'We Think Choppiness Helps': CRC's David Donato On Finding Deals Amid Economic Turmoil

Baltimore-based Continental Realty Corp. has recorded its highest-ever volume of equity raised and assets acquired over the last 12 months, despite turmoil in the economy stemming from lingering supply chain issues, inflation and rising interest rates. 

The real estate investment and management firm's purchases include the $36.5M acquisition of the St. Mary’s apartment complex in Raleigh, North Carolina, and the $3.9M addition of The Shops at Towne Centre Way near Charleston, South Carolina. 

David Donato, CRC’s chief operating officer, spoke with Bisnow about the types of assets catching the firm’s eye and how the turmoil in the capital markets will affect his company's acquisition plans. 

"I think there will be opportunities," he said. "People's inability to refinance now may force a sale rather than a refinance. People who've been using floating-rate debt might have to run for the exits. ... We think choppiness helps." 

The following has been lightly edited for style and clarity. 

Bisnow: CRC has been aggressively acquiring a couple of types of properties nationwide. Tell me about what you've been purchasing.

Donato: Our historic specialties have been multifamily and retail, specifically outdoor shopping centers. I don’t have my records right in front of me, but we've bought quite a bit in both asset classes. 

The most recent buys in multi have been core [low risk and stable income], and retail has been more opportunistic [higher-risk properties that often need overhauling], as even before Covid, you saw rising cap rates and a bit of choppiness that led to some opportunistic buys for us. 

Bisnow: What are you seeing in terms of these assets' fundamentals that enticed you into buying these properties? 

Donato: Different things for each type, but in the Global Financial Crisis years ago and its early recovery, we made some of the best buys we have ever had on the shopping center side. 

So when there was more choppiness pre-Covid and then, of course, the Covid shutdown and the chaos that [followed], we knew there may be a panic away from retail. 

Here’s the thing about retail: It's a big category, right? It includes enclosed shopping malls, single-tenant, triple-net, high street, outdoor strips and all those categories. 

Is there one trend that governs all those different things? I don’t think so.  

So while some people are panicking about quote-unquote retail, we feel like they're running away from some of the wrong things. We are finding that we're getting really good buys on really steady stuff. These outdoor strips have performed very, very, very well.

If you're following just one metric — online sales as a percent of total retail sales — you might be scared of retail. But when you look at who occupies neighborhood strip shopping centers, 20 years ago, there weren't gyms in shopping centers.

Fitness is in there, entertainment is in there, restaurants as a percent of gross leasable area are bigger than ever, medical, urgent care, dentists — there is a really diverse set of tenants who want parking, signage, roadside visibility. 

And so that's what's made it really, really, really resilient, and so that's why [CRC is investing in] that asset class or that asset type.

Multifamily, I think everyone around the world seems to understand the appeal there. There is no drop-off in demand for rental housing, and while interest rates are going up and that is causing a momentary blip where it might be hard to acquire at this very moment, it's also having the effect of growth.  

But the long-term dynamics of apartments are just great. In good and bad economies, there's pretty consistent demand for that product type. 

Bisnow: On the retail front, something that's come up locally — I don't know how this plays out nationwide — there's been concern no one’s building these strip shopping centers anymore. How much is that playing into the decisions you're making nationwide? 

Donato: That's exactly what we're seeing. You still have to be very careful. 

That macro trend is very appealing to us. Strip [centers with] outdoor surface parking [are] not being built. 

Locally here in Baltimore, a ton of the newer projects that have retail are all pretty much mixed-use. I can't remember the last surface shopping center. I guess the Owings Mills Mall conversion ended up as a surface shopping center. 

Selectively, it happens, but it's at the lowest point probably in my career for new deliveries of that product.

I think that demand is steady. If you look at not just us but all owners of strip centers, we’re probably at near-record lows for vacancy. 

Bisnow: On the multifamily side, when you're looking at multifamily purchases, are you targeting any particular asset class? 

Donato: The most recent purchases have been in core because that's what the equity behind it, that was the direction for that. 

There's money to be made in core, I believe — newer deliveries and well-located. Again, you're growing that yield because demand is there, and the rent growth continues. 

But there's an opening in value-add, for sure. If you think about the choppiness that could come with this rising interest rate environment, there could be some very good buys.

We’re in this moment in time where interest rates are shifting, and cap rates haven't moved as much yet, but you're beginning to see that. So I think they'll be good buys there. 

Every time you see a major economic change, like a recession or the Covid shutdown or you see interest rates shift up, it creates a change in the landscape that can create opportunities for good buys. 

Bisnow: When you're looking for these good buys, are you looking at them in certain areas? Are you looking at more suburban or more urban properties? 

Donato: Historically, for multifamily, it's been almost all suburban, and maybe that's dumb luck. The real urban stuff took a hard hit from Covid-19 when nobody wanted to be in groups or whatever. 

But in retail, it's also primarily been suburban, but that's not a rule. We move to opportunity. The strategy right now has been suburban, but I could see us adopting multiple strategies, honestly. 

Bisnow: Looking ahead, what impact do you think the choppiness in the economy will have on your eagerness to purchase new stuff? Are there going to be opportunities to create deals? Or does the rising interest rates, etc., give you a reason to pause? 

Donato: No, I think there will be opportunities. We've always been a patient but steady buyer. 

There are people who deploy a lot more equity than us. We’re a player who waits for the right deal on both product types. 

People's inability to refinance now may force a sale rather than a refinance. People who've been using floating-rate debt might have to run for the exits. We don't know. 

I don't want to speculate on the exact method that we will use to get our next acquisition. But we think choppiness helps. 

There are a lot of different models of what could be a good buy coming up. But I think the main answer to your question is that the playbook you develop for any season has to be thrown out the window when the season changes. So you just think up the next opportunity that creates and patiently apply that strategy to the next economic reality. 

Bisnow: How would you describe the past year for CRC, and its ambitions? What do you see the new year bringing for you? 

Donato: There goes our biggest year for acquisitions, in the last 12 months, that we've had. Our biggest year for equity raised as well. So we are really on a nice growth trajectory. There’s just a whole lot of energy and action. 

It feels a little hectic. When you do that much activity, navigating everything else that has come in this last year, that's been a little hectic. 

But we all feel very energized by the biggest year of equity raised, and the biggest year of deployments, in our company's history.