Weathering Volatility: Identifying opportunities to win in an economic downturn

Daniel Walsh
Founder and CEO
Citymark Capital

Smart Business Cleveland, October 2022 – When I was a young banker in the Real Estate division at KeyBank in the mid-1990s, many of the seasoned professionals often said, “You don’t really know anything until you’ve gone through an economic downturn.” I was annoyed by this admonition, but after experiencing some downturns, I gained an appreciation that the true test of anyone responsible for capital deployment is the ability to make decisions that result in a solid performance through all market conditions. Given market conditions in 2022, I find myself reflecting on those experiences as we position Citymark Capital for the future.

In January 2008, after successfully navigating a downturn or two, I was asked to lead KeyBank Real Estate Capital Markets nationally. Market signals of the looming recession started to emerge in summer 2007, but much of the systemic failure of the economy, marked by events like the collapse of Lehman Brothers, didn’t occur until fall 2008, giving us time to execute on important decisions to position the business for future success.

The immediate charge was to reduce risk, restructure the real estate capital markets businesses and position the platform for future growth. Early in 2008, the capital markets were rapidly deteriorating. The team had to thoroughly evaluate Key’s $22 billion real estate portfolio to identify the greatest risks. We decisively reduced risk by aggressively selling real estate loans that were likely to lose value based on mark-to-market accounting or potential performance failure, shuttered the business’ single family home equity investment businesses and reallocated capital and resources away from businesses that had significant capital markets risk/exposure. One of the big takeaways as we were selling risk-exposed assets was to be a first mover in selling into the market, and that our first bid from a buyer was usually our best bid — hit the bid, preserve as much value as possible and move on.

As we de-risked the real estate portfolio, we began to invest in Key’s real estate capital markets businesses that would perform well during the downturn and provide an engine for future growth as the markets recovered. We focused on investing in our multifamily lending businesses under the theory that more people would rent apartments, rather than buy homes, during a recession.

This strategy paid off, as these moves quickly blossomed into Key’s thriving real estate capital markets businesses, growing immensely since 2008.  We positioned the real estate portfolio and capital markets businesses to not only survive a downturn, but to strengthen the platform. The lessons learned can still be applied today as we all try to grapple with current market conditions.

Anyone who is responsible for capital deployment is judged on their ability to predict the future accurately and perform through all market conditions. This idea applies broadly to anyone running a business — investing in people, projects, equipment, companies and so much more. In times of growth, these investments usually appear successful, but in times of recession, their real value is often revealed.

Given the market volatility of 2022, it makes sense to identify the greatest risks in your business and implement a plan to cover your downside. As important is identifying your opportunities to “win” during a recession, and positioning your business to provide valuable solutions for your customers and investors is paramount. Your business can see rapid growth when the economy returns to steady growth in the years to come.

Smart Business Cleveland – October 2022 Full Issue

 

The information contained in this communication should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. The general information discussed is not a guarantee, prediction, or projection of real estate investments. There are risks associated with investing in real estate assets, such as inflation, interest rates, real estate tax rates, changes in the general economic climate, local conditions such as population trends and neighborhood values, and supply and demand for similar property types. This communication may contain forward-looking statements identified by the use of words such as “outlook,” “indicator,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive.