Q&A with Jakub Drwal, co-founder of CR3 Markets
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University of Notre Dame rising seniors Jakub Drwal, Andrew Vittiglio and Jack Wayman want to take real estate investing into the future by bringing transparency and liquidity like never before to the market.
Their early-stage startup, CR3 Markets, aims to serve as an exchange for commercial real estate asset management firms and developers to raise public funds. The company has secured an initial pilot with a South Bend-based developer and also received $250,000 from Notre Dame’s 1842 Fund, which also helped with the process of hiring the company’s CEO, Wyck Brown.
Inside INdiana Business spoke with Drwal, an Evans Scholar and business major, about the inspiration behind the idea, putting a team together, and navigating regulatory environments. This article has been edited for brevity and clarity.
How did your partnership come together?
Jack Wayman and I both live in Siegfried Hall at Notre Dame. We’ve pretty much lived across the hall from each other all three years. I came up with the idea of CR3 Markets during my summer internship in a real estate private equity firm. I approached Jack, the smartest guy I know, to start the business with me because I saw a huge demand for it. We were looking for a technical co-founder and when we asked our friends, Andrew’s name kept popping up. So that’s how we met Andrew and we’ve been working together ever since.
What was missing in the commercial real estate investing market that prompted you to launch CR3 Markets?
Commercial real estate in general is highly illiquid and doesn’t really have market-to-market pricing. People try to find previous transactions so they can figure out what their current assets are worth, which is a highly inefficient manner. It also leads to situations like we’re seeing right now with Starwood REIT and Blackstone REIT where they have huge redemptions because they’re not really sure where their assets are valued, and they can’t get liquidity for their investors.
That’s exactly what CR3 Markets is working to resolve. We’re creating a robust market, in which people can trade in and out of real estate assets, which will then provide liquidity to the asset manager and an accurate market-to-market pricing. So everyone knows what the real estate assets are worth at the end of the day.
How does CR3 Markets calculate property value?
It comes down to the efficient market hypothesis. Those who are buying and selling on our marketplace set the prices for what they believe the asset is worth. We strongly believe that the asset value will be a little bit better than where the private market is but also correlated with where the public market is for commercial real estate, which is very thin right now. As we start building out this robust ecosystem, you’ll see that it’ll be very similar to what the current bonds market or equity market looks like.
How do you see CR3’s effect on the commercial real estate market in the next five years?
Real estate itself does not create wealth or generate revenue. It is the management of real estate that creates the revenue that people associate with real estate. Real estate valuation is usually based on multiples off of the revenue that’s generated. In the COVID run up years, we had a low interest rate environment so people had more cash to spread around and allocate to real estate investments. You saw a lot of people purchasing properties which drove up the multiples.
The multiples got so high that they weren’t sustainable in correlation with revenue. So now what you’re seeing is a correction in the market where prices are plummeting and so there’s people who bought in 2021, 2022, who now have their equity cut in half simply because they bought too expensive. Unfortunately, there’s nothing you can really do about that.
This is where CR3 comes into play. We are all cognizant that there needs to be a correction in prices at this point, it’s just who’s willing to admit it or not. We help asset managers recapitalize their capital stack. So if an asset manager is seeking liquidity on an individual property we can come in, help them raise public equity capital and then the asset starts trading at the valuation that we assigned in real time.
So when you think about a five-year run, I see us coming into play, onboarding our first pilot asset. In the next five years, we really envision putting together a huge base of assets trading on the secondary markets and then also allowing for more assets to come on board allowing us to build a more robust financial infrastructure going forward. We hope to get SEC qualified by the end of the third quarter this year. By the end of this year, we hope to have that asset freely tradable. So we’re very excited about these milestones going forward.
What’s the property onboarding process?
Asset managers come to CR3 Markets, we onboard them to our proprietary SaaS platform in which we help them with documentation, the entire securitization process, the capital market stack, and then we help them get out to the secondary trading market and compliance. So we’re basically a one-stop shop for anything regarding receiving public equity and then also trading on the secondary market.
Your tagline is, “The New York Stock Exchange of Commercial Real Estates.” How did that come about?
It’s more of a reference to make people understand what we are. When you think about exchanges, they actually operate in the background. The individual investor doesn’t really have access to the New York Stock Exchange; you go through Robinhood, Fidelity or any other trading platform. It’s the same with us. We’re in the background, making sure that everything works financially and infrastructure-wise. We’re not actually an interface you would interact with on a daily basis. They would interact with a broker. You can think about it as a mini IPO.
So, as part of our attempt to minimize that IPO risk, we’re actually building an active capital markets team. We’ll do the book making process that a traditional underwriter would do for their IPO process. That’s essentially what CR3 Markets does for the real estate market. We essentially sell to the investors who want to buy in, and then once that entire book is sold, then it starts trading on the secondary market.
How has being connected to Notre Dame impacted CR3’s growth and reach?
My team and I were part of the pre-accelerator program at Notre Dame, which is led by John Henry and the startup coaches. Then John Henry invited us to become part of their accelerator program. We received funding from the university but also support. Then the 1842 Fund came along, invested in us and helped us find our full time CEO, which is really exciting. We’ve been very fortunate to be surrounded by great people at the university, especially at the IDEA Center.
What’s it like working with someone so established in the commercial real estate space?
It’s fantastic. The way I tell it is that at the end of the day, this is a person who has over 40 years of experience and equities capture. Having that domain experience allows us to minimize mistakes on our end, go to market quicker and then also gain credibility quicker, given the fact that the financial industry is based on trust and connections. It’s been a huge benefit to the business and we’re really excited to keep working with him going forward.
How are you navigating the regulatory environment?
We’re really fortunate to have two great advisors in that area. Jim Falvey is the former general counsel for the Intercontinental Exchange, so we’re very excited about that and his huge wealth of domain experience. And then Zachary Fallon, co-founder of Ketsal PLLC and before that he was a senior SEC official, where he was the principal drafter for Regulation A of the Jobs Act of 2012. So a wealth of domain experience there. We’re also connected with an army of lawyers. So that’s a lot of good old domain experience and we’re fairly confident we can go around those regulatory bodies.
Do you guys have any competition in this space?
Real estate’s a huge marketplace and we’re trying to disrupt it. We’ve identified a spot on which we can compete very efficiently given the fact that there’s not a lot of good proxies for what people need. Most people use traditional crowdfunding platforms, which we’ve deemed not appropriate. So we’re doing a lot of things differently. And so we’re very excited about that.
When do you expect to have your first property online?
Right now we’re building out the infrastructure and also our test pilot assets. So we should have a tradable asset by the end of the year; that will be our huge milestone. After that, we’ll start ramping up the amount of properties on our platform. We have not solicited our first investment yet but we have pilot assets ready to go.
What will be your message to people in the real estate business who probably are just going to be hearing about you for the first time?
For real estate asset managers, we help them raise capital, we help them achieve liquidity and mark to market pricing. For the investors who are purchasing assets for their own personal portfolio, this is a diversification opportunity that grants access to commercial real estate without duration risk for liquidity.
And how have you guys been able to combine school and work on this business at the same time?
It’s really tough but you just have to power through it. Know where your priorities lie because at the end of the day, it’s what we’re really passionate about. So when we’re not in class, we’re just working on the business. You go to class from 9 to 12. And then from 12 to 7, you’re just working on the business. That’s just how it is.