The New Math: Michael Lehrman on his plan to introduce derivatives into New York City’s otherwise staid rental market.
Jotham Sederstrom May 29, 2012, 10 a.m.
Michael Lehrman thinks the commercial real estate services business is completely staid, calcified, old-fashioned.
He doesn’t use those words specifically. He’s a little more eloquent. He’s a Wall Street man now, and to him it’s practically laughable when major real estate services firms claim to be cutting edge when the heart of their analytical capacity is still rooted in the decades-old practice of collecting troves of market data and organizing them into endless charts in order to divine tomorrow’s market conditions.
“We don’t want to be looking at yesterday’s information,” said Mr. Lehrman, considered one of the chief architects of BGC Partners’ acquisitions and merger of Newmark Knight Frank and Grubb & Ellis, whose real estate lending and services practice he now oversees.
Last week at Newmark Grubb Knight Frank’s ICSC booth in Las Vegas, Mr. Lehrman highlighted BGC Partners’ specialty in creating systems that allow stocks and other financial instruments, even those that are not normally liquid, to be accurately priced at any given moment. Such transparency can stoke trading, he insisted, while also creating markets and the potential for entirely new classes of financial products.
One of the epiphanies of both Mr. Lehrman and his boss, Howard Lutnick, the chief executive of BGC and Cantor Fitzgerald, the better-known Wall Street company it was spun off from, was how the company’s model could be applied to commercial leasing.
Mr. Lehrman reiterated the company’s plans to create derivative products that can be used like insurance against rental price swings in the leasing market. But the goal is two-tiered: The trading of these derivatives could create an index, a Wall Street-style gauge of the rental market, complete with indices that could measure where it’s heading.
“Our goal is to give our clients who are making any investment decision, who are gauging what that investment is going to cost tomorrow or six months or six years from now, the real-time information to make more informed decisions,” Mr. Lehrman said. “What we’re doing is going to create state-of-the-art information about the leasing market. Lease-forecasting analytics that will empower our brokers by having that at their fingertips.”
Assuming such pricing measures actually work, it would give Newmark Grubb Knight Frank a huge leg up against competitors. “Tenants and landlords are going to see that we have the best information and they’re going to want to work with us,” Mr. Lehrman said.
Of course, the devil is in the details. Much skepticism has rippled through the industry as to whether BGC can actually create a system that commodifies real estate leasing, a business many professionals believe fluctuates so widely from deal to deal that it’s impossible to value in such a broad fashion.
“You can have two spaces that are identical, but one landlord measures the space at 12,000 square feet and the other at 10,000 square feet,” said one real estate broker knowledgeable on market statistics who sits on an industry committee for the database company CoStar.
“You have free-rent periods in one deal that are six months; in the other, 12 months,” said the broker. “You have incentives that are kicked in. There are way too many variables for leasing deals to fit into that kind of a trading model. I mean, if you’re buying and selling gold, you could do it. An ounce of gold [there] is an ounce of gold here, in Brazil or in China. It’s not .99 ounces here and 1.23 ounces somewhere else. But with leases, it’s different.”
How BGC plans to overcome some of these hurdles is unclear. Mr. Lehrman indicated that the company would release more details in the coming months.
One thing is clear, whether or not the company’s push for newfangled leasing derivatives and market measures proves to be successful: it has built a solid real estate services company in a remarkably short span.
Mr. Lehrman comes from a real estate family that was involved in retail development, including the Gateway Center at the Bronx Terminal Market.
“My grandfather trained me,” Mr. Lehrman said. “When I was a young kid he would take me into buildings and we would count the number of columns in a space and guess the space between them. I still will go into restaurants today and count the number of chairs and tables in the place.”
Given his ties to retail, Mr. Lehrman said he has been coming to ICSC for about 30 years. But for much of his career he focused on finance, partnering with his friend and fellow Columbia University graduate Anthony Orso in the early 1990s to launch a business raising equity for joint-venture partnerships.
By the 2000s, he had become one of the most prominent professionals in the lending business, leading Credit Suisse’s huge CMBS origination team with Mr. Orso. When the downturn hit however, Credit Suisse shed virtually its whole securitization department, and Mr. Lehrman moved to Cantor Fitzgerald with a select group of former Credit Suisse colleagues, including Mr. Orso and Michael May. The move stemmed largely from Mr. Lehrman’s friendship with Mr. Lutnick. The two had become acquainted years ago, he said, because they both have sons who are the same age and go to school together.
“Working with friends is the way I do business,” Mr. Lehrman said. “When you work with your friends, the great days are out of this world and the bad days, well, you get through them a lot better.”
While Cantor sought to become the securitization originator of choice when the CMBS market returned in 2010, Mr. Lehrman saw a need for a more immediate financing source. “There’s $1.5 trillion of loans rolling,” he said.
He moved over to BGC to tap its suite of connections in the world of banking and finance, what were the new balance sheet lenders who would be pouring capital into real estate deals and refinance transactions.
It’s a business that Mr. Lehrman is still clearly building. This week, BGC announced that it had hired a former high-power Nomura lending team led by the executive Mark Brown to join the company.
Credit Mr. Lehrman for branching beyond the lending business into other real estate services lines. Mr. Lehrman said that he views the major leasing and investment sales brokerage powers in the market as lacking the kind of financing business BGC has.
“Look at a firm like Eastdil: it’s plugged into the lending markets in an incredible way with its parent Wells Fargo and it’s a great broker of financing deals. But would you do leasing with them?” he asked.
“That’s what we’re going to be. I’m most excited about taking everything that we’ve built on the capital-markets front and integrating that across the combined platform. There is tremendous overlap. We’re going to help a real estate owner acquire an asset, finance that asset, lease it up and sell it for them.”