Deep Dive: USREM

Building the secondary market for real estate equity

Today’s Thesis Driven is the latest installment of our deep dives into specific innovative companies. You can check out our prior deep dives into EliseAI, Ownify and Neutral.

Secondary markets are found across the financial world. Trading a share of a public company’s stock, for instance, is a secondary transaction. And the past decade has seen a number of private companies join the party with robust markets for secondaries in companies like Stripe, OpenAI, and DataBricks.

Real estate, however, has largely remained on the sidelines. For sure, secondary sales of real estate LP stakes happen, but they generally keep a low profile and are often seen as an indicator of some kind of distress—either at the project level or an LP in serious need of cash. Despite this, an estimated $20 billion of secondary transactions occurred in the real estate market in 2024.

One company aims to bring real estate secondaries into the mainstream. The U.S. Real Estate Market (USREM), led by technology and real estate veteran David S. Rose and funded by a group of national real estate heavyweights including the Rudins, Roses, Zeckendorfs, and others, is looking to upend the real estate market by doing something that hasn’t been done to date: create a robust secondaries market for LP shares.

Today’s letter will dig into the unsolved problem of real estate secondaries and explore USREM’s approach to solving it.

A Secondary Problem

At its core, a secondary market allows holders of financial instruments—whether equity or debt—to trade them in an open marketplace. A stock exchange is a secondary market, with investors buying and selling secondary shares of public companies.

Secondaries of private companies also exist, although they never became as popular as many had hoped. In general, the only private companies with robust secondary markets are those that probably should be public but aren’t for various reasons—OpenAI and SpaceX, for instance.

Robust secondary markets are generally seen as a sign of a healthy ecosystem around an asset. Equity holders, for instance, see a liquidity premium—some estimate up to 3% per year—when there’s a strong secondary market for their stock. Investors are willing to pay more, after all, when they know there’s an opportunity to exit when they want to. Secondary markets also generally require believable and transparent metrics and financial information around securities, further enhancing their value.

Unfortunately, up to now real estate has not been able to benefit from a robust secondary market for a few major reasons.

One, the subscription agreements that investors sign when they put money into a real estate project usually forbid secondary sales. GPs generally want to know who their investors are, and the kind of financial disclosures that a robust secondary market would require are anathema to many real estate sponsors.

Two, all real estate assets are unique; each must be underwritten on its own merits. While a share of Home Depot is a share of Home Depot, two Class B garden communities in Sarasota may differ greatly as financial assets. This has made secondaries challenging as secondary investors struggle to understand what they’re really buying.

Finally, there’s a bit of a self-perpetuating stigma to secondaries. Historically, real estate secondaries were such a pain that they only happened in situations of serious distress. Trying to sell a real estate secondary often signaled trouble and attracted opportunistic buyers seeking deep discounts. As we’ll discuss later, most of the dedicated real estate “secondaries” funds today are effectively vulture investors.

Attempts to create a secondary market in real estate have thus far fallen flat. LEX Markets, for one, raised more than $27 million in venture capital to take individual real estate assets public for small investors through special purpose vehicles. They only took two assets to market before shutting down in early 2023; the heavy lift of bringing real estate assets onto the public markets to reach non-accredited investors was too much for most asset owners, and LEX struggled to draw sufficient investor interest when they were able to bring assets to market.

But the potential benefit of a secondary market is too much to pass up. So a new company, USREM, is looking to learn from prior attempts—and the broader movement to liquidity—and tackle the opportunity with a new approach.

USREM’s Model

It’s hard to imagine a founder with a resume more tailor-made to tackle this opportunity than David S. Rose. A scion of one of New York’s great real estate families, David spent most of his career at the intersection of tech and the capital markets. While working for his family’s real estate business in the early 1980s, Rose created the first computerized real estate sales office as well as New York City’s commercial real estate brokerage software. Rose wasn’t just doing Proptech before it was cool, he was doing it before it existed.

After running a tech company up—and down—during the internet bubble of the late 1990s, Rose became one of the country’s most prominent angel investors, founding New York Angels, putting the first money into ventures acquired by Facebook, Amazon, Google, Uber, and Intel, and writing the bestselling textbook on the subject. From there, he built Gust, an international software platform for angel investors connecting over a million startup founders with 100,000 business angels.

With Gust’s scale, Rose conceived of launching a secondary platform for startup stock. But the feedback he received from the market pointed him in a different direction: secondaries investors were more interested in asset-backed real estate investments than risky startup stakes.

“Real estate investments are like a roach motel,” said Rose. “Your money goes in and doesn’t come out. But people have needs—divorces, deaths, capital calls, and things like that. An investor can have an unexpected need for cash before the maturity date of the fund or sale of the asset.”

So Rose decided to bring the secondary model to the familiar landscape of real estate, founding USREM to be the secondary marketplace for LP stakes in real estate assets.

Initially, Rose toyed with the idea of building USREM on the blockchain to manage the chain of title. But he quickly pivoted in the face of market feedback. “Nobody in real estate wanted to hear about the blockchain. Everyone wanted a secondary marketplace, but it was just too early to discuss blockchain and tokenization.”

However, to build the marketplace, Rose had one big problem to overcome: the vast majority of real estate subscription agreements disallow secondary sales. Without buy-in from GPs, Rose’s marketplace would go nowhere fast. And the kind of GPs exemplified by Rose’s family real estate business—generational owners with close, long-term LP relationships—are the least likely to see value in a secondary marketplace. “Their LPs don’t need liquidity,” said Rose. “And if they do, the GPs handle it themselves.”

A different set of sponsors, however, found USREM’s vision far more enticing. For GPs who syndicate deals to arms-length LPs, Rose solved an acute need.

Dealing directly with LPs who need to sell their stakes leaves GPs with few options, all of them unappetizing. Some GPs simply refuse investors’ request to sell, leaving them with annoyed LPs who feel stuck in the deal. Others attempt to accommodate LPs’ requests by finding other investors to buy them out, a time-consuming activity that puts the sponsor in the role of an uncompensated placement agent. While some well-capitalized GPs buy the investors out directly, they often find themselves in the unenviable position of either overpaying or marking down their own books.

By handing secondary transactions over to USREM, Rose notes, GPs remove themselves from the middleman role. “And they also meet new LPs who might be interested in future deals,” he explains.

From a GP’s perspective, signing on to USREM is simple enough: they simply amend their subscription agreements to allow secondary sales through USREM. GPs also share basic financial information on the platform, such as the initial PPM as well as any recent asset-level financial reports they have shared with investors. “Buyers and sellers have the same level of information on the property, for better or worse,” said Rose.

From there, USREM automatically manages what can best be referred to as an asynchronous, double-blind auction. LPs who have an interest in selling can set their reserve price—the number at or above which they’ll see offers. Secondary investors can then make offers of any amount to invest in a particular property or fund, and it’s USREM’s job to match supply and demand. A registered broker-dealer, USREM only charges fees upon transaction close, similar to a private placement agent.

Since opening this spring, over $1 billion in total value of properties have been listed on USREM, with another $2 billion in the pipeline according to Rose, and the platform is completing its first few transactions now.

But Rose and USREM are aware the sector is dotted with failures of past attempts to build markets for otherwise illiquid securities. And they’re being careful to avoid two specific pitfalls.

One, you won’t find anything about “democratizing” in USREM’s marketing collateral. They’ve chosen to steer clear of the crowdfunding universe, instead restricting USREM participation to only Qualified Purchasers, the regulatory tier above “Accredited” encompassing institutions as well as high net worth individuals with at least $5 million invested outside of their primary residence. Instead of targeting small checks from retail investors, USREM set a $100,000 minimum investment per deal.

Two, USREM’s double-blind system is designed to discourage “vulture” participants hoping to score deals from desperate sellers—or spam the marketplace with lowball offers. “We’ve had several secondary funds come to us looking to sit on the platform as vultures,” explained Rose. “But I don’t want to go in that direction. I want to elevate this market.”

Instead, Rose is looking to pull in both long-term, experienced investors interested in accessing passive investments in attractive off-market assets, as well as newer investors who never previously had the opportunity to invest in real estate secondaries. The platform’s first investors include a large family office as well as a number of high net worth individuals. “This latter group are generally not traditional real estate investors,” said Rose. “They’re younger, have cash, and are new to real estate investing.”

Initially there will be educational material on the platform, including excerpts from Rose’s forthcoming book from Wiley, The Real Estate Investing Bible. Later this year USREM plans to introduce a sophisticated artificial intelligence system that will match investors with opportunities on the platform targeted to their specific investment goals.

A Liquid World

Without a doubt, Rose and USREM have a tremendous task in front of them. Double-sided marketplaces are among the most difficult businesses to build, and the fact that no two real estate assets are identical only makes the challenge greater.

But it’s hard to overstate the impact a robust secondary market would have on the real estate ecosystem. Today, secondary sellers typically accept steep discounts to net asset value—an average 26% discount, according to the New York Times, and up to 40% for smaller stakes, according to Rose. Reducing that spread through liquidity would make private real estate investing more appealing to a wider variety of investors, ultimately making fundraising easier for GPs. A recent report from CBRE estimated that “real estate secondary transaction volume… could realistically grow to 2%-3% of the $1,026 billion in unrealized value in private real estate funds and the more than $816 billion in non-fund structures.”

The easy availability of secondary stakes also presents a new path to building real estate portfolios by purchasing secondaries rather than investing in primary offerings. While secondaries funds are rare today—and almost always seen as vehicles for distressed investing—the emergence of a secondary market would almost certainly lead to the expansion of secondary-specific funds.

While there’s no clear line past which a secondary market is clearly established, Rose views critical mass as “over a hundred assets” available for purchase through USREM. He anticipates reaching 50 to 100 assets on the platform within 12-18 months and a few hundred within a couple of years. “When you only have a handful of properties, you’re matching by hand. When you have a hundred, investors and intermediaries are doing automated searches, and artificial intelligence agents can really shine. But first we need a few options in each category—office, multifamily, new construction—for investors to look at.”

Of course, shaking real estate secondaries’ distressed reputation may be Rose’s biggest challenge. Doing so will require educating a new generation of investors—almost certainly those outside of the current real estate secondaries market—on their potential. And it certainly requires avoiding a catastrophe like the Nightingale fraud that hurt the reputation of crowdfunding leader CrowdStreet.

But the emergence of a secondary market in real estate would likely come with a big, under-appreciated benefit: more standardized accounting and reporting among sponsors. Today, each real estate GPs produces their own reporting packages in their own preferred format, often using non-GAAP accounting rules, making comparing apples-to-apples challenging. “Nobody can go to a sponsor today and say ‘we want your stuff in this standard format,’” said Rose. “But if we have investors and 200-300 properties on the platform, we can require GAAP accounting and a standard structure. Ultimately, that makes it easier for sellers to market, and buyers to evaluate.”

The best real estate innovations don’t just add a new tool or optimization, they promise to fundamentally upend how the industry works. Succeed or fail, by combining new technology and business models with a traditional securities framework, USREM is doing exactly that.

—Brad Hargreaves