Real Estate: Downtown apartment market loses some steam

Three apartment buildings are  under construction near downtown Milwaukee.

1857 E. Kenilworth LLC is building Latitude, a 90-unit apartment building with 7,500 square feet of retail space southwest of North Farwell Avenue and East Kenilworth Place on the east side.

Milwaukee-based Mandel Group Inc. is building a 76-unit apartment building called Corcoran Lofts that on the north side of East Corcoran Avenue, adjacent to Mandel’s Gaslight Lofts development in the Third Ward. The building will also have 3,400 square feet of retail space.

Developer Robert Joseph is building an 81-unit, five-story apartment building called Jackson Square at the northwest corner of East Menomonee and North Jackson streets in the Third Ward. The building will also have about 9,000 square feet of retail space.

At the same time, developers are seeking loans from the city of Milwaukee for two proposed high rise downtown apartment projects.

The 30-story The Moderne development at the southwest corner of North Old World Third Street and Juneau Avenue would have 203 apartments, 14 condominiums, 204 structured parking spaces and 7,500 square feet of retail space. The project is seeking loans from the city of $9.3 million.

Milwaukee-based New Land Enterprises LLP plans to build Bookends North at the northeast corner of East Kilbourn Avenue and North Van Buren Street. The proposed 19-story, $70 million New Land building would have 224 apartments, 292 structured parking spaces and 3,000 square feet of retail space. New Land is seeking a loan guarantee from the city for $3 million to $4 million.

Can the apartment market for the downtown Milwaukee area support all of these developments?

A year ago, the downtown area’s apartment occupancy rate was healthy, at about 93 to 95 percent, said Robert Monnat, chief operating officer of Mandel Group Inc. This year, the occupancy rate has declined to just under 90 percent, he said.

That still sounds high, but apartments need to have a high occupancy rate to generate a decent rate of return for building owners, Monnat said.

“On a per square foot basis the yield for an apartment building is not as high as for office space or for retail space so you have to have a higher occupancy rate,” he said. “For apartments (around 95 percent occupancy) is really where you want to be. To really justify the investment, you have to have high occupancy.”

The credit crunch has made it very difficult for developers to obtain financing for projects, which is why New Land and The Moderne say they need city loans or loan guarantees for their projects. However, Monnat said even in a normal financial market developers would struggle to get financing for a new project with the dip in occupancy rates this year. To increase demand for apartments Milwaukee needs job growth or population growth that results in the formation of more households, he said.

Mandel Group recently filled all 83 apartment units of One, the first building in it’s The North End development. It took about 10 months to lease all of the apartments in the building. But despite the success of One, that is not necessarily indicative of the health of the downtown apartment market, Monnat said. The building has high-quality, condo-level finishes, unusual in downtown Milwaukee apartment buildings, and is the first new luxury apartment building downtown in about 2 years.

“We’re very fortunate that it leased up,” Monnat said.

In addition to the dip in overall occupancy rates, rental rates have been flat for downtown apartments causing further challenges for building owners, he said.

“We are working twice as hard to fill our apartments and keep our apartments filled,” Monnat said. “They are still generating a return, but not as much as they did last year.”

Still bullish

Nevertheless, some developers remain bullish on the downtown Milwaukee apartment market.

“The vacancy is low,” Joseph said. “I think the apartment market is strong. Unless something changes, I think apartments will remain strong.”

The credit crunch has made it harder to purchase real estate, Joseph said, making apartments more attractive for some residents.

In addition, some people simply do not want to own a home, said New Land director of sales and marketing Tim Gokhman. Some apartment owners are living here only temporarily. Others do not want to put up with property maintenance in a condo. Still others are thinking about buying a downtown condo, but they want to try out the lifestyle first by renting, he said. Quality apartment developments can attract residents that fit some of these criteria.

“When you look at really well-designed properties in really good locations, those buildings are full,” Gokhman said.

“If you make niche products in neighborhoods that have residential services, shops, restaurants, destinations, people are still interested in living in these types of neighborhoods,” Monnat said.

New Land’s Bookends North project will go one step further offering an ultra luxury apartment product that is not currently available in downtown Milwaukee, Gokhman said. That untapped market niche will make the project successful, he said. Features will include high rise views, hardwood floors, concrete structural soundproofing, a swimming pool, plus concierge and security services 24 hours a day, 7 days a week.

“We’re talking about a different class of apartments,” Gokhman said. “The product currently doesn’t exist in the marketplace.”

Wired Properties owner Blair Williams said that developers of apartments under construction, or in the planning stages, are not necessarily concerned about the state of the apartment market today.

“They are more interested in what the apartment market will be 2 years from now,” he said.

‘Shadow market’

A major issue hovering over the downtown Milwaukee apartment market, that could cause havoc in a few years, is the so-called “shadow market” of unsold condominiums being converted to rental units. Sales of downtown condos have slowed to a trickle and some projects with large amounts of unsold units may decide to lease instead of sell them, which could significantly increase the supply of available apartment units downtown.

The project that could potentially have the biggest impact in the shadow market is the Park Lafayette development. The 292-unit condominium development, with two 20-story towers, is located at North Prospect Avenue and East Lafayette Place on the east side. Only a handful of the units have sold and its lender, New York-based Amalgamated Bank has filed a $100 million foreclosure suit against the developer, Oak Brook, Ill.-based Renaissant Development Group. The bank is asking the court to appoint Monnat as a receiver to complete the project. As a result, Monnat said he could not comment on Park Lafayette.

It would take several years to sell all of the unsold units at Park Lafayette, Williams said. Therefore to generate some financial return on the project the bank may turn to leasing the units.

“It’s hard to know how (units in the building) wouldn’t be (rented),” Williams said. 

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