Borrower profile: CityView takes cautious stance on 2023 investments

The Los Angeles-based workforce housing developer and owner continues to have conviction in high-barrier markets.

CityView, a Los Angeles-based investment management company and developer, is taking a cautious approach to the coming year for a confluence of factors that include concerns about the health of the US economy, rising interest rates and the quality of product that is up for sale.

We’re cautious going into 2023,” said Sean Burton, chief executive officer. Burton, whose view is that the market is in either a recession or is entering one, adds, “We’re not seeing much that’s worth it at this point to buy, but we do think because of the resetting of loans and neat-term caps expiring, that you’re going to see some interesting opportunities, particularly in the last half of 2023 and 2024.”

The multifamily lending and development market has shown stability despite the backdrop of a higher interest rate environment. For the majority of the past year, the firm has seen a strong performance on their asset level. “[In the] third quarter of this year, we’ve had currently best performance in terms of occupancy and rent growth across our portfolio,” Burton added.

However, the financial turbulence in the market also made it difficult to do new multifamily transactions. “No one’s really selling anything right now unless they have to, [and it’s] very difficult to get price discovery,” Burton added. “People don’t want to take on negative leverage on a project.”

Company background

Founded in 2003, CityView is an investment management and development firm focused on urban residential real estate in the western United States. The company’s investment thesis is focused on high-barrier-to-entry urban and suburban markets with a supply-demand imbalance and a lack of affordable housing. Its investors vary from public pension plans to financial entities, including institutions like large regional retirement systems and national investment banks.

Coming out of the Global Financial Crisis and then the covid-19 pandemic, CityView was able to navigate the acquisition market in periods of volatility. Now the timing is becoming interesting again.

One risk that borrowers may have, according to Burton, is when interest rate caps on short-term loans expire and borrowers, in order to extend a loan, are required to buy new rate caps at a much higher price. This could lead to some forced sales of properties. But meanwhile, “there’s a lot of capital waiting in the wings to take advantage of those opportunities,” Burton said.

Debt capital is more selective, but is ready to move on deals with promise.

“We just went out to look for financing on a 260-unit project [that] we’re building across the street from SpaceX, a great location in Los Angeles,” Burton added. Due to the very strong yield and returns of the deal, Burton said, they have had interest from 25 different lenders on the project, a rare situation in the current market. “[Debt is] expensive, and the spreads are greater than they used to be. The proceeds aren’t as good as they used to be. It’s not as attractive as it was even six or nine months ago, but I think [the capital] is available,” he added.

Having been focusing on markets with profound potential for employment and rent growth at CityView, Burton also highlighted the correlation between office and multifamily sectors. Although the dislocation will remain due to the hybrid work model, the conversion of office buildings to multifamily is another story. “You’ve got to figure out a number of things, how do you get light to the units and rework plumbing [for conversions]. Not all buildings are going to make sense for conversion,” Burton said.

Burton continues to see a strong correlation between the office and residential sectors. “You’re going to see office and residential connected going forward,” he said. “That story is still being written, and I don’t think anybody knows exactly how it’s going to end yet.”