CRE's Next Generation: How Developer Abiud Zerubabel Is Filling His Downtown Apartments And Looking To Buy More
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The pandemic has put a strain on midsized real estate companies like Acumen Cos. that own urban apartments, as they have seen vacancy rise with young professional tenants moving home or fleeing to the suburbs.
Acumen Cos. Chairman Abiud Zerubabel, whose firm owns about 1,000 apartments in D.C., Maryland, Virginia and Los Angeles, said his portfolio experienced a sharp increase in vacancy in May, June and July as its predominantly millennial tenant base moved out.
He decided to use this difficult situation as an opportunity to pivot his business model. He shifted from leasing properties primarily to young people with roommates to intentionally targeting families using government-subsidized housing vouchers to fill his buildings.
This shift has not only created stable cash flow for his company and its financial partners but has created more affordable housing opportunities in amenity-rich neighborhoods. He has now filled his existing portfolio with voucher-holding renters, and he is beginning to acquire properties with high vacancy at discounted prices with plans to fill them up in the same way.
"We had a challenge, but once we thought about 'How do we fill these properties?' that brought an opportunity to say, 'OK, if we can do this already in our portfolio, this is a great time to go out and buy,'" Zerubabel said.
The 34-year-old Zerubabel, who goes by A.Z., was born in Ethiopia and moved to the U.S. when he was 16.
He got his start in real estate by managing and leasing units for his family's landlord in New York City. He turned that job into a business, master-leasing blocks of units from the landlord and renting them out by the bedroom to college students, keeping the difference in rent as profit.
When he was 23, he moved to D.C. and began buying distressed residential properties during the Great Recession. He started developing condos in 2011 and expanded to midsized multifamily properties in 2015.
Zerubabel merged his company, then known as Urban Investment Group, in 2016 with Acumen Capital to create Acumen Cos. He serves as chairman of the company and has continued to grow its portfolio of apartments.
Much of the portfolio sits in hot D.C. neighborhoods like Logan Circle, Shaw, Columbia Heights, Park View and Bloomingdale, which have become draws for the city's young professional class. Many of his properties are older, Class-B apartments with multiple bedrooms that recent graduates would share with roommates to save money on rent.
When the pandemic struck, Zerubabel said these young renters began moving out in droves. He said he has seen various reasons for people leaving the city, from young renters moving home with their parents to older millennials buying houses in the suburbs to people fleeing for more affordable cities after their jobs went remote.
"The shift that's happening right now is the shift from gateway cities like Washington, D.C., Los Angeles and New York to secondary markets, tertiary markets and suburbs," Zerubabel said. "That has brought a new challenge to being a landlord in a gateway city like D.C., where you're now seeing double-digit vacancy."
The District experienced a 33% decline in Class-A apartment absorption in Q3, and Class-A vacancy rose from 4.4% in Q3 2019 to 7.8% last quarter, according to Delta Associates. In the District's Class-B apartment market, vacancy rose 330 basis points to 5.9%.
As he was working this summer to fill the vacant units in one of his Columbia Heights apartment buildings at 3120 16th St. NW, Zerubabel said he didn't see the typical demand from recent graduates moving to D.C. who would lease an apartment with roommates.
But what he did see was a large number of families using Section 8 vouchers that were looking for units with multiple bedrooms.
"That was an aha moment for us," Zerubabel said. "We said, 'Why don't we shift and become intentional about it and directly advertise to voucher tenants?' And that yielded results."
Zerubabel filled the 22-unit Columbia Heights building with voucher-holding tenants, then expanded the strategy across his portfolio by directly targeting these tenants and leasing all of his vacant units to them.
"Since August, where we have vacancy, now we're replacing them with voucher tenants," he said. "We made it a business model to adapt to the change that's happening, the shift to the suburbs from market-rate tenants."
In normal times when the apartment market is strong, landlords can often achieve higher incomes by renting to market-rate tenants, and there was plenty of demand to fill the buildings. But the pandemic has dissipated that demand and dropped market rents well below their typical levels.
Last quarter, the District's Class-A rents fell by 10.7%, and Class-B rents fell by 8.9%, according to Delta Associates.
Landlords have been in need of stable cash flow this year, with many tenants unable to pay rent because of the economic crisis the pandemic has created. Zerubabel said that leasing to tenants using Section 8 vouchers is an attractive option for apartment owners because it provides reliable income to stabilize their balance sheets.
"You're minimizing your delinquencies because the government is subsidizing a portion, if not all, of the money," he said. "You're alleviating the market tenants that say, 'Hey, I lost my job and I need a deferral.' The government has been paying, whether through the D.C. government or HUD. That cash flow hasn't stopped."
In addition to the financial reasons for making the shift, Zerubabel said it also provides a social good by creating more opportunities for lower-income tenants to live in expensive neighborhoods that were previously dominated by young, market-rate renters.
"Now you're creating affordability in the city, and it gives an opportunity for workforce housing to naturally occur in the city," he said. "The people that are waiting tables and used to live out in the suburbs and commute to the city, now they get an opportunity to live there."
Zerubabel sees a large number of families with Section 8 vouchers still looking to rent apartments in the city, and he is not the only landlord taking notice.
"The demand is not met by supply. There is still a significant demand of people looking for housing using subsidized programs," he said. "In the past, because market tenants were competing and willing to pay more for those units, those voucher programs were overlooked. Now businesses like us are saying, 'This solves two problems at the same time.'"
Now that he has stabilized his balance sheet with this strategy, Zerubabel is going on offense. Acumen is using its own equity, bolstered by a few recent asset sales, to seek out downtown apartments that are selling at below-normal levels.
"Landlords in downtown areas in gateway cities will start selling properties because they're not able to sustain their debt services," he said. "That creates opportunities for groups like us in the middle-market area, where we're not institutional, to come and acquire those properties."
Zerubabel said the large, institutional apartment owners have shifted their focus from major gateway cities to secondary markets and suburban areas, leaving midsized firms like his with less competition for assets that are selling at a discount.
"You can see the shift of [institutional investors] saying, 'I don't want to touch New York City or downtown D.C.,' and that gives us an opportunity, being somewhere in the middle between a small mom-and-pop operation and institutional guys," he said. "Being middle-market gives us an opportunity to be nimble, not just identify the opportunity but fill it."
Zerubabel said he is actively in talks to buy multiple properties, including two buildings in Columbia Heights totaling around 200 units, a 137-unit building in the Shaw-U Street area, a 36-unit building in Logan Circle and a 100-unit building in 16th Street Heights.
He said the properties all have double-digit vacancy, and he plans to fill them up with voucher tenants to add value to the assets. He said he is currently using Acumen Cos.' own equity to finance the acquisitions, but he is considering bringing on equity partners to scale up his buying.
Acumen also has a 32-unit project under construction at 818 Bladensburg Road NE that it had previously planned as condos, but Zerubabel said he is considering pivoting it to apartments and filling it with subsidized renters.
His long-term plan, Zerubabel said, is to amass a large enough portfolio of apartment buildings stabilized with voucher-holding tenants that he could sell it to an institutional buyer.
"What we've identified is, because there's no institutionalized approach to this and we've kind of figured out a business model that works here, we can create a great portfolio of affordable housing, create 2,000 units of this through acquisitions and construction, and attract institutional guys to come take us out of our position and let them operate the portfolio," he said.
The first-generation immigrant who became a real estate executive by his mid-30s is adapting to the pandemic using the same entrepreneurial spirit that led him to create a business out of master-leasing units from his family's landlord in New York.
"We're being what we're supposed to be: entrepreneurs," Zerubabel said. "We're living that out by implementing this model."