Cantor To Change Real Estate?

Howard Lutnick, chief executive of investment-banking firm Cantor Fitzgerald, doesn’t just want to join the commercial real-estate game. He wants to change how it is played.One of the big ideas he is studying: developing a market in property derivatives pegged to rents in individual buildings as a way for landlords and tenants to hedge against unexpected market volatility.”You know you can hedge orange juice and you can hedge corn, but real estate you can’t?” said Mr. Lutnick in a recent interview. “It doesn’t make any sense.”

Whether Mr. Lutnick can pull this off, of course, remains to be seen, and there are plenty of Newmark competitors questioning whether it would work. But the idea represents the kind of fresh thinking that Mr. Lutnick plans to introduce into the clubby world of commercial real-estate brokerage.

“I think property derivatives will become a common part of tenants’ and landlords’ transactions in commercial real estate,” Mr. Lutnick said.

It took the commercial-property industry and most brokers at Newmark by surprise late last month, when the firm announced it was going to be acquired by BGC Partners Inc., a Cantor spinoff that also is headed by Mr. Lutnick. Few non-real-estate companies have attempted acquisitions of real-estate service companies or started businesses, and even fewer have succeeded. Goldman Sachs Group Inc. and Morgan Stanley both launched office-leasing brokerage firms in the late 1980s but got out of them after the market cratered.

Also, there are no obvious synergies to the deal, which is set to close later this year. BGC was launched in 2004 as a shop in which traders work the phones to put together complicated bond deals and later added eSpeed Inc., an electronic-trading business. Newmark is a traditional New York-based real-estate company that, since it was founded in 1925, has made the lion’s share of its revenue from trading, leasing and managing office buildings.

“I think it’s still a little bit of a puzzling move,” says Patrick O’Shaughnessy, a research analyst at Raymond James. “It’s a substantial departure from BGC’s normal course of operations.”

But the lack of overlap was one of the things that appealed to Newmark’s executives, including Chief Executive Barry Gosin, Chairman Jeff Gural and PresidentJames Kuhn. They had been eager to figure out a source of capital to expand the firm, sensing opportunity in this turbulent time of real-estate consolidation.

But they didn’t want to do be acquired or merge with a larger real-estate company that would force scores of layoffs at Newmark, which currently employs about 425 brokers. They also were averse to accepting private-equity money, which typically looks for a relatively short-term return.

The price wasn’t disclosed, but a person familiar with the deal says it involved cash and BGC stock and was valued in the $125 million to $200 million range.

“It gives us a strong financial partner to continue to grow,” said Mr. Gosin, the Newmark CEO, in an interview.

At the same time, Mr. Lutnick has made a few forays into commercial real estate. In late 2009, at Cantor Fitzgerald, he launched a commercial-mortgage-backed-securities underwriting and trading business. And earlier this year, BGC Partners teamed up with Jones Lang LaSalle’s LaSalle Investment Management fund-management unit to launch a property-derivatives business in the U.K.

Mr. Lutnick contends that the commercial-real-estate and bond-trading businesses are a good fit because many of the clients overlap. The financial industry is one of the key users of office space in New York, he noted.

Also, at the end of the day, he said, the job descriptions are fundamentally similar. “In commercial real-estate brokerage, it is a customer service, high-value-relationship-driven business that is very much akin to the brokerage businesses of BGC,” Mr. Lutnick said.

Cantor Fitzgerald and Mr. Lutnick are best known from the Sept. 11, 2001, tragedy, when the firm lost 658 employees, more than any other World Trade Center tenant. Since then, Mr. Lutnick has slowly rebuilt the firm while continuing to honor the people who died and to support their families.

During the downturn, Mr. Lutnick’s businesses have stayed relatively healthy. Like other niche firms, it has benefitted by the demise of bigger competitors like Bear Stearns and Lehman Brothers. Besides commercial real estate, he has also expanded into other businesses, like Cantor Gaming, which manufactures and operates gambling systems at places like the Cosmopolitan of Las Vegas.

BGC’s deal with Newmark comes at a time when the real-estate brokerage business is rebounding from the downturn, which saw an enormous decline in transactions. But even as it is recovering, the industry is going through considerable upheaval. Some of the larger firms, likeGrubb & Ellis Co., have been struggling, and smaller firms are finding they need to grow to keep up with the demands of corporate tenants with offices throughout the world.

BGC is still working out the particulars of how the derivatives would work, but Mr. Lutnick predicted that they will be traded as well as used by tenants and landlords to hedge against rent increases and decreases.

“The broker’s job would be to match those individuals as counterparties in a transaction,” Mr. Lutnick said.

Not everyone is convinced that such derivatives would work. They note, for example, that pricing in the office rental market is more amorphous than, say, the market for Treasury bills, so it would be harder to tie a derivatives contract to it. “I think it will certainly be a tough sell,” says Gary Rosenberg, a prominent New York real-estate attorney.

But Mr. Lutnick pointed out that his companies have been pioneers in information technology and that expertise could enable Newmark to pinpoint such metrics as market rents for the purposes of settling derivatives contracts.

Newmark’s information division “would have enormous technological backing and financial backing,” Mr. Lutnick said. “It will be a complete eye opener to our clients.”Not everyone is convinced that such derivatives would work. They note, for example, that pricing in the rental market is more amorphous than, say, the market for Treasury bills, so it would be harder to tie a derivative contract to it. “I think it will certainly be a tough sell,” says Gary Rosenberg, a prominent New York real-estate attorney.(credit, d, rubinstein, wsj)