Real Estate: Market correction reshapes downtown condo scene

When the downtown Milwaukee condominium market took off in the late 1990s, demand was so high that some developments sold out before construction began.

Those heady days for the downtown Milwaukee condominium market seem like a distant memory now. Developers eager to meet the demand for downtown condos created a building boom that eventually created an oversupply of condos that now floods the downtown market.

“We have never been in equilibrium in the downtown Milwaukee condo market,” said Blair Williams, owner of WiRED Properties and a former Mandel Group vice president. “The boom was driven by the lack of product. We went from too few to too many.”

The collapse of the national housing market, followed by the recession and the financial industry crisis, have brought downtown condo development nearly to a halt and sales have slowed dramatically.

“There is no question about it the condo market is far slower today,” said Boris Gokhman, the owner of one of the city’s biggest downtown condo development firms, New Land Enterprises LLP.

The oversupply of downtown condos has spurred on a market correction that has affected several projects:

In January, Dallas-based Gatehouse Capital decided to drop its Milwaukee Hotel Palomar and Residences development proposal that was planned for the Park East corridor. The $150 million, 22-story development planned for the northwest corner of West Juneau Avenue and Old World Third Street was to include 63 luxury condominiums and a 175-room boutique hotel. The project struggled to sell the high-end condos and city officials declined the developer’s $18 million tax incremental financing (TIF) request.

The Staybridge Suites hotel/Residences on Water development, being built by Park Ridge, Ill.-based Economou Partners at the southeast corner of Water Street and Juneau Avenue, has shifted the 31 condominiums in the project to apartments and is adding a few suites to the hotel. Completion of the construction project has been delayed several times.

The proposed Moderne development, which would be located southwest of Juneau Avenue and Old World Third Street, has reduced its condo inventory. The number of condominiums in the proposed building has been cut from 81 to 33. The number of executive apartments in the building has been increased from between 60-84 to 154.

Mandel Group’s 61-unit Domus condominium development, planned for the Third Ward, has been delayed indefinitely.

Some large condominium developments have been built but still have large numbers of unsold units including the 12-story, 147-unit The Point on the River (formerly known as First Place on the River) project located on the confluence of the Milwaukee and Menomonee rivers at 106 W. Seeboth St. and River Renaissance, the seven-story, 82-unit condominium building located southeast of Water and Erie streets in Milwaukee’s Historic Third Ward.

The First Place on the River project was placed into receivership a year ago. The original developer, KeyBridge Development, was replaced with Mandel Group to finish the re-named project. Mandel Group is optimistic The Point on the River will be more successful in its hands. So far 60 of the development’s 147 units have been sold.

“Unlike a lot of real estate investments that are now realized to be of dubious merit, this project benefits from a lot of positive attributes and is receiving a tremendous reception in the marketplace,” said Mandel Group chief operating officer Robert Monnat. “We are enjoying the highest velocity of sales of any condominium development in Milwaukee. We are convinced that this will be the comeback kid of the year story.”

River Renaissance has “a number” of unsold units, said Evan Zeppos, spokesman for the project’s lead developer, Bob Schultz. “We are going to consider both rental options and block sale (of unsold units) for convert to rental,” Zeppos said.

Construction was recently suspended on Renaissant Development Group LLC’s 284-unit Park Lafayette condominium development at North Prospect Avenue and East Lafayette Place. So far only about 30 percent of the units have been sold.

Landmark on the Lake, the 275-unit building at 1660 N. Prospect Ave., which was converted from apartments to condominiums is now offering some units for rent.

The cancelled and suspended projects, unsold units and shift to apartments are all reactions to the oversupply of downtown condos. With the economy mired in recession it could take awhile for the downtown condo market to absorb the oversupply.

“It could be years,” Williams said. “It’s not ‘year.’ It’s definitely ‘years.’ I just don’t know how plural that statement is. It will take a long time.”

Gokhman is more optimistic and thinks the downtown condo market could achieve equilibrium in a year or two.

“I hope closer to one year,” he said.

When Mandel Group did a market study in June it found that the downtown condo market had a 22-month supply, Monnat said. In other words it would take 22 months to sell the unsold units in existing, under construction and proposed projects. A normal market supply would be about 8 to 12 months, he said.

Downtown condo sales dipped from 562 in 2006 to 475 in 2007 and 142 in the first half of 2008, Monnat said.

But the state of the downtown market is looking up, Monnat said. The elimination of some projects, such as the Palomar and the re-tooling of other projects, including The Moderne, has eased the supply of luxury condos.

The downtown condo market should also get a major boost from an $8,000 first time home buyers tax credit included in the federal stimulus package, Monnat said. That will help condo sales in the $150,000 to $250,000 range and will help existing condo owners sell and move up to more expensive units, he said.

“(The tax credit) should really jump-start the bottom end of the market,” Monnat said. “And that’s where most of the (sales) activity has been.”

The tax credit combined with low interest rates and the buyer’s market with low condo prices makes this an ideal time to buy which could lead to a “whiplash” recovery in the downtown condo market that will surprise people, Monnat said. Cancelled and adjusted developments have already reduced the downtown market’s condo supply, which is now probably closer to 14 months, he said.

However new condo development is unlikely to occur because banks remain reluctant to lend, Monnat said.

The biggest problems for the downtown condo market is that suburbanites that want to move downtown are having trouble selling their homes and many potential condo buyers are unable to obtain financing because of the financial industry crisis, Gokhman said.

Young professionals that don’t have a home to sell and are shopping in the lower price range are able to get loans for a condo if they have good credit ratings and some money for a down payment, Gokhman said. The market at the high end, though small, also remains strong because wealthy buyers are less affected by the credit crunch, he said.

The middle market for downtown condos, priced between $400,000 and $700,000, has been hurt the most because most of those buyers need to sell their existing homes and are having trouble obtaining credit, Gokhman said.

With an obvious oversupply, a slowdown of downtown condo development for awhile is healthy, he said.

“I think instead of building condominiums, we have to sell them for a year or so,” Gokhman said.

New Land is working on a new condo development that he hopes will break ground next year. The project, The Transera, would be a 26-story, 35-unit building at 1550 N. Prospect Ave. Each unit costs more than $1 million. The small number of units and high end market demonstrates that “Transera is not a typical project” and could be a success despite the oversupply in the overall downtown condo market, Gokhman said. New Land needs to pre-sell about 20 of the units in the Transera to obtain construction financing, he said.

But Williams, like Monnat, says any new condo development is unlikely to break ground with the financial markets in turmoil.

“I don’t think anything is going to happen that has condos,” he said. “They can’t get financing.”

Meanwhile, apartment occupancy rates in the downtown area are healthy and developers may have more success building apartment buildings than condos, Gokhman said.

“I think apartments are a good product for (developers) to produce,” he said. “People are renting.”

Downtown condo sales are so slow, some units are being offered for lease, including units at Landmark on the Lake. If a lot of condos are converted to rental units that could put pressure on the apartment market, Williams said.

The presence of so many condos available for lease makes it harder to assess the state of the downtown condo and apartment markets and just how many units are available for sale and for lease. Some units that are available for lease now, might be sold later and some that are for sale now might be leased later if they can’t be sold.

“I think that’s what is making the market more complicated,” Williams said. “The apartment market has this underlying issue it is going to have to resolve. It’s easy to say there are too many condos. It may (also) be fair to say there are too many housing units. It will take economic recovery of some shape or form to absorb the housing units (downtown) Milwaukee has in inventory.”

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