For the past year, developer Stewart Wangard has been meeting with commercial lenders and taking steps both individually and as a company to become more desirable as a customer.
His company, Wauwatosa-based Wangard Partners, has deleveraged many of its properties and is now focused more on cash flow and the quality of its portfolio, Wangard said.
Commercial banks are becoming more selective and enforcing stricter guidelines for multifamily real estate loans following concerns about overbuilding. How this will affect the apartment building boom in the Milwaukee area will depend on developers’ ability to secure financing through other channels.
Wangard and many other multifamily developers are preparing for the change to keep their momentum going.
“The banking environment is going to return to normalcy,” Wangard said. “We’ve benefitted from extremely low interest rates and while as a borrower we appreciate that, we also realize it was temporary.”
Wangard, whose projects include Freshwater Plaza, a mixed-use development with 76 apartments under construction in Walker’s Point and the Avenir Apartments, with 104 units in 2015’s phase one and 82 units in phase two underway in the Park East corridor, has been to Chicago four times in the past 60 days to meet with lenders.
“Our company has a longstanding relationship with local banks but as we have become more active, we’ve been traveling more,” Wangard said. “As a company, we’ve put standards in place and been working for a year for efficiency in capital markets. Rather than saying this is something we’re concerned about, we’re looking at this being a return back to normal times.”
John Stibal, director of development for the City of West Allis, doesn’t believe the market has hit the multifamily bubble, but said banks will begin requiring developers to have a 75 or 70 percent loan-to-value ratio instead of 80 percent, which had been the case.
“It’s going to make deals harder to do, because in order to bring equity into the project, the investors are going to expect a certain return,” Stibal said.
This could potentially lead to a request for more municipal assistance in the form of tax increment financing, but just as the banks are getting tougher, so will the public sector, Stibal said.
“Apartments had been a safe harbor and multifamily is still a solid bet, but banks are just getting more cautious,” Stibal said. “Some are getting too many in their portfolio. Markets fluctuate all the time. Multi-family is the hot commodity. In a year, industrial buildings will be the next hot market for people to invest in.”
Other options for financing multifamily developments could include private equity, life insurance company funding, mezzanine financing, New Markets Tax Credits and TIF.
Mark Henschel, vice president of commercial banking at Milwaukee-based Park Bank, recently met with a client who wants to build a new apartment building in the City of Milwaukee, but doesn’t know what the internal response will be.
“In the last year-and-a-half, I would send out a proposal and it would be a blood bath of six banks trying to win it; I can see that has changed a bit,” Henschel said. “It’s not dog-eat-dog amongst the banks and the banks ultimately drive the project. No one is going to pay cash to build a $20 million building.”
Milwaukee-based multifamily housing developer Mandel Group Inc. currently is building the 132-unit DoMUS apartment development in Milwaukee’s Historic Third Ward. In January, Mandel began work on the fourth phase of its The North End project, which will add 155 apartments to the 650-unit mixed-use development along the Milwaukee River Downtown.
Tim Gokhman and Jim Wiechmann built Rhythm, a seven-story 140-unit apartment building at 1632-40 N. Water St. and farther north, Atlantic Realty Partners, an Atlanta-based developer, is constructing a four-building, 443-unit luxury apartment development at the Gallun tannery site at 1781 N. Water St. on Milwaukee’s East Side.
A lot of apartment projects have been announced, but Henschel doesn’t believe they all will be built unless they are in select areas, such as the Third Ward, where there is always demand.
“On North Water you have Wangard and Mandel; they are established and I’m sure will do well, but some of the others will be tougher,” he said. “(Walker’s Point) is interesting. There are a lot of people acquiring buildings with intentions of development and I’m not quite sure what will happen there.”
Developers interested in building in smaller markets, such as Plymouth, Lomira or Hartland, could have more success in securing a loan, Henschel said.
“It’s not a broad brush stroke of ruling out the City of Milwaukee, but it’s a little tougher because the mass of units coming online (there),” he said.
Another issue developers are facing is the increase in long-term interest rates, which have increased 100 basis points since August, said Patrick Lawton, senior vice president, director of investment real estate at Brown Deer-based Bank Mutual Corp.
Lawton said looking at the 10-year treasury rate chart, the low point was 1.5 percent on July 1, 2016. On Dec. 23, the rate was 2.55 percent. However, looking at the broader period of the past 30 to 40 years, the average is between 5 and 6 percent.
“People have gotten used to low rates and a lot of times, this is now what they are willing to pay,” Lawton said.
Despite the increase in long-term interest rates and the pullback in commercial lending, Lawton believes the environment is still relatively favorable for developers.
“As favorable as 12 months ago? Perhaps not,” he said. “It’s one of those items to watch. If we get another 100 basis points, it could cause developers to rethink a project.”
