" In American cities where rental housing supply increased by 3 % in a given year , average rents fell by 2-3 %. Conversely , cities with no year-over-year increase in supply saw rents climb by 2-4 %. " www . aamdhq . org 19 | TRENDS JANUARY 2025
AFFORDABLE HOUSING
WHAT ' S A CAPITAL STACK ?
EQUITY 20-40 % OF PROJECT CAPITAL
Total : $ 340,000
Sponsor / Developer ' s Equity 4 % Sourced Locally ($ 10,000 per unit )
EQUITY 60-80 % OF PROJECT CAPITAL
Limited Partner Equity 21 % Sourced Globally ($ 70,000 per unit )
Mortgage Debt 75 % Sourced Globally ($ 260,000 per unit )
the Denver metro area , the cost of constructing a modest , four-story apartment building typically exceeds $ 340,000 per unit . To house just 100 families , a developer needs to attract at least $ 34 million in capital — a daunting figure that underscores the challenge of meeting the city ’ s needs .
THE FINANCING CHALLENGE
Understanding how developers finance these projects is critical to crafting housing affordability policies that work . Building the complex , multi-layered financing arrangement , known as a “ capital stack ,” involves two main components : debt and equity .
Debt , primarily sourced from banks or other institutional lenders , usually accounts for about 75 % of the capital stack . For a typical new apartment in the Denver metro area , this means lenders cover roughly $ 260,000 of the $ 340,000 per-unit cost . The remaining 25 %, or $ 80,000 per apartment , comes from equity capital provided by investors .
Contrary to popular belief , the developer ’ s financial contribution is modest . Developers can typically provide only 5-15 % of the equity , or roughly $ 10,000 per unit . The rest of the equity —$ 70,000 per unit — comes from outside investors .
Consequently , 96 % of the funds required to build a new apartment in Denver come from external sources , including lenders and investors . For that capital , developers must look beyond Denver ’ s borders to the global capital markets .
COMPETING IN GLOBAL MARKETPLACE
Investment capital is famously mobile . It flows where the risks are manageable , and the rewards are enticing . Capital for real estate investments is no exception .
CBRE Analytics reported that global real estate investment flows reached a staggering $ 1.62 trillion in the second quarter of 2022 alone . But capital is fickle . By the fourth quarter of 2023 , those flows had plummeted to $ 650 billion . Investors , spooked by rising interest rates and geopolitical uncertainty , pivoted to safer or more lucrative asset classes .
Between June 2023 and June 2024 , $ 341 billion flowed into US commercial real estate , with $ 92.9 billion directed toward apartments . Denver captured just 1 % of the national total .
To attract the capital necessary to maintain and expand its rental housing , Denver must be viewed as a good bet by
" In American cities where rental housing supply increased by 3 % in a given year , average rents fell by 2-3 %. Conversely , cities with no year-over-year increase in supply saw rents climb by 2-4 %. " www . aamdhq . org 19 | TRENDS JANUARY 2025