Borrower’s corner: How CP Capital is navigating ever-crowded multifamily markets

Low supply, high demand forces new risk profiles and equity staging.

CP Capital is targeting new opportunities in more suburban, lower-density markets to capture multifamily momentum as deals become increasingly competitive to sign in the ever-growing sector. 

The New York-based real estate investment manager is looking toward markets in Arizona, Colorado and select suburban coastal markets to broaden its multifamily portfolio. Recent deals include a March 23 agreement with Wood Partners to develop a 402-unit multifamily project in Phoenix. 

Jeremy Katz, co-head of CP Capital US, told Real Estate Capital USA land sellers are more aggressive and demanding in the current market, both in terms of pricing and timelines for any related development or rehabilitation needs of a given multifamily asset.  

“Supply is still coming online in a lot of these markets, it’s being generated,” Katz said. “It’s just gotten a lot harder for developers and there’s more capital chasing these opportunities.” 

CP – formerly HQ Capital Real Estate before an August 2021 rebranding under the new majority ownership of Concord Pacific and Paragon Real Estate Advisors – is a US real estate investor primarily using sponsored funds to target opportunistic and value-add rental apartment investments through joint ventures in high-growth markets. 

To counter the persistent under-supply of multifamily assets and capture the favorability of the apartment sector especially, Katz said CP is lining up new properties in Atlanta, Tampa, Denver and Phoenix to grow its own footprint. 

The firm also likes opportunities available in more coastal markets, such as suburban Boston, where demand is overwhelming the current supply available. Since 1989, CP has invested more than $9 billion in rental apartment projects and $15 billion in real estate assets total.  

Even with inflation lingering in the background, Katz said demand for apartment properties from buyers is still accelerating at a pace that exceeds the rate at which prices are rising. This allows for healthy margins when it comes to the return on cost and exit cap rates.  

The slew of office, retail and hospitality players pivoting toward industrial and multifamily lending opportunities have also provided additional factors to consider. In some cases, Katz said landing a multifamily deal may require a developer to close on land before clearing every approval they need to build, a rarity in prior market cycles.  

Heightened appetite for multifamily opportunities has driven a slight increase in the risk profile when getting new deals across, according to Katz. This has in turn forced CP to build more mitigation elements into deals, such as staging the equity for an ongoing investment to ensure certain construction or rehab benchmarks are met before funding the next wave of work on a given asset. 

Supply chain disruptions – including the decreased availability of appliances such as refrigerators – and labor issues with local municipalities have also brought headwinds to capitalizing on multifamily opportunities in a timely, economical fashion for CP and its multifamily peers.  

Katz said review processes and inspection timelines have drawn out construction schedules as well, forcing multifamily investors to build in more buffers to account for any timing constraints. In select cases, resident opposition is also proving to be a barrier for new development, especially when the look of a property and its components are all subject to municipality and community guidelines. 

Local requirements for mixed-use components, retail components and maintaining the feel of a neighborhood all have potential to make multifamily projects less economical, according to Katz. “It doesn’t make sense anymore and so it just artificially restricts the amount of projects that actually get done,” he said. 

Katz said he is anticipating a shift away from the wider resident opposition trends over the next five years, especially as towns realize they need to make parameters easier for developers to build by either allowing for upzoning, higher-density projects or fast-tracking capabilities so as to not miss multifamily development momentum.