Colorado Real Estate Journal - June 17, 2015
Denver-based RedPeak developed the 302-unit One City Block apartment community in Denver. It also has acquired apartment buildings with as few as 15 units in Capitol Hill. Institutional apartment developers and investors like RedPeak aren’t supposed to be buying the small, one-off infill buildings. Historically, that has been the role of small, nimble entrepreneurs, who know neighborhoods well and are willing to risk their own money in a sketchy neighborhood that has promise as an investment. Plus, the small buildings in different neighborhoods don’t provide the big players the critical mass to manage them efficiently. “I think that is right,” said Bobby Hutchinson, RedPeak’s investment director. “We are fairly unique in that,” Hutchinson said. He said he thinks a lot of big organizations find it “challenging” to find, buy and manage small properties. “A lot of big companies just aren’t structured to do the small deals, ” Hutchinson said. “ These one-offs tend to be harder to manage and these scattered portfolios have always been challenging,” he said. Recently, however, RedPeak is starting to come across other institutional investors seeking the small properties, he said. “When we first started doing this five years ago, we were truly pioneers,” Hutchinson said. Today, RedPeak has 17 buildings with 730 units in its “urban living portfolio” that account for about a third of the 2,455 units RedPeak owns in Colorado. Andy Hellman, a broker with ARA Newmark, said he still doesn’t see many institutional investors other than RedPeak with a big appetite for the small, urban infill properties. “The one company that does come to mind is the Laramar Group from Chicago,” Hellman said. Last year, Laramar bought much of the urban apartment buildings from Denver-based Boutique Apartments. “Laramar has had great success with that strategy in Chi cago and other cities,” Hellman said. In Denver, however, other than RedPeak, he said he primarily is seeing “institutionlike” buyers picking up the small stuff, rather than the classic institutional investors. “We are seeing more people coming here from both coasts than we ever have,” Hellman said. New investors interested in the smaller properties include family offices, wealthy individuals and syndicators that raise money from qualified investors, he said. Many investors from the East and West coasts are coming out of 1031 sales and think Denver has more upside than if they invested in properties in their backyards, he said. RedPeak, however, is the perfect buyer of small properties. “Basically, they plan to own their properties forever,” Hellman said. “Like I’ve said before, it’s almost impossible to overpay for a building in a great, walkable neighborhood like Capitol Hill, especially if you plan to own it for the long term,” Hellman said. That is because renters who can’t afford to pay $3 or more per square foot for the newest buildings opening in downtown and nearby neighborhoods will always find better deals in existing buildings in places like Capitol Hill, he said. “And it’s hard to find land to build in Capitol Hill, so that really limits the new competition,” Hellman said. RedPeak’s buy and hold strategy allows it to compete aggressively for these smaller buildings. “We have long-term ownership in mind in every deal we do and our capital partners have very long-term deals in mind,” Hutchinson said. “We see great benefits from owning buildings in these very urban, walkable neighborhoods,” Hutchinson said. “We think they will be less impacted from new supply and should outperform the overall market in the long term,” Hutchinson said. “Long term, we think these smaller, urban properties will provide better risk-adjusted returns. And short term, if there is a correction, we think they will be better insulated from falling prices than the newer properties.” Part of that is because many renters have trouble paying $2,000 a month for a 650-sf unit, he said. “We have plenty of $2,500 units in our portfolio and we would like to have more $1,200 or $1,400 units in our portfolio,” Hutchinson said. That is one reason that, going forward, RedPeak is more likely to be adding to its urban portfolio than developing new buildings. “We’ve got one development underway at Seventh and Sherman, with 115 units in an eightstory property, but after that one, we don’t have too much on our development plate,” Hutchinson said. “And given the extent of new supply in downtown and Cherry Creek and potential headwinds, we think we might get a better, safer, risk-adjusted return from buying existing buildings at a lower price point than building new,” Hutchinson said. The math of what renters can afford also works in its favor. RedPeak is interested in buying buildings in Capitol Hill, Washington Park, Congress Park, Mayfair and City Park South, he said. “We also don’t have anything on the west side, but we really like that whole Highland area,” he said. A few years ago, RedPeak tried to develop three buildings in West Highland, but pulled the plug on the project after neighbors sued to stop it. “Really, we want to be anywhere there is a vibrant, walkable urban neighborhood,” Hutchinson said.