The recession has put a major damper on real estate development, especially for major projects, which are struggling to obtain financing in the middle of a major credit crunch.
A perfect example of that is the $158 million Milwaukee Hotel Palomar and Residences development that Dallas-based Gatehouse Capital wanted to build in the Park East corridor. Gatehouse recently cancelled the project, saying it could not obtain financing. The developer asked the city for $18 million in assistance for the project, but that request was denied. In addition, the project struggled to sell its 66 condos.
Meanwhile, across Juneau Avenue, the developers for the proposed 31-story, $75 million The Moderne development remain optimistic that their project will get built, despite the failure of the Palomar project and the challenges posed by the recession.
The Moderne recently obtained a $1.5 million equity investment from four investors from Hong Kong, said Rick Barrett, managing partner for The Moderne LLC. Barrett’s partner in the development, Tan Lo of Lo Enterprises LLC, has connections with the Hong Kong investors, who may invest more in the project later, Barrett said.
The new financing dramatically increases the chances that the project will get built, Barrett said. The funds will help attract more investment to the project. It also provides funding to create more detailed construction documents which are necessary to obtain financing, and it will pay for a $250,000 ad campaign this year with First Weber.
“We’re very, very excited,” Barrett said. “This is a huge step for us.”
The project now has obtained $5 million in equity financing and needs to attract another $15 million. In addition, a $40 million construction loan will be needed.
That sounds daunting in this economy, but Barrett, who developed some of the condominiums on the Commerce Street Beerline, is confident that The Moderne will break ground this year.
“We’re building this thing in ‘09,” Barrett said. “I’m confident of it. We’re going vertical. We have a fundamentally sound project. We have banks and investors interested in the project. We definitely have interested parties in the construction loan.”
To help attract financing, the developers have made some adjustment to the interior mix of the building, which was designed by Matt Rinka of Milwaukee-based Rinka|Chung Architecture Inc.
The number of condominiums in the building has been reduced from 81 to 33. The number of executive apartments in the building has been increased from between 60-84 to 154.
The changes in the unit mix of the building could help the developers in their effort to attract financing. Condominium sales have slowed dramatically downtown since the housing market collapsed in 2007, and the financial industry crisis of 2008 has placed even more stress on that market.
Meanwhile, apartment occupancy rates in downtown Milwaukee remain well above 90 percent according to most reports.
So far, 13, or about 40 percent, of the 33 condos in The Moderne have been reserved.
The recent cancellation of the Palomar project and shifts from condos to apartments at The Moderne and the Residences on Water project have removed 145 condominiums from the downtown market, which some real estate industry observers say has a glut of condo inventory.
It will take 22 months to build The Moderne, so its developers expect the recession to be over when the building project is complete. The site will be ready to begin construction in May, subject to financing.