Borrower’s Corner: CP Capital sees little hit from rate hikes

The firm’s investors like US multifamily so much they’re willing to live with current disruptions.

While interest rate hikes are causing volatility throughout the US commercial real estate debt and equity markets, New York-based manager CP Capital has yet to see an impact on its ability to develop high-quality multifamily properties.

Like its peers, CP Capital is seeing rates fluctuate on its floating-rate debt, Paul Doocy, co-head of CP Capital, told Real Estate Capital USA. But for a developer, the impact of rising rates is spread over a longer period and therefore is not as big of a cost factor as it might be for other sponsors.

“If you think about construction, you’re drawing down some money right away [from a loan], but then you’re drawing down the rest over time,” Doocy said. “If it’s a 50-basis point increase on a floating-rate construction loan, you don’t have all that money out from day one, you draw it down over time and you’re ultimately building these properties in two years and you’re filling them up right away.”

Founded more than 30 years ago, the firm focuses on the US suburban multifamily markets while sourcing much of its funding from European investors. In 1994, the firm started doing  development ventures in which it provided equity to developers to build and lease up properties around the US before executing a sale. This is the firm’s sole focus at this point, Doocy added.

CP Capital’s original clients were mainly German investors, but the firm now raises capital throughout Europe and North America. And despite turmoil and confusion over rate hikes and the direction of inflation, its European clients see the US multifamily market as a good long-term bet regardless of short-term economic fluctuations.

“[Multifamily] is not as closely tied to the economy as other property types. It’s just tied so much to population and household growth,” Doocy added.

Population patterns are a key driver of European interest in US multifamily. While Europe’s urban population declines, the US has seen solid growth in emerging sunbelt markets like Florida and Texas. It is one of many reasons CP Capital’s European backers are keen on US multifamily.

“They understand demographics [and] they saw that the US had population growth when [Europe] did not. Everyone who looks at apartments, sees that [US] apartments have performed well even when the economy hasn’t,” said Doocy.

The decline of office and retail has only accelerated European appetite for US multifamily. 

“We have some [investors] who weren’t even interested in apartments and now they are because they are less interested in office or retail,” Doocy added.

Doocy also sees projected rent growth in growing suburban multifamily markets more than offsetting cost hits from inflation and rate hikes.

“We tend to be in the suburbs [which] tend to be not so expensive that people can’t afford it. Maybe they’re spending 25 percent of their income for their housing costs, they’re not maxing out at 30 percent or 35 percent. So there tends to be some room still in the markets that we’re looking at where their rents have gone up, but people can afford it,” Doocy said.