Daniel Walsh seems to have built a recession-resistant business in Citymark Capital.
Despite the COVID-19 pandemic plunging the country into an economic downturn, the strategy for the private equity real estate investment fund is not feeling the same stress as other sectors of the economy, at least not yet. That strategy calls for buying, improving and selling multifamily housing in top apartment markets across the U.S. (so, excluding Cleveland).
Investors are taking note: Citymark in August hit its $150 million target for its second fund amid a global health crisis, nearly double the $80 million collected for fund one.
“One of the questions we always get from prospective investors is what happens in a downturn or economic dislocation,” said Walsh, a former Cleveland market president for Huntington Bank who left the company in 2015 to launch Citymark. “We always said people need a place to live, and rental apartments are a wonderful place to be and pretty insulated from economic downturns.”
Many of the apartments in the Citymark portfolio have become remote-work offices, bolstering retention of renters.
That’s helped with strength in the apartment market nationally and supports deal flow, which remains strong, Walsh said. April was a low point for deal activity, but that has since improved. A comparable trend has been playing out with the broader M&A sector.
Citymark’s debut fund, which closed in 2017, acquired six apartment complexes — in Atlanta, Orlando, Phoenix, Dallas, New York and Las Vegas — and sold four of those.
The Citymark model is to buy up multifamily properties in markets ripe with deal flow, improve them, add new amenities, raise the rent and sell.
One of Citymark’s secret ingredients in vetting a deal comes in examining the average ratio of rent as a percentage of renter income. Walsh has said Citymark prefers properties where tenants spend about 21% of income on rent.
On average, renters tend to spend about one-third or more of income on rent. For Citymark, the thinking is that renters will be positioned to absorb rent increases when their units are renovated and buildings improved.
That might mean adding a gym or pool (features that appear to be of interest to remote workers because they provide alternatives to even more public settings), renovating floors and patios, or adding new appliances. With social distancing now the norm, properties adjacent to outdoor amenities such as forest preserves or jogging trails are getting interest. The markets and renter demographics Citymark targets are part of the firm’s secret sauce for excelling in the asset class of multifamily housing that’s been trending up for years because of things that make it harder for young professionals to buy homes. Those factors include a collective pile of student loan debt around $1.6 trillion.
These are some reasons why Ed Schwartz, founder and CEO of Beachwood’s ORG Portfolio Management, is a big fan of Citymark. ORG, with about $10 billion in assets under management, represents institutional investors, including some invested in Walsh’s business.
“Citymark has a strategy of suburban apartments in strong locations, growth markets,” Schwartz said. “Given the pandemic, but even before that, trends were very favorable to suburban apartments.”
The trend with younger professionals taking to apartments seems to have only picked up during the pandemic, despite a booming market for mortgages and refis.
“Suburban locations with good amenities and space have proven to be very successful, and we think it will continue to be successful,” Schwartz said.
Citymark typically looks at Class B properties that can be improved to a B+ level, often through the renovation of common areas. Rents tend to range between $1,000 and $1,200 a month.
In terms of rent collection, Citymark properties, which are directly managed via partner agencies like InterCapital Group, are working with those encountering financial struggles, Walsh said. But that’s apparently a small group. Collections remain in the 95% range or better for Citymark’s portfolio properties, Walsh said.
He declined to discuss fees paid by investors or actual returns. But those returns are besting returns in other sectors, Walsh said.
“We are pleased so far that we’ve fared well during these initial stages of the pandemic,” he said.
According to data shared by Citymark from RealPage, the top 10 U.S. apartment markets by sales volume are New York; Dallas; Los Angeles; Atlanta; Washington, D.C.; Phoenix; Seattle; Denver; Houston; and Austin, Texas.
New York and Austin logged about $7.6 billion and $3.7 billion, respectively, in apartment transaction volume in the 12-month period ending at midyear 2020, according to RealPage. Citymark really only looks at markets with at least $1 billion in annual sales, which doesn’t apply to Cleveland.
In the top 50 apartment markets for annual sales volume, according to RealPage, the bottom five are Pittsburgh, Cleveland, Cincinnati, Milwaukee and Providence, R.I. Cleveland’s annual transaction volume in the same one-year period was fewer than $300 million.
This is why Ohio isn’t so much on Citymark’s radar.
The firm has been investing out of its second fund since launching it in 2018. Six complexes have been acquired through that so far. They range from 120 to 408 units and are located in Las Vegas, Dallas, Houston, Atlanta and Raleigh, N.C. That fund is projected to make between 10 and 12 acquisitions, Walsh said.
And the intention is to sell off the remaining assets of the debut fund in the near future.
There’s some lingering concern that a worsening economic downturn and erosion of jobs could stymie the prospects for real estate investment funds like Citymark if tenants can’t afford rent.
“But we feel that the markets and the demographics they are in, the renters should be more resilient and they should be able to continue to work from home more than others who are maybe more susceptible to longer layoffs or additional negative impacts related to the current job market,” Schwartz said.