KRM-Ventures partnered with Greystar’s multifamily, shovel-ready, transit-oriented, development in the popular Union Station neighborhood, within walking distance to Denver, CO downtown districts.
KEY DEAL POINTS
2nd Marketplace Opportunity with Global, Enterprise-Level Sponsor, Greystar: Founded in 1993 and headquartered in Charleston, South Carolina, Greystar operates in over 60 regional offices serving over 190 global markets as of June 30, 2020. Greystar has grown to become one of the largest and most experienced investment managers and operators of rental residential properties in the U.S. The group has an estimated $200B+ of real estate under operation, including ~713,000 units managed worldwide.
Unmatched micro location: The site is located in the heart of downtown Denver’s Union Station which offers superb access to 140,000 miles of daily transit routes, 145,000+ jobs, any downtown Denver district, eatery or brewery, the connection point of 330 miles of walking, biking and running trails, and over 60 acres of adjoining parks.2,3
Attainable offering, lower entry rents, large renter pool: Greystar believes that the Project’s design has allowed the General Partner to project lower base rents while still projecting attractive investment returns. The average rents at 19th & Chestnut are projected to be $1,604 per month, a substantial discount to like-kind product in Union Station.
A lack of new supply: The proposed development sits on the last undeveloped partial block within Union Station. Additionally, the Union Station neighborhood has no multifamily units under construction and no known planned multifamily developments.4 The lack of available sites will push new projects into other submarkets around Denver resulting in less competition for the proposed Property.
Low execution risk: As of the date of the PPM, The Denver based Greystar team has developed over $850 million in multifamily rental housing and currently manages over 33,000 units in Denver.5 Additionally, the Project is within one block of two completed Greystar development projects, Alara Union Station (formerly known as Elan) and The Pullman.
Significantly reduced basis relative to comps: Given the high concentration of studio units the Project benefits from a significantly reduced basis comparative to what is being built and sold across the Denver core today. At an all-in basis of $291,500/unit the Project is positioned favorably to recent trades in Q420 of Alexan Cherry Creek at $446,000 / unit and Canvas on Blake at $430,000 / unit.6
Budget contingency: The General Partner is budgeting 5% in owner controlled hard cost contingency and the General Contractor (“GC”) is budgeting 2% contingency as of construction document (“CD”) pricing.7 In addition, the General Partner has allocated another 3% soft cost contingency in the capitalized budget. These budgets and contingencies are believed to be reasonable, however, they are future forecasts and there is some likelihood that they may be found to be inaccurate or insufficient.
Speed to market: The site is fully entitled, shovel-ready, and is expected to have 90% CD set of plans, Guaranteed Maximum Price (“GMP”) pricing, and approved foundation permit prior to close. The Sponsor believes that the expected timing of the proposed development will mitigate market and cost escalation risk seen during normal pre-development windows.
THE BUSINESS PLAN
Greystar intends to develop a 13-story high-rise comprised of 232 units that will target the deep demand generated by existing and incoming professionals who desire the walkability Union Station has to offer. A focus on attainable rents provides residents making between 80 and 100% of AMI the ability to rent in a submarket that has forced many renters to become cost-burdened. The site is considered shovel-ready and fully entitled. Following completion of construction and upon property stabilization, Greystar intends to offer the community for sale, resulting in an expected 3-year hold period.
Acquisition & Reversion
The 19th & Chestnut development offers the opportunity to invest in, the Sponsor believes, one of Denver’s most desirable, high-barrier, transit-oriented submarkets – Union Station. Greystar plans to develop a 13-story high-rise comprised of 232 units that will target the deep demand generated by existing and incoming professionals who desire the walkability Union Station has to offer. The site is shovel-ready and fully entitled. The due diligence process, including without limitation title, environmental and geotechnical, will be completed prior to close, which allows the General Partner to deploy dollars towards a construction start quickly.
Construction Timeline
Based on the April 2021 construction start date, and an expected construction period of 22 months, construction would wrap up in February of 2023. Full delivery of the building in February 2023 will allow the property to lease-up during spring and summer months which typically have the strongest demand.
Greystar’s management team will begin pre-leasing roughly two months prior to first unit completion. Following the pre-leasing period, full on-site leasing will commence, which allows the project to reach stabilized occupancy in October of 2023 based on a proforma 25 unit per month leasing pace and projected 95% stabilized occupancy. Upon property stabilization, Greystar will begin to prepare the Project for sale.
Property Management
Greystar believes it will be able to execute the business given its past experience. Greystar’s property management company is the largest multifamily property management company in the US and the largest in the Denver market with over 33,000 units under management in Denver. Greystar possesses excellent market knowledge, and therefore knows how to lease up and operate a property to achieve superior performance.
THE PROPERTY
Physical Details:
19th & Chestnut is a 232 unit, 13-story, Class A, high-rise multifamily development. The Project will feature a progressive design palette, modern furnishings, and high-end unit finishes.
Amenities:
The units will feature fully functioning kitchens, hard surface countertops, tile backsplash, and stainless steel appliances, while the community will feature uninterrupted Wi-Fi throughout the property, Fetch package delivery services, a state-of-the art fitness and yoga center, as well as a co-working space. Additionally, residents will have access to fresh air via private balconies (select units), a 3rd floor terrace, and a rooftop amenity space with indoor and outdoor lounge. Each unit will have access to the amenities and our on-site property management team.
Unit Mix:
Elevations:
THE LOCATION
Denver - According to the Metro Denver Economic Development Corporation (EDC), Denver experienced job growth of 42,000 jobs across the seven-county metro area in 2018, with 31,000 jobs in 2019. Denver has continued to experience accelerated economic and employment growth. Denver's economy is one of the most diverse in the country including aerospace, technology, bioscience, energy, telecommunications, healthcare, aviation, and professional services. Denver has the largest concentration of federal employees outside D.C. and the 4th highest GDP in the nation. The region routinely attracts young talent with a strong job market, high quality of life, robust public transit system and access to outdoor amenities. Denver offers a true live, work, play lifestyle at an affordable cost. According to the Census Bureau the metro has the 5th strongest job market in the country attracting a highly educated workforce. Denver's population has been growing at an average of 1.7% annually for the past decade, averaging 50,000 new residents each year. Denver's 2019 net migration was 1.3% (23,600) and is projected at 20% (660,000) by 2030 according to the EDC.
Downtown - Now with over 145,000 employees, Downtown Denver has enjoyed extraordinary growth over the past 10+ years that has resulted in unprecedented economic diversification. For these reasons, companies continue to expand operations and relocate headquarters to Denver. In 2020, three major tech companies have announced expansions in Denver - Gusto (615 employees), Marqeta (HQ2, 500 employees), and Facebook (200 employees). After the outburst of COVID-19, Mark Zuckerberg announced in a town hall that Facebook "will be aggressively opening up remote hiring around the US and Canada" with a focus on Denver, Atlanta, and Dallas. Other Silicon Valley based tech companies have recently announced expansion into Denver with Robinhood adding 800 jobs and Snapdocs adding 650 jobs. Additionally, the recent announcement of major office tenants and Fortune 500 company, VF Corporation’s, relocation to downtown brings an additional 900 jobs. As more professionals and their employers look to relocate to Denver from other major metros, demand for urban, walkable, downtown communities will continue.
Some of Denver Metro's best-known landmarks reside downtown, including the Colorado Convention Center, the Denver Center for the Performing Arts (one of the largest in the world), Union Station, Coors Field, and the Pepsi Center. Cutting right through the center of the CBD is the 16th Street Mall, an outdoor, walkable shopping center, as well as Denver Pavilions, home to 40 cafés, clothing stores, taverns, burger bars and more.
Union Station - The neighborhood serves as the central nervous system of the region - powered by connectivity and embraced by people. Union Station is located adjacent to, and within a 10-minute walk, to any downtown Denver district, the Highlands, the connection point of 330 miles of walking, biking and running trails, over 60 acres of adjoining parks, Larimer Square, 16th Street mall, Coors Field, The Pepsi Center, The Auraria Campus, Elitch Gardens (site of the future 60-acre River Mile neighborhood redevelopment) and Denver Union Station. Union Station is still the hub of metro Denver's bustling transportation network, connecting to over 140,000 weekday regular fixed-route scheduled miles. In addition, the A-Line connects Union Station to Denver International Airport in 37 minutes, providing residents easy access to one of the nation's busiest airports.
The subject site is 0.37 acres and within one block of GDG's first two deals in Union Station, Elan Union Station and The Pullman. The site has excellent proximity to ~4.2 million SF of retail and entertainment, along with strong transportation offerings, as evidenced by a 85 Walk Score, 93 Transit Score, and 95 Bike Score. Union Station, which is home to The RTD Light Rail ("A" Line), is only 3 blocks from the site. This offers future residents direct and convenient access to all destinations throughout Denver. In addition to public transit, access to I-25 lies less than half-a-mile away via 20th Street, which runs just north of the site.
NEARBY AMENITIES
Union Station - The neighborhood serves as the central nervous system of the region - powered by connectivity and embraced by people. Union Station is located adjacent to, and within a 10-minute walk, to any downtown Denver district, the Highlands, the connection point of 330 miles of walking, biking and running trails, over 60 acres of adjoining parks, Larimer Square, 16th Street mall, Coors Field, The Pepsi Center, The Auraria Campus, Elitch Gardens (site of the future 60-acre River Mile neighborhood redevelopment) and Denver Union Station. Union Station is still the hub of metro Denver's bustling transportation network, connecting to over 140,000 weekday regular fixed-route scheduled miles. In addition, the A-Line connects Union Station to Denver International Airport in 37 minutes, providing residents easy access to one of the nation's busiest airports.
Transformation of the Historical RailYards around Union Station has unleashed over $2B in private development totaling 11M SF, expanding Denver's Downtown core by 86 acres in less than a decade. The subject property is one of only two sites left for development in Union Station for 50+ years.
ASSET CLASS MARKET
Positioned in one of Denver's highest barrier-to-entry submarkets, Union Station, the site is one of only two remaining developable parcels in the entire submarket creating minimal to no future supply following the delivery of the project. Union Station continues to be one of Denver's most sought after residential neighborhoods given that residents gain access to an abundance of restaurants, retail, public parks, and employers (145,000+ jobs) within just footsteps from their front door. Furthermore, the site provides convenient access to mass transit being within minutes from Union Station (less than 5-minute walk) and I-25 (less than 0.5 miles). Positioned as a luxury high-rise micro-housing project, the community will be tailored to attract residents who desire a more affordable housing option in a submarket that has eclipsed average post-covid rents over $2,700 per month. Given the boutique deal-size, low all-in-basis, speed to market, micro-location, and a more affordable offering relative to current supply we believe the investment to be attractive and well positioned in the market.
RENT COMPARABLES
Over the last ten years, the cost of living across many urban metros has increased sizably; particularly with outsized housing costs consuming most gains in income growth. Given Denver’s extraordinary growth the cost of living index has increased almost 13% over the last 5 years, acutely outpacing the greater US cost of living average.
Strong rent growth has created a divergence between household incomes and rents making urban apartments unattainable to many residents. According to the U.S. Census Bureau, 49.7% of American renters (or 20 million households) are now classified as “cost burdened” – meaning more than 30 percent of their income goes to rent.
Greystar believes that in order to close the widening affordability gap, apartments must be delivered at a more tangible rental price point, making them attainable to a wider range of the population. Attainable housing is non subsidized housing that is affordable to renters that have incomes between 80 and 120 percent of the area median income (AMI), and represent the void in offering between traditional affordable housing and luxury apartments present in the market today. For example, in Denver, an attainable rental rate on average is $1,958 based on an AMI of 100%.
There is a common misconception that attainable housing equates to subsidized affordable or workforce housing that provides a lower quality finish in less desirable locations. RCLCO's consumer preference studies reveal that residents at all income levels preferred higher quality finishes, better location and robust amenities in exchange for a smaller unit size.
Since the end of the Great Recession, the hallmark of this apartment cycle has been luxury units located within the urban core. The Union Station submarket is no exception and is a place where larger, luxury, less-affordable apartments represent the majority of what has been delivered in recent years. Average rents in Union Station have surpassed $2,700/unit equating to renters needing an income of 140% of AMI on average ($98,000 annual income), which only serves 38% of the Denver population.11,12
Greystar believes that 19th & Chestnut is positioned to offer attainable housing without sacrificing location or quality by thoughtfully designing a smaller average unit size relative to the current submarket supply. By solving for affordability through design 98% of the project will provide an offering to residents whose salary is equivalent to 100% AMI. Furthermore, 47% of units will be attainable for residents making 80% of AMI. This will equate to 19th & Chestnut providing an offering that serves residents who make up to $40,000 less than the average renter in Union Station today (83% AMI or $58,000 vs. 140% AMI or $98,000).
This accessible price point is anticipated to cater to over 60% of the Denver population (nearly 70% increase in market reach when compared to the current submarket offering). In addition to the population in its entirety, new renters entering the market are largely priced out of Union Station. When surveying 22 occupations, the average starting salary in Denver is $68,500, just shy of 100% AMI.15 Given the lack of current attainable supply, Greystar believes that 19th & Chestnut will provide young working professionals access to housing in Denver’s most desirable submarket.
Additionally, the Project will benefit from the expertise of Greystar's global Urban Living platform which brings together best practices from around the world in an effort to curate a best-in-class product that provides attainable living within dense urban settings. The team supporting the Project draws upon expertise across design, development, investment, operations, technological innovation, branding, and customer insights to provide a holistic approach.
Greystar will leverage their global platform and expertise in attainable housing to provide a differentiated offering into the Union Station submarket. The design has been carefully curated to deliver key attributes that Greystar believes are important to today’s renter such as storage, fully equipped kitchens, natural light, and generous ceiling heights. Greystar believes that 19th & Chestnut will provide an offering that is not widely available in the Union Station submarket today, and has therefore has triangulated proposed rents using the two approaches described below:
Comparing to apartments that are of like-kind, high-rise construction and provide a similar product quality within the Union Station submarket.
Comparing to apartments that are of like-kind, high-rise construction and offer a comparable small format unit type outside the Union Station submarket (often in less desirable areas of Denver)
Part 1. Comps within Union Station that are high-rise construction and provide a similar product quality
It is the General Partner’s opinion that no existing apartment communities are of comparable unit mix to the proposed 19th & Chestnut development within the immediate submarket. Most communities are comprised of larger average sized units. As a result, the General Partner has compared rents for apartments that it considers similar product quality and of high-rise construction within the submarket. Additionally, it is the General Partners opinion that studio units in particular provide the most comparable offering to 19th & Chestnut given both price point and unit typology. The compared properties cited in this analysis include Union Denver, The Grand, and Platform at Union Station.
Given the heavy concentration of traditional 1 and 2-bedroom units within the submarket, only 14.4% of apartments offered today within the competitive set are considered studio units. This represents approximately 200 units of the nearly 1400 units delivered. Given their more modest square footage, averaging approximately 550 SF, small format studio units provide an attainable option for the price sensitive renter. The continued demand for such units has been demonstrated throughout the pandemic as studio occupancy has outperformed property level performance averaging 94-98% occupancy, resulting in an imbalance of available supply today.16 The General Partner believes these submarket fundamentals present an opportunity for 19th and Chestnut to deliver into a void of supply.
Furthermore, the scatterplot below highlights that 93% of competitive set’s units are priced above 19th and Chestnuts average underwritten rents of $1604, further highlighting the lack of attainable housing within the submarket.
Part 2. Comps outside of Union Station that are high-rise construction and provide a small format unit
It is the General Partner’s opinion that no existing apartment communities are of comparable unit mix to the proposed 19th & Chestnut development within the immediate submarket, therefore we’ve expanded our analysis to include those high-rise apartment communities outside of Union Station that provide a similar small format unit typology. It is worth noting that the General Partner believes the settings of these expanded comps to be inferior to that of the Union Station submarket.
Civic Lofts is a 14-story high-rise located within the Golden Triangle neighborhood situated roughly 2-miles from the Union Station submarket. Although adjacent to the Central Business District the Golden Triangle is viewed by the General Partner as less desirable given its lack of walkability to major employers, restaurants, retail, nightlife, sports entertainment, and mass transit. Given the inferior location rents are at a discount to like-kind comps within Union Station.
Turntable Studios is an adaptive reuse development originally built as a hotel in 1967 and renovated into apartments in 2015. Similar to Civic Lofts, the location of Turntable Studios is believed to be less attractive than 19th & Chestnut given its lack of walkability situated in the Jefferson Park submarket. Additionally, given the inherent constraints of a hotel conversion the older exterior façade, limited unit offering, and amenity package are viewed as inferior in the General Partner’s opinion to the program anticipated at 19th and Chestnut. The superior location and elevated offering of 19th & Chestnut is anticipated to demand a meaningful rental premium to Turntable Studios which has been reflected in the current underwriting.
SALES COMPARABLES
Recent trades of Class A multifamily apartments in Denver’s urban core reveal that cap rates continue to compress despite the global economic headwinds created by COVID-19. The sales comps outlined below show that cap rates have trended around 4.0% for Class A multifamily product in Denver's urban core and in other high barrier to entry submarkets. The Sponsor has assumed 70 bps of expansion between spot and development phase cap rates.
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