Real Estate Transparency?

The Wall Street Journal carried a small article about an affiliate of Cantor Fitzgerald acquiring a real estate services firm and speculating on the types of products that could be forthcoming.  Specifically, derivatives based on commercial real estate rental rates are expected. The Chief Executive is quoted as saying, "You know you can hedge orange juice and you can hedge corn, but real estate you can't? It doesn't make any sense."

Cantor has a history of developing products that bring transparency to otherwise opaque markets.  In the late 80s and early nineties, Cantor maintained a trading desk for units of limited partnership.  As a part of the business, Cantor published a bid/ask quote for scores of partnerships, and stood ready to trade at the published prices.  The revitalization of the REIT market, which allowed for the rollup or buyout of all of the big partnerships of the 80s, led Cantor to close the desk.

I can envision a family of swap contracts that have a group of rental rats on one side (e.g. northeast Class A office, national enclosed retail) and traditional financial rates on the other.  Sophisticated investors might even want to swap one rental stream for another.

The development of derivatives based on rental rates will have a number of affects: Rental rates on comparable buildings will tend to converge, leases will reference the derivatives market in escalator clauses, Landlords will be willing to sign longer term leases.  the greatest benefit, though, will be the creation of the reference indexes that will be the basis for the derivatives.  This will bring a level of transparency to the commercial real estate market that has never existed.  This should reduce both the cost and the time required to execute transactions, both leases and acquisitions.  And as this information drives convergence and encourages liquidity in the marketplace, real estate will move closer to becoming a mainstream asset class rather than an alternative.