals on the platform at this phase in the deal cycle, so they can reallocate capital as needed. Such access to potential liquidity helps make investments in commercial real estate more investor-friendly in what is otherwise a highly illiquid market.

Cadre’s platform strives to provide transparent information about each opportunity. This includes an investment memo with detailed information about the property, the business plan, deal partners and projected financials. Potential buyers are also provided the most recent quarterly update on each deal, which includes a recent snapshot of the property and how it has performed relative to our original underwriting.

Providing Options for Risk Appetite

Investors in all asset classes have various levels of comfort around risk. Some prefer to take on greater risk up front for the potential to reap greater rewards. Such investors may seek out a commercial real estate investment opportunity with a higher internal rate of return (IRR). Investing when the business plan is still in the ideation phase comes with the expectation for greater return to offset the higher risk they are taking as an early investor in a project.

Coming into the deal after some (or all) of the property renovations have been completed may appeal to investors with a preference for established business plans. Such later-stage opportunities—when the property is more likely to produce more stable income and command higher rent—may help allay some of their concerns about risk and stability.

The charts below represent the various risk and return benefits that stem from two hypothetical starting points for investments in commercial real estate. Chart A depicts the potential expected risk and return from investing in real estate at the start of the deal. Chart B indicates the potential decreased level of risk and reduced commensurate return from entering into a deal two years after origination through the Cadre Secondary Market.

A: Hypothetical Risk and Return from Investing at Origination

Graphs A and B were created by Cadre from simulated data using a stochastic model. We assume that the expected value of the asset would increase and the volatility would decrease over time.

Diversifying Across Markets and Property Types

With the option to commit to a shorter time horizon, investors taking on deals in the secondary market have the ability to diversify their CRE investments across various markets and property types. Others could seek out opportunities that diversify their overall portfolio through a range of time horizons and risk profiles. This increases the chances that investors can seize upon an opportunity that meets their specific investment criteria, as CRE deals that suit their needs may come available at different stages of the investment lifecycle in both primary and secondary markets.

Increasing Availability to a Greater Investor Pool

The secondary market expands access to investors who might otherwise be unable to add commercial real estate to their portfolio. One way Cadre does so is by providing sellers consistent access to a potential pool of liquidity, along with the opportunity for buyers to enter into deals they may have missed out on in the primary market.

Each quarter, interested buyers have the chance to scour available properties put up by current investors who have decided to exit their positions. Each opportunity comes with an abundance of up-to-date information, designed to provide potential investors with everything they need to both enter and exit their real estate positions with conviction.

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