To merge the institutional asset management process with the flexibility and responsiveness of entrepreneurial hands-on ownership.

Capital Real Estate principals and management team have reviewed the management techniques, successes and failures of more than $4 billion in apartment assets. Through this experience CRE has developed its own asset management process and believes this process assists its partners and clients in achieving their investment goals.

CRE is experienced in the selection of third party vendors (such as property management companies), reviewing budgets, renegotiating service contracts, contesting property taxes, coordinating capital improvements and the securing or restructuring of debt. CRE is strategically positioned to analyze the timing of any proposed disposition of the asset.

Communication with the investor through monthly progress reports and an annual report to investors keeps CRE and their investors on the same page.

It is CRE's goal to provide the best asset management in the apartment industry. With this goal in mind, CRE's investors will reap the benefits of maximizing property potential and strategic acquisition and disposition timing.

INVESTMENT STRATEGY

The Opportunity

Real estate values have fallen nationwide since 2007 as the economy has weakened. Low demand, higher investor return requirements and few financing options have hammered commercial property values, and many assets nationwide are now worth less than their first mortgages. While apartment properties have fared better than commercial assets, values are certainly depressed.

Down markets present opportunities and a parallel can be drawn to the recession of the late 1980s. The Denver apartment vacancy rate hit 14% in 1986 and rents dropped 23%. Apartment values fell dramatically. As the market recovered in the 1990's, the investors who bought apartments hit the jackpot, virtually regardless of where they bought or what they paid. The opportunity we see in the market today is similar. We see great demand and very little future supply. What is different than almost any other U.S. apartment market is the current vacancy rate in metro Denver. After increasing to over 9% during 2008, the current vacancy rate is 5.3%. However, a diverse and resilient local economy and a limited supply of new apartments will ensure continued recovery. Apartment financing terms have rarely been better. It is an excellent time to buy apartments in Colorado.

Why Apartments?

Apartments differ from other commercial asset classes because they are fundamentally a cash flow business. By contrast, in the case of commercial assets like office buildings and retail centers, investors typically make their returns - or fail to make them - upon disposition. Tenant improvements and leasing commissions can soak up cash flow and, as we have recently seen with Circuit City and others, even "credit tenants" can fail.

Apartments fundamentally present lower risk. There are no tenant improvements or leasing commissions and a single tenant can't create a vacancy problem. As long as debt service is well covered, it is unlikely that either vacancy or dropping rents will result in a crisis, especially if one buys in a market that is already depressed.

Apartment demand is expected to increase significantly over the next 20 years. The national home ownership rate rose to 69% in 2006 from the historical norm of 62%. Today, the rate is falling due to tighter credit, a weaker economy and a growing belief among potential buyers that owning a home is not a great investment. Experts predict that the home ownership level will fall to at least 62% and probably further. Each 1% percent represents one million new apartment renters on a national basis.

At the same time, rising investor yield requirements have dramatically increased the rents required to support new apartment construction. Of course, the rents required to support urban style, high density construction with structured parking are far higher. Industry experts expect a low level of apartment construction for several years and ultimately a shortage of apartments nationwide until rents rise enough to catch up with the economics of development.

Why Denver?

The Denver economy is poised to weather this recession better than most U.S. markets. Although the local unemployment rate has increased to 7.93%, it still remains far below the national rate of 9.58%. Unlike the local economy of the 1980s, which was overly dependent on the energy sector, Denver now has a remarkably diverse economy. Denver has the largest concentration of federal workers outside of Washington D.C. Other recession resistant industries, including oil and gas, renewable energy and healthcare, are helping to stabilize Denver's economy.

The Denver apartment market is also stronger than other cities. Although there has been a record number of single family foreclosures, the "shadow market" of foreclosed homes and condominiums has had little impact on apartments because there was no significant price run up after 2001 and hence little speculation. The foreclosures in Denver have mostly been owner occupied so the vacancy in rental homes has been below 5%. Now that the foreclosed homes are being sold to new residents, many of the foreclosure victims are returning to apartments. The city's demographics have also added to demand. Denver has a larger "echo boom" population than cities of similar size because a tremendous number of "baby boomers" moved to Colorado in the 1970s. Their children are now renting apartments. This trend will continue as 360,000 Denver residents will turn twenty years old during the next 10 years.

The development pipeline of new apartments in Denver is almost non-existent. Approximately 600 new apartments have been delivered in 2010, representing 0.21% of the supply, and only 1,100 units are scheduled to be delivered in 2011. As discussed above, higher rents will be required to finance new apartments, and there are significant barriers to apartment development in Denver. Few zoned sites exist in decent locations and rezoning ranges from difficult to impossible. Land costs are high and likely to remain so, since few land owners have encumbered their holdings with debt and therefore there is little motivation to sell at lower prices. Most of the attractive sites in the market require expensive high density construction and must have much higher rents, in the $1.75 to $2.00 per square foot range to be viable.

Opportunities in Denver will be attractively priced but will not match the deep discounts that will be seen in other markets, such as Phoenix. Only a handful of Colorado properties are distressed, largely because rents have been stable. Although values are certainly depressed, few apartments were bought with high leverage and mezzanine debt. Ironically, Denver's cap rates were too low and prices too high for such structures to be viable. Most apartment purchases in Denver involved low leverage of 50% to 70% and longer term loans. Apartment properties in Colorado are worth less than they were in 2009, but most are covering debt payments. Therefore, the owners have no motivation to sell. And, unlike most other growth markets, Denver is not overbuilt.

Thanks to a stronger local economy and balanced supply and demand, apartment values in Denver can be expected to recover much more rapidly than in other markets. The population continues to grow and employment will recover sooner, thanks to the unique mix of industries. The discounts may be less than markets like Phoenix but the upside is sooner and more certain.

Conclusion

Deep discounts in real estate only come along so often. The present economy presents the best buying opportunity we have seen in over 15 years. Prices are depressed and the market will soon see significant upward pressure on rents. Thanks to Fannie Mae and Freddie Mac, financing is available at some of the best rates and terms in history. These current market conditions are perfect for multifamily acquisitions.