(Image: Solis)
Wall Street is near bear territory putting investors on the hunt for stock market alternatives. Would you invest your money in an IPO for a Pike/Pine mixed-use apartment building?
In a first for Seattle and Capitol Hill, the “ultra-luxury, ultra-sustainable” Solis at 13th and Pike is being lined up for an initial public offering.
Why Pike/Pine? Jake Weyerhaeuser, vice president for the Seattle region for Lex Markets and co-founder and CTO Jesse Daugherty say it is because the neighborhood is now home to the kind of people they hope take notice of this new type of investment.
Lex, they say, is “targeting retail investors,” “the same kind of people who would live in this building.”
“It’s an exciting place to be,” Weyerhaeuser said.
Even the challenges of CHOP and the social unrest of 2020 can be a market factor.
“For a neighborhood like Capitol Hill, this investment plays in these nationally known communities,” Weyerhaeuser said. “People have heard of it.”
(Image: Solis)
Opened by developer SolTerra in 2020 at 1300 E Pike, the design by Weber Thompson-designed Solis is one of Seattle’s first Passive House-certified mixed-use buildings and was originally planned as condominiums before pivoting to remain part of the lucrative Capitol Hill rental market.
Studios start at $1,950 with one-bedrooms listed from $2,000 to $2,645 a month.
“SOLIS is situated on Capitol Hill’s fast-growing and popular Pine-Pike corridor,” the investment pitch reads:
The building is surrounded by a lively mix of restaurants, bars, and prime retail and entertainment venues; it also offers convenient proximity to major tech employers and Seattle’s largest universities. Located on 1300 East Pike Street, SOLIS is currently 100% leased and features top-tier tenants including Sonder, the next generation hospitality company known for curating award-winning accommodations around the world.
Lex says part of the Solis investment appeal is its green design and cost savings from its relatively low energy use. Even more appealing for some investors, the property is exempt from property taxes on over 61% of its assessed value for ten years under Seattle’s Multifamily Tax Exemption program which requires a portion of the building’s units to be offered below market.
Solis is a six-story mixed-use building with 34,260 square feet of total rentable space: 5,960 square feet across three retail units on the first floor, and 28,300 square feet across 45 residential units for rent on floors two through six. There is also underground parking.
The deal to take a portion of the Seattle development public will value the building at $33 million, Weyerhaeuser and Daugherty said, after the initial offering period ends, and Solis begins trading.
“Shares can be purchased through any brokerage account and will trade on the secondary market, just like any other stock,” the company says.
For investors, Lex says it presents an avenue for smaller investors to more directly put their money behind specific real estate opportunities where they can benefit “from favorable tax treatment” and “receive their proportional shares of income distributions at the same rate as the owner.”
“If you buy a REIT, you’re buying a share of the management company,” Weyerhaeuser said. “Income gets generated in the form of a dividend, taxed at an ordinary rate.” Buying shares in one of the buildings it trades is like buying real estate directly, Lex maintains.
“As the market pulls back, this deal is more like a real estate deal. It’s a hard asset,” Weyerhaeuser said.
The Solis will be the third building Lex has helped take public — but the first home to residential tenants. Last month, a small office and retail building on New York’s Lennox Ave began to trade shares using its platform. That followed the IPO of a $24 million parking garage in Portland, Maine.
Lex says its platform allows developers to raise capital and put it to use by addressing debt and securitizing a portion of their property while still retaining ownership.
(Image: Solis)
The six-story Pike/Pine building includes 45 living units above retail space home to a mix of small businesses including Paint Salon which has survived opening into the teeth of the pandemic, and the Flight Wine + Chocolate cafe that opened in March 2021 and provides a few echoes of the old Fran’s Chocolates that was demolished to make way for the mixed-use building. A new cafe from an escape room company, meanwhile, has yet to fulfill its plans of opening in the building’s third street level retail berth.
Capitol HIll’s mix of developers, real estate investors, and family landlords continues to ebb and flow with nationwide property owners increasingly targeting the lucrative neighborhood. But small property owners still wield power in numbers enough to occasionally have their say. The arrival of a publicly traded building — less than half the property will be owned by shareholders — may simply be a one-off gimmick. Or it could be the harbinger of yet another type of landlord in the neighborhood.
How will shares in its building trading publicly impact the Solis tenants? Could stock market pressure push rents higher in a publicly traded building?
“We don’t anticipate that,” Daugherty said. “We see this as just replacing capital with new capital raised by shareholders. The fundamentals haven’t really changed. We don’t expect it to move rents.”
Instead, Lex’s Weyerhaeuser and Daugherty said the performance of shares in Solis — once it gets its ticker assigned and hits the market — will be determined by factors like the overall Capitol Hill real estate market and investors seeking yield. Though Weyerhaeuser said, yes, if rents go up, “prices (of the shares) could go up.”
But Daugherty said the market is already pushing Solis rents as high as they can go. “They’ve been maximizing rent,” he said.
So, will the future bring a wave of IPOs and publicly traded buildings to a neighborhood like Capitol Hill? For Lex, the goal right now is to present its users with a diversity of building types and regions meaning another Pike/Pine offering won’t come soon.
“We want opportunities everywhere,” Weyerhaeuser said. “The more diversity we have on the platform, the better. The more we have, the more tailored a portfolio we can have.”
Weyerhaeuser and Daugherty are hoping for a successful entry of Solis into this new market with hopes that some of the people who know the asset best might be interested in adding shares to their portfolios.
“A high percentage of residents in this building are the tech employees that might be a prototypical Lex holder,” Daugherty said.
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The United States doesn’t have a particularly good track record when it comes to trust fund kids with chips on their shoulders and a burning desire to ‘make it big’ in the real estate market.
This will end badly and I expect everyone who invests money in this thing will lose their shirt in the process.
“This will end badly and I expect everyone who invests money in this thing will lose their shirt in the process.”
Why, because the Seattle real estate market will crash? What specifically do you expect is going to happen that will negatively impact the value of this apartment building?
I haven’t read the prospectus, but for me the major downside is that it’s going to trade on the “Lex” proprietary market rather than a major exchange.
The value of the building doesn’t have to decrease for the value of the shares to decrease. For example, when management decides to leverage all equity after selling a bunch of stock, and the company’s financials go upside down (or, I suspect, into a deeper hole than they already occupy), then the value of the shares could easily tank while the value of the building continues to climb with the market. Given that lenders will have priority over shareholders in a bankrupty proceeding, there’s really only upside for a lender to swamp such a company with debt so long as the assets they can seize in bankruptcy are valuable enough to justify the loan. And there’s only upside for the insiders who liquidate their shares during the bubble.
What makes it very likely that they only intent to exploit investors is that they say they are specifically targeting retail investors. If the insiders intended to hold this asset long term and maximize it’s value they would be more interested in having institutional investors on board who will drive less volatility in their valuation. But institutional investors likely wouldn’t fall for such a scheme (or good God I hope not!)
Then short it?
I think it is ludicrous to say that this won’t push rents up, especially if more buildings follow suit. The same way that publicly traded companies are compelled to return maximum value to shareholders, shareholders will expect maximum return on this investment…which naturally means taking in as much money as possible (rent) while spending as little money as possible (services, staffing, repairs). The rental market already doesn’t really bear any relation to what people actually make, other than tech workers. Disappointed but not surprised, this is really bleak.
The person who said that this won’t push up rents is either lying or an idiot. This will force feed even more money into an already overstuffed real estate market. If this catches on, there will be a tidal wave of new money into the market and we will all pay the price with either higher rent or higher buying prices. God dammit.
I liked the old building better, had so much more character. I wish they would have at least kept the facade.
Hmm. They decided not to market it as condos because luxury apartments were more valuable. Ok. Then they decide it’s not so valuable after all, and rather than sell it to existing REITs/investors, they now want to market it to retail investors instead.
Seem like they’re chasing dumb money.
People are jumping to unwarranted conclusions, namely that this is somehow a new sally by Wall Street big money into real-estate. A large amount of US real-estate (residential or otherwise) is owned directly or indirectly by by companies or by REIT (real estate investment trusts) that trade on stock markets. In many ways ownership by public firms is better than private VCs due to better transparency and financial reporting.
What’s somewhat novel here is the way in which that ownership is structured, not that Wall Street financing is somehow involved. Multi-unit buildings, even small ones, are multi-million dollar projects in Seattle, so of course ‘big money’ is needed to finance them.
What’s really noteworthy is the valuation. At $33 million they are valuing the building at about $733,000 per unit. That is a very rich valuation compared to similar Seattle mixed use buildings. Are they betting the liquid nature of the investment, that is easily traded shares, justifiés the elevated pricing per unit?
The only reason they would be trying to take this property public is so they can exploit investors. If the business model is viable then they have nothing to gain by dilluting their ownership. Are there major capital investments they need to make to unleash compounding profits? Unlikely. Are they seeking a quick exit on a shaky investment at the expense of investors? More likely. The typical story would be that the model is viable but they want investment to replicate it faster than they could from the revenues and equity the property will generate on it’s own… But if they really believed that scaling quickly is a guaranteed win then they could seek other financing and, again, prevent the dilution of ownership. There’s a reason that residential landlords aren’t usually public companies; there’s no benefit to them being public companies unless they are up to something even more exploitative than residential leasing already is (a pretty high bar to surpass).
Why is residential leasing exploitative? All it is is monetizing use of a physical resource for a set fee and period of time. No different from leasing a car really. I fail to see the exploitative argument.
Let’s do this socratically to avoid confusion and rhetorical cul de sacs. I detect from your question that you understand the word exploitation to connote a negative moral judgment. That being the case, what examples can you come up with in which you would use the word this way? Upon providing such examples it may then be interesting to ask if there are any parallels between those examples and residential leasing… I suspect that this procedure would prove quite enlightening and I suspect you have the skills required to carry it out. If the examples you come up with don’t have obvious parallels with residential leasing, let me know, and I’ll see if I can help you tease it out.
Thanks for not answering my question, and engaging in condescending dialogue.