New York-based manager CP Capital, which has just started work on a suburban Denver multifamily development with Greystar Real Estate Partners, has found that relatively fast lease-up periods and strong demand from buyers mean it has been able to sell its projects and pay back construction loans ahead of schedule.
“We have sold some things recently more quickly than we thought we could and are finding that people are jumping on things as soon as they are in lease up,” Paul Doocy, co-head of real estate at CP Capital, tells Real Estate Capital USA. “Our construction loans have a four- to five-year term and we are in and out in three to four years typically. There is great demand for these projects and some of them are selling faster than we thought [they would] a year ago.”
Doocy attributes the speedy lease-up periods to demand for apartment properties, particularly in fast-growing markets such as Brighton, a Denver suburb, as well as the success of on-site leasing. The project, Brighton Park Apartments, follows the firm’s exits from similar projects in suburban Los Angeles and Charleston, South Carolina.
PNC is providing construction financing for the planned 288-unit property development, which is slated to complete at the start of 2023.
The firm, which tends to use leverage of a roughly 65 percent loan-to-cost, has found that loan terms are very similar to where they were prior to the pandemic.
Brighton Park Apartments is being built at a site fronting Longs Peak Street and North 42nd Avenue, Doocy says. CP Capital, formerly known as HQ Capital Real Estate, invested about $20 million of equity in the scheme.
“We tend to have a strategy of coming in at the start of construction, funding the capital… that allows us to get it built and leased, and then we tend to be selling it right away when it is stabilized,” Doocy says.
CP Capital targets developments of 200 to 250 units but tends to be focused more on the size of the commitments it can make rather than the number of units. It invests via a series of private equity real estate funds and is using the remaining capital from its current fund and initial capital from its next vehicle to finance the Brighton project.
“We are trying to get a diversified portfolio within the fund, with 12 to 15 projects with a mixture of developers,” Doocy adds. “We tend to be the LP equity partner on deals, with the GP putting in some of the equity.”
The firm plans to deploy capital in other suburban US growth markets in the coming months. Doocy says CP Capital will pen commitments for approximately five ground-up multifamily projects in Q4 2021. Each equity stake will be in the range of $15 million to $35 million, he adds.
The firm tends to work with lenders on construction financing, but this could change if the company opts to roll out a build-to-hold strategy. “In that case, we’d be more tied to permanent lenders,” Doocy says.
Brighton had the lowest multifamily vacancy in the entire Denver metro while the whole region experienced unprecedented investment and sales activity, according to Q2 research from Colliers International.
“Apartment complexes are not only selling rapidly, but also constructing rapidly. Five properties totaling over 1,400 units delivered during Q2,” the report stated. “These newly constructed units are in high demand as, despite the increase in inventory, vacancy has reached a 12-month low this quarter at 5.8 percent. With the demand to live in Denver only strengthening, rent is up 10 percent year-to-date, outperforming the nation for the first time since the start of the pandemic.”
Other recent transactions in the space include Crow Holdings’ planned purchase of the 1,184-unit Palomino Park Resort for $435 million, which was the largest single-asset apartment sale in the history of Colorado, according to Colliers International. Additionally, three sales in June totaled more than $820 million in investment activity. Among other notable 2021 Denver transactions were CIM Group’s purchase of the 721 apartments at The Lex at Lowry and Clarion Partners buying Aspire 7th and Grant for $91 million.
Colliers International said total transaction volume in the second quarter reached $2.2 billion, with 7,553 apartments sold at an average price per unit exceeding $295,000.
NorthMarq reported that demand for rentals drove vacancy down by 110 basis points to 4.9 percent by mid-year, with net absorption reaching 5,000 units in the second quarter. The Denver metro area set a record in net absorption of 12,000 units in the 12-month period ending in June 2021.
Average cap rates on year-to-date sales reached 4.3 percent by the end of Q2, according to NorthMarq. The company said more than 28,500 units are under construction across the Denver metro area, with more than 12,000 expected to come online by year-end.