Sean Burton:

We were never doing large high rises in downtowns. We never believed in that model. We always liked to be near downtown, but in cities that not in the kind of suburbs or tertiary markets.

Obviously during COVID, you saw a bunch of funky things happen. You saw a real surge in the Sunbelt markets. We resisted the urge to invest there because our fundamental thesis was capital is very efficient. We'll see the opportunity, we'll rush in, and we'll overbuild.

I think people live differently than they did before COVID, and because even though you're seeing people go back to the office in a significant way, it's not five days a week. It's two days a week, or three days a week. On average now people live 2.7 times farther away from their office as they did them before the pandemic.

Nancy Lashine:

Hello and thanks for tuning into Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is the lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities. Who are they? What motivates them? What can we learn from their experiences?

On this show, we introduce you to some of the industry's most influential thought leaders and decision makers, and we talk about what is important to them, how they make critical decisions, who has influenced them, and a lot more.

Today's episode features Sean Burton, CEO of Cityview. Cityview is a real estate investment management firm focused on multifamily housing in the Western US with approximately 6,000 units under management. Sean joined Cityview in 2003. He didn't follow a straight line to get there. His jobs wove through political appointments, a corporate law firm, and venture capital.

His first job was in the Clinton White House where he worked on President Clinton's attempted overhaul of the US health care system. And public service has remained a common thread throughout Sean's career. From 2013 to 2021, Sean served as president of the Board of Airport Commissioners in Los Angeles. And in 2022 he was appointed by President Biden to the Metropolitan Washington Airports Authority, which oversees Washington Dulles and Reagan National Airports.

Our conversation focuses both on Sean's career path as well as the growth and organization of Cityview. Like many emerging managers, Cityview started with an allocator model and gradually transitioned to a vertically integrated operator. We discuss why and how that happened, how the business has capitalized, and the investment opportunities the firm is focused on today. Our conversation begins with Sean discussing his first job in the White House.

It's great to have you on the podcast, Sean. Thanks and welcome. Welcome to Real Estate Capital. We've had a number of guests recently whose careers have been focused on service and some like you have gone from the private side to the public side and back again. I don't think we've had a guest who's done both simultaneously as much as you have done in your career.

And I'd love to talk a little bit about how you think about service and how you think about balancing in your career, the public and private. So maybe just start with giving us a little background about what that arc of your career path has looked like and how you've chosen to go from one thing to the next.

Sean Burton:

Sure. All right. First of all, thank you, Nancy, for having me on today. I'm a fan of your podcast interviews, so I really appreciate being here.

Yeah. I actually started my career in public service. When I graduated college, I was fortunate enough to get a job in the White House and the Clinton White House when I was 21 years old. I moved across country. I actually started working there before I even graduated from college because that was the opportunity and it was incredible.

I got a chance to work with incredibly smart, hardworking people who were trying to change the world. I mean, that was what we all thought we were doing. Probably a little bit less jaded than I am 30 years later, but it was an incredible experience.

But one of the things I learned there was how important the private sector was. Because the people I worked with in the White House were frankly the most impressive, that they were most efficient, they were the best at getting things done. That they had the best skills, were people that had not been career government sector folks, but people that worked in the private sector.

They were lawyers or business people or doctors. And they developed this kind of set of skills in a different environment. And so I made the decision there that I wanted to go into the private sector to really kind of build and develop myself.

So I ended up going to law school, went to NYU Law School, which was a wonderful experience. And then went and worked for a big private sector law firm, California-based firm, O'Melveny & Myers, as a corporate lawyer. But I always had a passion for public service as well. And one of the reasons I went to O'Melveny & Myers is Warren Christopher was the chairman of that firm and he had been Secretary of State for President Clinton, but he had built this incredible international law firm as well.

And he was really kind of a model and a role model for me and a mentor. Someone who said, "Hey, you could build a private sector career and you can do a great job for your clients. You can make some money and resources for your family, but you can also serve the public at the same time by using those skills and volunteer capacity." So it's really that model that I built my career on.

Nancy Lashine:

I have to ask you this, since you worked in the Clinton White House, I had the privilege the other day of hearing Bill Clinton and Bush speak both together on the same stage. And there was a big applause when they came on. And the moderator said, "Well, that's because half of the people in this room voted for one of you, and half of them voted for the other."

And Bush, who was so funny, said, "Well, today they'd vote for either of us." And then Bill Clinton said, "Yeah, but we're too young to run for president even today." So when you think back to your time in the Clinton White House and you think about having people who are in their 70s and 80s at the helm, how do you think about that? Does that make you scratch your head at all?

Sean Burton:

Yeah, look, it makes you scratch your head. I mean, obviously I worked for a president who was in his 40s at the time. Look, I do think there's something to be said for age and experience. Maybe I say that as I'm older now.

Nancy Lashine:

Yes, I would agree heartily with you, of course.

Sean Burton:

So I do think that's important. And look, I think we all wish we had presidents or candidates running that were on the younger side. But I do think we need to focus on the age and experience and what the benefits are and accomplishments and those kinds of things. So unfortunately, we don't get the wave of magic want to change the way the election's going to be. We just have to deal with the choices that we have.

Nancy Lashine:

Wow. That is the smartest political answer, Sean, you could have possibly given me. And obviously you've had a little bit of training along the way.

So when you think about where you are at today, did you ever think about an end goal? Was being at Cityview an intentional, "I finally got to where I've been reaching for." Or was it really just opportunistic taking the opportunities as they came?

Sean Burton:

I wish it was part of some big master plan and I was at X point in it. It didn't really work that way. I mean, my attitude was I really want to build skills. I want to work with really smart people and I want to develop and learn. And if I do that and I work hard, opportunities will come.

And so when I was a lawyer, I did a lot of real estate work. Really, really interesting real estate work both in the public sector and the private sector and capital markets and took companies public. And really, really interesting. And I left the law to go work at Warner Brothers for five years in their corporate venture capital group. And it was a chance for me to do investing and move away from being a lawyer onto the business side. It was incredible experience, but I missed the tangible nature of real estate.

I missed working with cities. I missed seeing the effect of what we could do when we create housing for people. And so I ended up leaving and Cityview was being formed at the time. And had a small little allocation, non-discretion allocation from a California pension system to build infill housing.

And I thought, "What a great opportunity to take all the skills that I've built and investing and law. Working with communities, understanding the public sector a little bit. And what about if I could apply all of that and one area?" And do it in a way where I could actually build a business and build some wealth for my family and for our investors.

And so it's kind of a two plus two equals five scenario. And I had no idea I'd be sitting here 20 years later and Cityview would be 15 times the size as when we started and we'd have all these wonderful investors and projects. I mean, it really has kind of exceeded my wildest dreams, but it wasn't a master plan. It was kind of pointing myself in the right direction and then taking advantage of the opportunities that came.

Nancy Lashine:

Yeah. And common denominators of the places that you have chosen to go along the way?

Sean Burton:

I would say working with really smart people. And I've learned a lot from, I still learn a lot, but I may have learned at the different places that I've been, that's been really valuable. And as I count the young people and when somebody will call me up and say, "Can you have coffee? I'm starting out at my career, do you have advice?"

One of the things I always tell them is to put yourself in a position where working with smart people who have integrity, where you can learn a lot. So that's a common denominator.

Complex. Everything we do is really complicated. I wish I could say it's simple, but that keeps it enjoyable and intellectually stimulating. And then I'd say mission driven. I mean, everything we do is with a purpose. At Cityview, our job is to make money for our clients. And we have public pension systems and teachers and firefighters and nurses and other people who entrust us with their capital in their retirement.

And we need to do a good job for them so they can be secure in their retirement. And we need to do a good job for our residents and the communities to make those communities better. So whether it's public sector or private sector, everything I've done, there's some sort of positive mission I think that helps set us apart and helps kind of drive the team that we have.

Nancy Lashine:

All right. Before we dive too far into the real estate piece of this, which I hope we will, you've served as president of the Los Angeles Board of Airport Commissioners, which oversees LAX and also I think Van Nuys airports. And I think you are still, you were confirmed by the US Senate in 2022 to sit on the Metropolitan Washington Airports Authority.

And I've been thinking a little bit more about infrastructure and airports and obviously our investors are thinking more about that these days. Tell us what those authorities do? And why you have chosen to spend so much time in that arena?

Sean Burton:

Yeah, so maybe I'll talk about LAX, which was the first opportunity I have to work there. But the Airport Authority in LA manages LAX, which is one of the largest airports in the world. And then Van Nuys, which is one of the largest private airports in the world.

And when you chair a board like that, it's like chairing a board with a big company. You have a multi-billion dollar budget. We had 90 million people a year come through that airport. We launched a $20 billion modernization program to build a new terminal, build a train system to the airport, build the largest rental car facility in the world.

So there, you're responsible for delivering on, for creating the vision and delivering on that vision. And it's incredibly important for the region. Most people don't understand that airports are the number one or number two most important economic development asset in any region that they're in. In terms of the amounts of jobs that they create, in terms of businesses and travel and kind of creating opportunity.

So when I got that call in 2013 with the ask to do that, it's an incredible opportunity that I jumped on. And I basically used it as a way to get off everything else I was doing from a civic standpoint so I could focus back on the Cityview and on kind of rebuilding LAX, which has been a really interesting experience.

And then I got a call from the White House in 2021 asking if I would leave LAX role and go on to the Metropolitan Washington Authority, which is the National Authority at Reagan National Airport and Dulles. A lot of policy and other things that are set nationally come out of that authority. And required me to go through a confirmation process with the Senate, which is not for the faint of heart.

Nancy Lashine:

Well, tell us about that. I was curious, what do you have to do when you go through a confirmation process like that?

Sean Burton:

Yeah, I mean it's the same process you go through whether you're going to be a cabinet secretary or an ambassador. It's the kind of same level of-

Nancy Lashine:

Do they interview your college fraternity brothers or your neighbors?

Sean Burton:

Thank God they couldn't find them because they probably [inaudible 00:12:45]. That is interesting, you asked about the neighbors. You do get top secret clearances as you go through an FBI background check. And my wife was walking the dog during that process and the neighbor pulled her aside and said, "Is Sean okay?" And she said, "Yeah, he's doing fine. Why?"

And she said, "Well, the FBI was here last week and they were asking lots of questions about him and does he come at odd hours of the night? And does he do strange foreign travel?" And the FBI doesn't tell people what they're interviewing you for. But now it was quite a process. I mean, basically you go through in a really intense vetting with the White House and the White House Counsel's office. And turning in hundreds and hundreds of pages of documents.

So reading everything you ever wrote. And they went back to my law school articles that I wrote that were published in 1996, asking me questions about them. Obviously everything about your business and everything else. And you go through that process with the White House and you go through it basically with the Senate staff. And then you actually have a Senate confirmation hearing where you're grilled by the senators on various questions, which was quite an experience. And I got through, I was unanimous out of committee, but it still took 15 months. It's quite a-

Nancy Lashine:

15 months. Wow.

Sean Burton:

And I was non-controversial. For a Biden appointee, I was considered obviously business friendly and moderate and had a lot of experience obviously, but it's still an intense process.

Nancy Lashine:

So it's really like a three-year term? Or do you serve until, if the next president is not of the same party and wants to appoint somebody else, do you serve until their person is approved?

Sean Burton:

Yeah, that's a great question. So it's an independent authority. So the president gets three slots on this that are approved by the Senate, so they actually outlast the presidency. My term runs in May. I filled a partial term. And so I'm going to serve through then as I committed to, and then the president will pick someone else for the next spot.

Nancy Lashine:

Got it. Wow. Well, that must be a huge commitment. And you have top security clearance for that.

Sean Burton:

Yeah, I have to get top secret clearance for that. Because you're dealing a lot with the FAA and national security issues and other things.

Nancy Lashine:

If I knew then what I know now, I would love to have tops. I mean, I think there's got to be some really interesting information that you can never tell anybody, but that's pretty cool.

Sean Burton:

It is pretty interesting. So I left LAX when I took that on, and then I'll be done with that in May.

Nancy Lashine:

So my last question on this whole topic, I remember so clearly when LAX was rebuilt in anticipation of the '84 Olympics. Are we going to see a similar rebuild in anticipation of the next LA Olympics?

Sean Burton:

Yeah, that's a great question. I think you're seeing it. I don't know the last time you were in LAX, but the next time you fly in, you'll notice that there's a huge train system now. They're not quite open yet because they're testing the train, but it'll be open by early next year.

And again, instead of 29 different rental car lots spread throughout Westchester, there's now one huge rental car facility. It's the second-biggest concrete building in the country after the Pentagon. So you'll see that. You'll see all the terminals have been modernized. Yeah.

And a lot of that was, we had to do it anyway, but as chair of the board, I tried to use the Olympics as an impetus to get everybody excited and to agree on the timeframe to get everything done. We needed kind of a rallying point and the Olympics was that. So I think you'll see that.

And look, I think we want to make sure as a country that America and LA is ready for the Olympics because we need to put our best foot forward. And so the airport's a big part of that because it's the way most people who come to LA, or a lot of people come to the country, it's their first impression of America, is the airport. And at LAX, we had a lot of work to do.

Nancy Lashine:

This is pretty geeky, but I was on an airplane yesterday and I actually watched the documentary that Delta produced about what happened during COVID.

Sean Burton:

That is pretty geeky, but I like it.

Nancy Lashine:

Well, when you fly as much as I'm sure you do, or I do, it didn't seem irrelevant. But I just had no idea. How did they park all those planes and take them out of service and then put them back in service?

And so just as you were talking about the redevelopment and the cost of it, it's obviously a public-private initiative, like so many of the things that we're going to talk about now in the context of building housing. And you really have to spend a lot of time figuring out how to bring the two sides, public and private money to bear.

Sean Burton:

And I'll say one of the greatest things I've learned as a leader and executive, which I think applies to Cityview and our business here, as well, is what we learned during COVID. I mean, when COVID hit, I sat down with the CEO of LAX and the team and I said, "What was the greatest drop in passenger traffic we've ever had at the airport?"

And they went back and they looked and they came back and they said it was in, from September 2001 to October 2001, right after September 11. Traffic dropped 47%. 47, imagine your business going up 47% overnight. And I said, "Well, how much have we dropped now with COVID?" And they said, "95%."

So we had to figure out how to restructure and operate the airport with one 20th of our revenue and our traffic during this crisis. Not even counting all the public safety and other things that we had to do. I mean, it was an incredible experience to learn how to manage through that crisis. And I frankly think those kinds of skills have really helped me as I've had to deal with issues at Cityview and otherwise.

Nancy Lashine:

Well, if anyone ever wants to talk to someone who knows how to multitask, Sean, you will be very top of my list because you were doing all that while you were managing the Cityview portfolio. So tell us a little bit about Cityview's business and how business is going today.

Sean Burton:

Yeah, so Cityview's been around for 20 years. We founded the company in 2003 with a thesis that there was going to be a move to cities and metropolitan areas from the suburbs, from a housing perspective. That you're going to have a generation of people who didn't want to live an hour from where they worked, that wanted to live closer to their job, to culture, to restaurants, to nightlife, to other people who thought similarly.

And at the time, that was called infill housing. And that wasn't really being addressed by a lot of the existing developers out there. So we created a business plan around building and buying that kind of housing. And we got a public pension fund to give us a small discretionary, non-discretionary separate account to focus on it. And so we kind of started to build the business that way. And we ended up doing quite a few projects and we built out that separate account.

2007, we launched our first commingled fund where three of the LA pension systems came into that. And then the downturn hit and housing was right in the teeth of that. And we had a bunch of decisions to make. And one of them was that we really realized that we just weren't close enough to the real estate. We were an allocator and we had developers and operators that were going bankrupt, that had lost focus, that just weren't able to meet their capital commitments.

We ended up having to take things back. And we had a real recognition that for what we were doing, the allocator model wasn't the best. That we really needed to vertically integrate and build out the skill sets within the firm, which is a really huge investment and time-consuming effort.

Nancy Lashine:

Huge. Well, very hard to build a property management business in the late two 2000s, right?

Sean Burton:

Yeah. So we actually started with development. And we said, "Okay, let's start with building out our own development business. So we can really have our reins on everything soup to nuts from a development standpoint." And then we next moved to construction management.

And then the last thing we took on, which is about six years ago, was property management. So we did it in phases and it took us a full decade to really vertically integrate because we want to do it organically. We didn't want to just buy a company and try to integrate them because culture is a big part of the firm and what we believe makes us special. And it's sometimes hard to integrate other firms with other culture.

So that's really what we focused on. And then we ended up, our big separate account customer made a broader decision to get out of the business, kind of unrelated to us, but across all of similar investments. And so we actually were able to go in and buy all of our assets from them with a new partner. We actually brought in the Blackstone Group to do that.

Nancy Lashine:

I've heard of them.

Sean Burton:

Yeah, you've heard of them, exactly. They were wonderful partners. I mean, it was incredibly complicated transaction, 29 assets and various stages. Some were parking lots and some were half built and some were operating. And they were smart enough and bold enough to understand it.

And so we built out this big joint venture with them. And so we continued on this path. And then we started doing a series of commingled funds and funds one, all around multifamily housing. We made a decision we weren't going to get into other product types. And we really made a decision we wanted to focus on the western half of the country.

We thought there was so much opportunity west of the Mississippi, and a lot of that was coastal California, but also the Pacific Northwest in Seattle, Denver, Phoenix, Salt Lake City, Dallas. And so we said we're going to focus like a laser on multifamily on the western half of the country. We're going to bring all of our resources to bear from a vertical integration standpoint.

And it's been a really busy decade. When the GFC hit, I don't know, we probably had 10 or 12 people. We have 150 today, kind of all focused on managing our portfolio and building and buying assets. And it's been quite a ride.

Nancy Lashine:

So obviously the last year and a half has been really challenging from a capital markets perspective for everybody in the real estate business. How is business operationally?

We hear a lot about multifamily rents were going sky-high during COVID. Now we're hearing more about rents moderating or falling, particularly in some of the hotter markets. Insurance costs rising, payroll inflation having a real impact to squeeze bottom line. Tell us about how business is going.

Sean Burton:

So it's been interesting. It's really been a tale of two cities between the operations of the assets and then the financial markets. I'd say the operation of the assets generally have been either solid or strong. There's been some challenges for sure, but we're not really in the Sunbelt markets by design.

We have always focused on markets that have supply constraints. Where it's really difficult to build new housing and that don't replenish their housing enough, which is a really good protection from a rent perspective, right? New supply is a great killer to our business.

Nancy Lashine:

Are rents flat in the portfolio? Up, down? What's going the last, in 2024?

Sean Burton:

I would say they're slightly up today in our portfolio. Bay Area has been flat. We own a lot up there. We built a lot up there over time. That was very, very strong. We have about 55 assets that we own and manage today. We have two south of market in San Francisco that we built and still own and operate, and a built core vehicle.

Those were our two strongest performers before COVID. And they're the only two that haven't recovered their pre-COVID rents, to give you a sense in San Francisco. They're close. But the rest of the Bay Area has been a little bit of a disappointment. We thought the Bay Area would bounce back a little bit quicker than it has, but it's flat. LA is slightly up in Southern California, kind of in the two to 4% range for rents. Denver's continued to be a strong market.

Now again, we stay out of the big supply pocket, so we're not in Union Station in Downtown, we're out near Cherry Creek or the Tech Center, other areas. And we've seen continued good rent growth as well there. So it depends on the sub-market.

We do think the Bay Area will come back. We like the job growth there. We like the income growth. Incomes are up 25% since COVID in the Bay Area. People can afford, we've got a lot more affordable to rent for housing there. But frankly until tech companies really demand that people come back to the office, I think you're going to see these kind of odd results coming out of the Bay Area.

Nancy Lashine:

Yeah, you're starting to see these articles about the rebuilding of San Francisco using, with the AI-focused firms as kind of the new base of employment.

Sean Burton:

And, Nancy, just before you go on to that point, there was an article in The Wall Street Journal a couple weeks ago that I thought was interesting, which was looked at some senior tech executives that had moved their companies to Dallas or Florida and they were moving back to San Francisco.

And it was interesting, they interviewed the guy who'd moved to Miami and he said, "We can't hire enough engineers there, can't get the people there that we need to. We got to go back to where the talent is." And I do think you're going to see more of that. It's very hard to replicate that special sauce that they have in the Bay Area in terms of amazing universities, the cluster of technology, and talent of people. It's very hard to replicate that.

And so we think you're going to see the Bay Area rebound. It may look a little bit different than before. It may be different drivers. People may live a little bit differently. And we spent a lot of time thinking about that. What does that mean in terms of where people live? Because that's what we have to be thinking about is multifamily investors. But we do believe that it will come back.

Nancy Lashine:

So post-pandemic, in the last 20 years, how has your view on markets, attractive markets changed?

Sean Burton:

So I would say that for many, many years we were a little bit snobbish about how urban our product had to be. And with this big caveat, is we were never doing large high rises in downtowns. We never believed in that model. We always liked to be near downtown, but in cities that not in the kind of suburbs or tertiary markets.

Obviously during COVID, you saw a bunch of funky things happen. You saw a real surge in the Sunbelt markets. We resisted the urge to invest there because our fundamental thesis was capital is very efficient. We'll see the opportunity, we'll rush in, and we'll overbuild. And I think we're seeing that now. You're seeing of eight, 10, 12% new stock coming online, which is way too high. And I think you're seeing rents get crushed in the Sunbelt.

But I think people live differently than they did before COVID. And because even though you're seeing people go back to the office in a significant way, it's not five days a week, it's two days a week or three days a week. And you can live a little bit differently if that's the case.

There was an interesting study I saw this weekend put up by a payroll company that said, "On average now people live 2.7 times farther away from their office as they did them before the pandemic." And that skews even more when you look at white collar workers. And when you look at millennials, exactly who most of our renters are.

So take the Bay Area's example, maybe before you worked in Mountain View, so you wanted to live in Mountain View or nearby, we have a project in Mountain View. But now you're willing to live in the East Bay in Dublin or Pleasant off the BART, because you only have to commute in two days a week. And you can get a little bit more bang for your buck out there for your dollar. It's a little bit more suburban.

So you haven't moved to Boise or Dallas because you still need to be in the office two or three days a week. But you're looking at a different kind of way of living. And so I would say that's been a fundamental change for us.

Nancy Lashine:

And that's before electric cars, driverless cars.

Sean Burton:

Yeah, exactly.

Nancy Lashine:

I mean, don't you think driverless cars are just going to accelerate that trend?

Sean Burton:

Yeah, that's right. I think it will. So we still believe, again, in the Bay Area, but now versus building south to market in San Francisco, we may build to buy in the East Bay. We may go farther down the peninsula. They're going to go to some different locations and I think that's going to create some new opportunity.

Nancy Lashine:

Can you find things to buy today?

Sean Burton:

Last year we underwrote 178 deals in our markets at Cityview, and we did three transactions just to give a sense.

Nancy Lashine:

And how does that compare to normal?

Sean Burton:

If we underwrote 170 in the past, we probably would've done 10 or 12 transactions, 15 transactions.

Nancy Lashine:

And that's just because of the bid-ask spread on pricing for the most part?

Sean Burton:

It's because of the bid-ask spread on pricing. It's because there's just a lot of uncertainty in the capital markets. There's a couple where we met the pricing and then the seller took it off the market because they had maybe told their investors, they asked it was worth more than they were getting for it.

I will say that in this year, the first two months of this year, we're seeing significant increase in deal volume and more deals are making from an economic perspective on the value-add side. We're not seeing any development deals that make, and we would not propose a new development deal today. Because we believe that you can buy at a pretty significant discount to replacement cost, existing assets. So why would you build something new if you can buy it 30%, 40% less than replacement costs?

Now what we are doing, we're pretty excited about, we kind of have our running game and our passing game. Our running game is our buy to discount to replacement cost. The passing game for us is tying up and optioning land in great locations. Taking it through an entitlement process, getting the plans done, getting the GNP in place, getting the debt in place, then buying the land and going vertical.

So going vertical in middle of '25 or early '26. And these great supply constrained locations that haven't built anything new because the development metrics don't make sense today. So we're creating this kind of what we call the golden pipeline of future development deals.

Basically using kind of 2023 or 2024 land prices, adding all the development value or the entitlement value. And then having this pipeline of projects to go vertical when it makes more sense, when interest rates are lower, hopefully. And when you've continued to see more housing un-affordability because there hasn't been any new supply built.

Nancy Lashine:

Interesting.

Sean Burton:

So we are pretty excited about that strategy. And it's a way to, you can control a two or $300 million deal for four or $5 million, really add value in the process and then create great opportunity going forward and pick your time.

Nancy Lashine:

I'm just going to jump ahead to this question and then we're going to circle back to some of the other things I want to talk about. But will institutional investors give you discretion to buy an un-entitled land? That's usually a hot button for investors.

Sean Burton:

Yeah. So traditionally, no. And we do have discretionary capital and we're using it in these land option deals because we're not actually buying the land until we have the entitlements, if that makes sense.

Nancy Lashine:

So you're just paying for the option?

Sean Burton:

Paying for the option, paying for the entitlement costs.

Nancy Lashine:

And institutional capital will support that?

Sean Burton:

Yes, and we've done a lot of that with institutional discretionary capital over the years. The hot button issue is are you going to take down and you're going to spend 20, $30 million on land that's not entitled? If you spend two or 3 million and go through the process, it's a different calculus.

Nancy Lashine:

Okay, interesting. And in the fund structure, your investors are willing to let you do that?

Sean Burton:

Yes.

Nancy Lashine:

Yeah. Interesting. That's great.

Sean Burton:

And we have a lot of history and experience doing it, so maybe that's why we're able to do it. I actually sat, before I was on the airport commission here, which we talked about earlier. I was on the city planning commission for five years in LA, largest planning commission in the country.

And so we've entitled probably 40 or 50 projects since we started Cityview. And in every single one, we didn't take down the land until after we had our entitlements. So we have a good model.

Nancy Lashine:

Well, since you've mentioned that, one of the things that I'm curious about, particularly with respect to LA and the city planning commission, this new tax that's been imposed, and is it called the Mansion Tax?

Sean Burton:

It's called the Mansion Tax, yeah.

Nancy Lashine:

Yeah. Do you want to maybe explain to our listeners what that is? And what the impact has been?

Sean Burton:

Sure. And it's one of the worst pieces of public policy that I've seen in a long career. And I've been very public about that, and I've told our mayor and every elected official of why it's doing the opposite of what the intended effect of it.

So basically, the voters in Los Angeles passed this mansion tax in November of last year, a year ago. So November of '22, and it was mis-sold to voters. It was sold to voters as you have millionaires and billionaires live in the wealthy beach communities of LA. They're not paying their fair share in taxes. So charge them this five or 6% as a sliding scale, five or 6% tax when they sell their homes. And we're going to take all their money from that, we're going to put it towards homeless housing. And it's going to raise a billion dollars a year for homeless housing, and we're going to solve our homeless issue kind of on the backs of these wealthy homeowners.

Well, it turns out that it wasn't just a tax on mansions, it's a tax on basically all commercial real estate. So it's a tax on any new housing. It's a tax on apartments, it's tax on a parking lot. It's a tax on a commercial building. And what that's done is it's basically stopped all new development in Los Angeles because nobody can make the numbers work when you add another five or 6% gross tax on top of the project, which is not the intent of the elected officials.

In fact, Mayor Bass who was elected, actually opposed this tax during the campaign publicly. But the business community, and I put us in this, did a lousy job of fighting it. It came about very fast. And now there's a state movement, the Taxpayer Protection Act on the ballot in November that would prevent this from happening anywhere in California, would actually roll back this mansion tax. And I think for LA really not to be in trouble that needs to pass because otherwise we're going to really be in trouble from a livability standpoint and an affordable housing standpoint.

Nancy Lashine:

That's on the ballot in November?

Sean Burton:

It's on the ballot in November. Yeah.

Nancy Lashine:

Okay. Well, that's good news.

Sean Burton:

Yeah. Anybody who lives in California who's listening to this, or if that's in California, the Taxpayer Protection Act, very, very important. Learn more about it.

Nancy Lashine:

Public service announcement.

Sean Burton:

Public service announcement, yes. Learn more about it.

Nancy Lashine:

You've obviously spent a lot of time thinking about some of these public issues. We've talked about homelessness on this podcast before. I mean, it's such a complicated problem. It's mental health, it's drug abuse, it's affordability of being able to build housing. Are you seeing any programs anywhere in your markets that you cover that seem to be working well?

Sean Burton:

Our new mayor's been very focused on this. She has made this her top priority, and I think she housed something like 18,000 people last year. We have over 60,000, so we have a long way to go, but she made significant progress.

But as we get asked this question a lot, both casually and then also professionally, people ask us for advice on this. And really the vast majority of the issue that we have is a supply and demand issue. We simply don't build enough housing for the people we have, and that's homelessness, but that's also a lack of affordability.

The rule of thumb, Nancy, generally is you want to build about 3% of the new housing stock every year. And if you build that in a community, you keep pricing equilibrium. That accounts for job growth and demographic growth and obsolescence of old units. In LA for the next five years, for example, we are projected to build 0.6% of our stock.

Nancy Lashine:

Oh, gosh.

Sean Burton:

One fifth of what we need. And we already have a homeless problem. We already have an affordability problem. So fundamentally, we need to find ways to build more housing. We spent a lot of time talking to elected officials and telling them that ways to do that that we think can make the most sense.

There's some actually really helpful state legislation that Governor Newsom has passed in the last year. That help increase and basically help increase housing production and create a more predictable process, which is what you need for developers. But that's from our perspective, is the fundamental issue.

Nancy Lashine:

Yeah. You think it's more barriers to entry from just getting entitlements and then the cost? One of the things that we've seen in other areas of our lives is just technology driving the cost down for food production, for clothing production. There's been some attempts to do that with construction and all kinds of technology to try to build houses simpler and cheaper, but still in good quality. Have you seen anything that works on that end?

Sean Burton:

No, there's been a lot of promise. We haven't seen a lot that has actually worked. I mean, I think we fundamentally still build housing the way today that we did 100 years ago, which-

Nancy Lashine:

It's true. It's crazy, right?

Sean Burton:

That's really ripe for-

Nancy Lashine:

Disruption.

Sean Burton:

Right? Disruption and innovation. But we haven't seen anything significant that's changed that. And look, the barriers to entry are, I mean, cost is a huge barrier to entry, and costs have continued to go up. We've really seen them moderate in the last 12 months because of the lack of new development, which is great.

Instead of going up half a percent a month or 1% a month, now they're going up two to 3% a year, which is sustainable. But cost, and it's a challenge. It's the challenges in California of getting entitlements. It's challenges of the California Environmental Quality Laws where anybody for $50 can appeal your project and hold you up for two years.

It's funny. We want to build something like a multi-billion dollar football stadium, the California legislative will weigh the CEQA requirements for that. So that doesn't get held up. But if you want to build housing for people, you have to go through this process. So I do think there-

Nancy Lashine:

I mean, is that economically driven? Or do you think that's just people's personal inclinations? The fact that you can build a stadium, but it's hard to get housing built?

Sean Burton:

Well, I think that LA wanted the stadium. They wanted the economic benefit of that. They wanted the job, they wanted the profile of it, and so they found a way to make it happen. And look, I think you can have sensible, reasonable reform of the CEQA without gutting it.

Often, I think in politics, we talk about these kind of zero-sum outcomes and there needs to be a way to work together. And I do think you're seeing some interesting, again, legislation come out at the state level that's allowing for kind of more rapid housing development, more certainty, more buy-write housing. And I think that will make a difference over time.

And I do think there's a recognition amongst most electeds that the way we're going to get out of this housing crisis is we need to build more. It's not just creating more rent control or more regulations or more rhetoric about how awful developers are. It's really fundamentally creating more housing for people. And I do think you're seeing a shift in that because people realize it's a real crisis.

Nancy Lashine:

Do you see any change in the rent control regulations in places like LA or San Francisco?

Sean Burton:

The state law, Costa-Hawkins Act, governs rent control within California, and so cities are not allowed to go beyond that, which is great. Every two years we have a ballot initiative that is qualified for the state ballot to make rent control more draconian.

But when I think what we found as a business community, when you explain to people and the voters that actually if they pass this, their rents are going to go up not down, it loses every time by 20 points, which is a huge margin in California to lose a ballot initiative. So I think that's pretty stable from a rent control issue.

We do have to deal with things like this mansion tax, because that will be a big detriment to any sort of new housing being built in cities that have it. And that's only going to make rents go up for folks.

Nancy Lashine:

Yeah. Let's talk about capital a little bit. Multifamily is a pretty crowded space to raise capital in the institutional investment world. There are a lot of investment managers who focus on multi, some regionally, some nationally. How would you advise other multifamily operators who may be listening to this about what you've learned about accessing capital?

Sean Burton:

I mean, we're in an interesting bucket because we have discretionary vehicles with large public and private pension systems. We have family offices. We have a pretty big high net worth contingent when we launched an opportunity zone program five years ago. And then we have most of our capital comes from our large joint venture relationships, whether the Blackstone or Brookfield or Clarion, or other household names that we partnered with over the years.

So I would say to especially new multifamily managers, raising discretionary is incredibly hard to do. There's I think a bias now that I've seen developed in the last years against smaller managers. There was a time where people liked smaller managers. I think we're seeing the bigger managers kind of gobble up bigger chunks of the discretionary capital that's out there. It's wonderful to have, and we always like to have a discretionary capital bucket, because that allows us to move very quickly on deals and win deals.

But we would not be the size that we are today as a firm if we weren't able work with joint venture partners, to work with family office, to work with other capital sources. Probably 70 or 80% of our deals that we've done have some sort of JV capital in there. So we like having both. And that gives us the flexibility to take advantage of all the opportunities that we see.

That's incredibly hard to rate discretionary capital. It takes a long time to build those relationships. The institutional capital moves not nearly as quickly as the private sector JV capital. And so I think you got to be in it for the long haul.

Nancy Lashine:

Can you ever find JV capital where they give you discretion?

Sean Burton:

We've never found JV capital that's given us discretion, but we've had and have a number of programmatic JV relationships, where it's almost like discretion in a box. So you still don't have the ultimate right to say yes or no, but we're basically drafting the investigative reports, we're doing the modeling. We know what the help button issues are, and we're able to move more quickly because of that.

And again, we love having both. I think the key to success in this business is having multiple capital sources and multiple different capital types because things fall in and out of favor. Everybody wants core plus one year. The next year, people want opportunistic and then they want value add.

And some people like build to core and some people don't. And different metrics matter. So we spent a lot of our time matching the best opportunities that we have conviction, into the right capital source. It's a full-time job. I got a whole team of people who does it, but it's important.

Nancy Lashine:

Well, if you figured all that out in two decades, good for you because it's a lot. And I would take a little bit of an issue with your comment that there's a bias against small managers. I think there's, for sure today the industry is so much more mature, that many investors already have a group of multifamily managers whom they're comfortable with. And so they may not need one more. And so that is often the issue more than small. Because, well, frankly, you're not small, any which way.

Sean Burton:

That's well-fed the way that they... It is a very crowded space. We spent a lot of time when we're talking at capital, but you do capital trying to distinguish ourselves, why are we different? And for us, I think the secret to our success has been, frankly, our vertical integration. That does make us unique.

There's a lot fewer managers who are going to actually run the project. Obviously now the double promote, double fees. And obviously investors who value that tend to invest with us. And that's been something we've focused on. And then we like being a sharpshooter, right? One product type. And certain markets, as you know, Nancy, some investors don't want that, right? They're like, "We want a national platform. Or we want people to be broader."

And then we do development. We don't exclusively do it. It's about 50% of what we do. But that knocks out a lot of capital sources. A lot of capital sources just don't want to do development. But the ones that do, I think we have a competitive advantage. So those are all the strategic things that we weigh as a firm as we're thinking about our products and what we should be focused on.

Nancy Lashine:

That all makes sense. So as you think, put yourself out five or 10 plus years, do you have any aspirations to return to the public sector someday?

Sean Burton:

Not full time. I think I will always be doing something in the civic realm that's impactful, but I really like running our business. I like what we've built. We got a management team that's in their 40s and early 50s.

We have a lot of gas in the tank. And have spent two decades building our experience, building our track record, building our capital relationships, building the culture of the firm. We personally believe that the next two to three years could be some of the best buying opportunities that we've seen since we've started the firm.

And so our plan is to lean in and do as much as we can. Take advantage of as many good opportunities as we can over the next few years to continue to build the business. I will always do something on the civic side because it's a passion of mine, and I think it's important for the soul to be giving back. But I don't have any aspirations to leave this and do something else full time.

Nancy Lashine:

Right. Well, I hope you're right about the best buying opportunity. I have to just ask you a few rapid questions, but where do you think interest rates are going to be at the end of the year?

Sean Burton:

I think they'll be, I mean, I have to sometimes separate what I hope and what I think..

Nancy Lashine:

Yeah.

Sean Burton:

But I do think you're going to see two or three rate cuts by the end of the year. And I think that they're not going to be major rate cuts, but any sort of rate cut I think will be a signal to capital and others like, "Okay, now let's go get to work."

Because we are moving the other direction. I think the market needs to see a concrete movement. But yeah, I think you're going to see them slightly down.

Nancy Lashine:

Right. So maybe 50 to 75 basis points down?

Sean Burton:

Yeah.

Nancy Lashine:

So, Sean, who's had the greatest influence on you personally?

Sean Burton:

It's funny, I thought about this. I think it was my father. I was raised by a single father who actually passed away when I was in high school. And he was someone who'd worked in the private sector, but he had also, he'd been a bombardier in World War II. He was older when I was born. And always instilled in me of work ethic, intellectual curiosity, and I think the sense of service. So I think he's probably had the greatest influence on me.

Nancy Lashine:

Wow. Favorite recent book?

Sean Burton:

I just read, over COVID I read one of the latest Churchill biographies, which was really, really interesting. I've always been a fan of Churchill, and I liked that time period.

But to study someone whose career started with a calvary charge in the Bourne War in the 1880s. And stand the dropping of a nuclear bomb and everything in between. I mean, it was an incredibly rich period of human history, and he played such an important role. So yeah, it was a Jenkins biography, and I highly recommend it. It's a commitment, but it's excellent.

Nancy Lashine:

Yeah, no, he is one of the greatest characters of certainly the last 100 years. I would agree. If you could have dinner with anybody dead or alive, who would it be?

Sean Burton:

So I would have dinner with Ernest Hemingway.

Nancy Lashine:

Ernest Hemingway? That's a surprise.

Sean Burton:

Hemingway, yep.

Nancy Lashine:

Really? Wow.

Sean Burton:

Yeah. He's always been my favorite author. He's another person who kind live life to the fullest from World War I, to living in Paris in the '20s, to living in Cuba, and all the writing that he did. Winning the Nobel Prize. I mean, I can't imagine.

Nancy Lashine:

There'd be a lot of alcohol at that dinner.

Sean Burton:

Yeah, I'm going to wring my liver out afterwards.

Nancy Lashine:

Yeah, really. Between him and Churchill, I think maybe put all of them at the table. That would be a very long night. I love that.

Sean, it's such a pleasure to have you on. It's always great to see you, and congratulations on what you've built at Cityview. It's tremendous, and really appreciate your comments. Thank you.

Sean Burton:

Nancy, thank you very much. It's wonderful.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media.

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