Penn Ultimate: Why Christian Dalzell Is Betting Big on Philly

It was during his time at Starwood—with the firm gobbling up multifamily assets through some well-timed trades—that he developed a taste for the asset class. Dalzell struck out on his own in 2016, launching Connecticut-based Dalzell Capital with a sharp focus on investment in Philadelphia multifamily properties. Between August 2017 and August 2018 it acquired seven assets in the City of Brotherly Love—five of which were purchased in off-market transactions—and it has no intention of slowing down any time soon.

All in all, the 22-year-industry vet, with a career that spans commercial real estate debt, private equity and investment banking has closed more than 500 transactions globally and lent more than $62 billion. Dalzell, who lives in Westport, Conn. with his wife Amanda and four children, sat down with Commercial Observer to explain why Philly has been largely overlooked by investors in the past and why—thanks to its firm footing in the eds and meds sectors—it’s about to have its day in the sun.

Commercial Observer: How did Dalzell Capital get started?

Christian Dalzell: I left Starwood in March of 2016 and started Dalzell Capital nine months later. During my garden leave I was thinking hard about what I wanted to do. We had bought a lot of multifamily at Starwood and I saw up close and personal how you could turn a low cap rate into a decent internal rate of return.

Why did you choose to focus on Philadelphia multifamily assets in particular?

When I started looking at areas to invest in, I focused on markets that had a very material influx of millennials. I have four kids aged 15, 13, 11 and six and they are already more technologically advanced than I am; they already understand that language so intuitively. It makes sense to follow millennials because they’re going to the places that are affordable, fun and enjoyable and where there are career opportunities. So, I was looking at the macro economy in general and deciding how I wanted to align myself. I quickly realized that, in picking a city you are really voting for a certain part of the economy. Philadelphia fit perfectly for me, because it has such a strong health care and education infrastructure. You have these institutions like the University of Pennsylvania, Drexel University and Temple University, 115 [colleges and] universities in total with 400,000 students. And Philadelphia went from retaining 25 percent of its graduates before the city’s real estate tax abatement was enacted in 2005, to 67 percent today.

William Penn modeled the city off of London in the 1660s and that’s why you have the tiny little streets that sometimes go nowhere but are really quaint and cool. It’s a really interesting and walkable city. I’ve lived in Dallas, on the West Cost, in Charlotte and in New York, but Philadelphia is one of the most enjoyable cities out there.  But still, everybody that I talk to always asks, “Why Philadelphia?” There’s just a negative perception that sits on top of the city.

Why is that, do you think?

It burnished a bad reputation in the 1990s, but the work that Mayor Ed Rendell did to create Center City as well as paving the way for the 10-year tax abatement for the development of multifamily and single family homes really led to the growth that Philly has seen today.

I think a lot of people still think of Philly as an old-economy type city. They don’t realize that the 55,000 jobs that have been added over the last seven years have been in science, technology, engineering and mathematics (STEM) and eds and meds. Sixty percent of new hires are in those very concentrated sectors and as a result those sectors are going to be growing much faster than we all can imagine. As the biomed and technology sectors move forward, those two worlds are colliding, and we’re going to see Philly become a much more relevant city than it’s ever been. Leadership on both the private and public sides are investing heavily in the city.

As an example, the University of Pennsylvania is creating Pennovation Works [office, labs and production space], Drexel’s Institute of Technology is under construction and Comcast is finishing its 1.3-million-square-foot  vertical incubator. You have these major institutions that are just funneling enormous sums toward these industries that are going to move forward in a more impactful way than other industries. Philadelphia is therefore very well positioned in the industries that are going to be very important in the future.

So do you think we’ll see others following your lead in terms of Philly investment?

There is more opportunity in Philadelphia than elsewhere but that opportunity was always available to everybody, right? Not just me. It’s very rare to have a city that is 70 percent rowhouses—that’s a barrier to entry right there—so you’d think people would catch on or be a little more agnostic about the way they invest. But we’re wired the way that we’re wired. Before I did my first deal there I talked to a number of institutional guys and I got zero positive response. Now I get a lot of calls from those same guys wanting to invest in that area, but how can I feel good about someone who says, “I want to help you get to this next level,” when they weren’t there before.

I always believe in investors or a municipality voting with their wallet. Philly has been voting with its wallet for a number of years. One example of this is it’s investing $330 million in the Port of Philadelphia, and working with the federal government to deepen the Delaware River for 105 miles from 40 to 45 feet so we can receive the super large boats [from China] whose goal is transport Post-Panamax cranes [part of the city’s infrastructure improvement plan and to increase Port profitability].

Despite your passion for Philly, you’re not a Philly native. Where did you grow up?

I grew up in Florida but Sarasota wasn’t exactly a hotbed of financial activity, and I knew I wanted to be in the financial world in some capacity. When I graduated from Southern Methodist University [in Dallas] I didn’t have a job, so I actually wrote a letter to every Certified Financial Analyst in the Dallas-Fort Worth metroplex.

Of all the resumes I sent out, one was forwarded to NationsBank’s HR department. Next thing I know I got a job offer, working for the commercial bank. After nine months I realized the loans we were making were being cut up; the cash flows were being bifurcated to match risk with the product. I started understanding the whole commercial mortgage-backed securities matrix and I raised my hand to try to join the investment bank [NationsBanc Montgomery Securities, later Banc of America Securities] in Charlotte. So I went from the commercial bank to the investment bank and worked in mortgage finance.

What was your role there?

My group was really the interface between origination and the bonds side. We were interacting with the rating agencies and also our originators; we knew what the agencies wanted and how they were going to ding us if we did this or that. Ultimately—working as hard as humanly possible—I rose through the ranks pretty quickly and was a principal by 25. I stayed at the bank for 10 years and the last couple of years I spent running the West coast region for the CMBS group. A few of us were sent to the West Coast to increase what had been a very anemic $280 million of new originations back in 2002. By the time I moved to Eastdil four years later we were doing over $5.5 billion in production in that same region with a smaller team.

What do you attribute that huge increase in volume to?

Large institutions are interesting, it’s all about relationships externally and internally. Coming from the headquarters in Charlotte they moved me out west with six years of in-depth relationships. I think it was that connectivity in creating a better bond between the mothership and that region and also having better relationships with clients there. We were doing deals as big as $700 million and as small as $2 million, so across the board.

But when Eastdil bought Secured Capital, Russ Allegrette [previously a managing director at Eastdil, responsible for debt placement and loan sales] left to run Rob McGuire’s company [McGuire Investments] Eastdil asked me to join their platform. The ability to run the capital markets group and get in front of some of the sophisticated people in our industry was a real godsend. I joined in March 2006 and left in March 2010. That’s when I joined Barry [Sternlicht] and Starwood Capital.

What appealed to you about the opportunity at Starwood?

The opportunity of working with someone like Barry Sternlicht is hard to describe; the power of that individual, his raw intelligence, the reputation of the firm. Rather than focusing on what’s going to pay me the most, I’ve always focused on developing my expertise and protecting my reputation. Barry was running Starwood Hotels and Starwood Capital simultaneously until 2006. He left Starwood Hotels, they sold a ton of assets and when they asked me to join they had two brand new funds plus they’d just launched the REIT. It was an extremely exciting time for the firm and they didn’t have anyone doing any capital markets work at the time, just individual acquisitions guys and asset managers. Four years later we had 13 people in the capital markets group; six working for me in Greenwich [Conn.] and six more in London. We were closing over $1 billion of loans per month and I was responsible for all financing work as well as managing our foreign exchange and interest rate exposure.

How was the experience of growing that business during the post-crisis slow down?

We had a lot of cash from the funds that were raised. I started in March and nine months later I closed my first acquisition, literally on the 31st of December, 2010. The next year things really took off because with the cash that Barry had previously raised we were able to buy when others couldn’t. We bought our first asset late 2010. In summer 2011, S&P pulled the ratings on the Goldman Sachs and Citigroup deal [a $1.48 billion sale of commercial property bonds which Standard & Poor’s balked at rating]. That blew out CMBS spreads, and CMBS spreads to Treasury widened massively [an indication of risk aversion in the market]. In September everyone got back from vacation and all the sales that were under contract blew up. Barry made an incredible trade by going long on limited service hotels and gobbling up a ton of these portfolios that had been under contract, and was able to take advantage of securing assets at a better price. It was a brilliant trade. We filled up with multifamily and limited service and it paid off beautifully for the firm. After three and a half years we were close to $50 billion in assets under management so we almost tripled in size. When I joined there were around 125 people working across various Starwood entities and when I left there were 600 to 700 people so it was mind-blowing growth. It was super exciting and an opportunity I couldn’t have imagined.

What was your favorite part of the role there?

What amazed me was the creativity, always a different way of looking at things. Having the input from our different offices around the world in addition to our different groups within the platform really created a tremendously strong baseline of knowledge.

Were you surprised by the number of capital markets platforms and debt funds popping up towards the end of your time at Starwood?

I wasn’t too surprised. Big institutional investors were wanting to diversify their portfolio. I think what a lot of people underestimated is how fast these loans pay off and how much work goes into maintaining a balance sheet. Starwood Property Trust had a great advantage coming in first, the team did a beautiful job in managing the balance sheet. They made it look easy, but it wasn’t easy [laughs]. Unlike an equity platform where you can buy $1 billion of assets with two people, you have to have 50 people in position and ready to go [in a debt platform] before you make your first loan. You’re not successful unless you have a good underwriting team, origination team and closing team.

Is real estate viewed differently than it was 10 years ago?

I think real estate is something people inherently understand, and the thought of putting $1,000, $5,000 or even $50,000 of your money in real estate when you’re staring at an extremely polished and sophisticated offering for an asset that is being presented by a person with a great track record? I can see why that has attracted a lot of capital into the space. The trick is, can they get that capital to work.

So what’s next for Dalzell Capital?

We’re going to continue to grow in Philly but also will look another markets with similar biases in terms of industry, or something we feel is going to be more consistent with the citizenry in the future. I like Philly because it’s a very reasonably priced community. We rent our units in Norwalk [Conn.] for far more than we do our assets in Philly that are three quarters of a mile from City Hall. If anything, I worry about undersupply in the future. Almost 3.5 million square feet of office space and 2 million square feet of retail space is about to come online, and that will bring jobs and make Philly even more desirable.