Colorado Real Estate Journal -
Boutique Apartments is selling nine apartment buildings in neighborhoods at the edge of downtown Denver. The buildings, with an asking price of $38 million, represent the largest portfolio of its type to hit the market in Denver. While single apartment buildings in the suburbs and in downtown have sold for more money, as far a scattered, urban infill portfolio, there has never been one quite like this, according to Terrance Hunt of ARA. “Obviously, in terms of the size of a portfolio, Carmel’s was much bigger, but for an infill, inner-city portfolio, this is the largest of its kind,” said Hunt, one of two brokers listing the buildings for Boutique Apartments. Pinnacle Real Estate Advisors also is listing some of the properties. In addition, Hunt also is listing the Cruise apartment building for Nichols Partnership, which was added to the portfolio offering. Grant Barnhill, CEO of Boutique Apartments, said they chose to split the buildings between two brokerage companies to take advantage of each of their strengths. “Pinnacle’s strength is to sell one building at a time,” Barnhill said. “ARA’s approach is more of a bid approach,” Barnhill said. “They go out to the market and provide an opportunity for everyone to see them and then they call for offers. They have been very successful with that strategy.” The portfolio could end up fetching more than $38 million. “The area is hot. The market is hot,” Hunt said. “I would expect that we would get multiple offers. And when you throw in Randy Nichols’ building for $12 million, it really is a $50 million portfolio.” Hunt said he expects some private investors will want to buy individual buildings, while some institutional buyers will seek to buy several buildings, perhaps even an entire portfolio of properties. The branded buildings to be sold include Le Cirque, Lodge, Metropolis, Prana, Red Fort, Rocket, Route 66, Shambhala and Works. "These properties represent a very unique opportunity for the right buyer,” Barnhill said. “At some of the highest rents per square foot in the city and a 98 percent occupancy rate, it's a great investment in Denver’s hot rental market," Barnhill said. Barnhill said 120 high-networth investors in 2003 pooled $20 million into a fund with Boutique to acquire and renovate apartment buildings “These funds have a finite, 10-year time frame and that really is the driving force for selling them,” Barnhill said. “We probably wouldn’t be selling them, otherwise.” On the other hand, the timing is fortuitous, given the appetite from investors. “With the strong uptick in the apartment market in Denver, we decided that now was the perfect time to sell,” Barnhill said. The buildings are in Washington Park, Congress Park, Capitol Hill and Uptown. Together, the buildings have 304 units. “I don’t think there has ever been a scattered, infill development with this many units in this many buildings to ever become available at one time,” Barnhill said. “It’s a pretty rare opportunity,” Barnhill said. Most of the buildings were originally constructed from the 1940s to 1971, “with most of them from the ‘60s,” Barnhill said. After they were acquired, they underwent extensive renovations, sometimes with themes and always with strong design elements. In exchange for the high-quality renovations, they get strong rents, high occupancies and happy clients. “Our average rents typically run from $1.70 to $2 per square foot,” with some units commanding $2.15 per sf, said Zvi Rudawsky, a principal at Boutique Apartments. Predominantly, it has been single women who are drawn to Boutique’s communities. “Our tenants demographic is good,” Barnhill said. “Sixty-five percent are female and they make from $45,000 to $50,000 per year. Ninety-eight percent are single. They usually live within seven miles of where they work.” Rudawsky estimated 35 percent of them are pet owners. It is not unusual, for example, to see young women walking their dogs near their buildings in the morning and evenings. Barnhill noted that Denver leads the nation in attracting the young workforce known as the millennial generation, which are those who were born starting the early 1980s. “That is important because the millennials are our market,” Barnhill said. However, the millennials are a mobile generation and their life situation might change, so there is turnover. “They might get engaged or married and they might buy a home together,” leaving the rental life behind, Barnhill said. On the other hand, a number of tenants also move into bigger units in properties owned by Boutique, Rudawksy said. “We have a lot of transition,” Rudawsky said. “By that, I mean we will have a lot of our tenants move from a one-bedroom unit to a two-bedroom unit, sometimes in a different building,” Rudawsky said. Tenants are pleased with the way the units are managed. “I can tell you that we have just done a residential satisfaction survey and 98 percent of our residents are either pleased or very pleased,” Barnhill said. He said Boutique will continue to manage the buildings after they are sold. “It’s a bit like investors buying a hotel and still wanting to retain the Hyatt flag,” Barnhill said. “We believe there is built-in value to Boutique’s name and having us continuing to manage them,” he said. A developer could not come into Denver today and replicate what they did over the past decade, he said. “You can’t compete with these buildings as developers are now required to build one off-street parking space for every new rental unit that’s constructed,” Barnhill said. “This means that developers have to build luxury projects with parking garages which rent for twice as much as our projects,” he said. “We created a great niche spot in the rental marketplace and a strong local brand,” said Barnhill. The sale represents just a portion of Boutique Apartment’s holdings. Pinnacle will be handling the sale of the Le Cirque, Lodge, Route 66, Works and Prana buildings, while ARA will manage the sale of Cruise, Metropolis, Rocket, Shambhala and Red Fort. "This portfolio is a turnkey opportunity with branded properties that have proven to be highly successful in the marketplace,” said Kevin Calame, a senior adviser at Pinnacle. “With central Denver as a destination community for young professionals, these properties are poised to outpace the market,” Calame said. Hunt, a principal at ARA, said that in multifamily circles the hot term is “value-add.” In many cases, the idea of buying low and upgrading the property in hopes of higher returns doesn’t work as planned, he said. “History shows that projected returns are rarely achieved,” Hunt said. Boutique, however, has removed the risk by providing properties in a turnkey condition with beautiful upgrades and filled with happy tenants, he noted. “The fully renovated nature of these assets takes the speculation away,” Hunt said. “This is a large portfolio of successful properties in one of the most popular submarkets in Denver that truly resonates with young professional renters,” Hunt said. “Boutique has created a distinctive niche that caters to these renters by branding smaller buildings with a unique style of renovation," he said. Many young professionals want to live in hot neighborhoods at the edge of downtown, he said, but can’t afford the $2-plus per sf charged by many of the new communities opening or under construction, so buildings such as the ones provided by Boutique provide an option. He agreed with Barnhill that a developer couldn’t replicate what Boutique achieved because of parking requirements. “You can look at what the replacement cost is, but the truth is, in many cases it is simply not applicable,” Hunt said. Boutique Apartments employs 35 full-time employees in the property management division of the company and another 25 fulltime employees in its construction company, Wheelhouse Construction Inc. The employees will not be affected by the sale. “We have another 300 Boutiquebranded apartment units where we act as the third-party management role and do not have an ownership position in them,” Rudawsky said. In addition, it has about 600 units under its Wheelhouse brand. “When the Wheelhouse units are renovated, the ownership might spend $5,000 to $8,000 per unit, including sprucing up the common areas,” Barnhill said. “Boutique buildings, by contrast, on average we spent $18,000 to $20,000 per unit.” Barnhill said he doesn’t think rising interest rates will hurt the prospects of selling the nine buildings on the market. “We have Fannie Mae financing on the units and as interest rates rise, the Fannie Mae financing becomes more competitive and attractive.” Hunt said he wouldn’t go as far to say the rising interest rates would help sell them. “Rising rates always hurts everyone,” Hunt said. “It is true, they will not be hurt as bad, as the gap narrows between the Fannie Mae rates and the market rates,” he said. Some of the Fannie Mae loans have been in place long enough that the prepayment penalties are not so steep, giving an investor the option of replacing the financing with a new market-rate loan, which is still lower than the Fannie Mae rate, he said. Rudawksy noted that they sold two of their first buildings, Aperature and H20, “way back in 2008 and that buyer just resold them about two weeks ago,” a sign of the interest in the market from investors. Barnhill said it will be interesting to see who ends up buying the nine buildings they have put on the market. “I think some of the larger buildings will go to institutional investors,” Barnhill said. “My gut tells me that at least half of them will go to individuals.”