Chief Product Officer Neutral 25 W. Main St., Madison Employees: 24 neutral.us Madison-based development firm Neutral announced recently that it has closed on $133 million in bank financing for its downtown Milwaukee apartment project, The Edison. The closing sets up an early 2025 construction start on the 31-story tower, which would be the tallest mass
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Daniel Glaessl[/caption]
Glaessl: “It’s focused on one-beds and some two-beds and studios. It’s focused on smaller units, and that’s not a random decision, it’s based on very extensive market research. Those types of units are what we feel will be most successful in the market from a leasing perspective.”
What are your thoughts on the depth of the luxury apartment market in downtown Milwaukee as The Couture and 333 Water have had slower lease-ups than previous luxury towers?
“I generally don’t use the term luxury. Maybe I have a wrong association with this, but luxury for me is the stuff they build in Manhattan that’s like $6,000 a square foot. I think we are building market rate, and we are building market rate with a strong sustainability focus.
“The building is passive house and on the trajectory to be Living Building Challenge certified. The reason I’m saying this in this context is that the sustainability certifications actually have a very significant impact on the user, so in terms of clean air, water usage, electricity usage. A portion of the sort of lifestyle we are generating in the building is kind of a byproduct of our sustainability strategy, so you could say that it creates a luxury product. I would just say it creates a market-rate, sustainability-focused product.
“In terms of the absorption, we have done extensive market studies, including third-party studies, so we are certain that the units we are putting on the market in 2027 can be absorbed. The other projects, like 333 Water, Ascent and other projects, will be fully stabilized by then.”
What was the reasoning for increasing the building’s height twice since first proposed in 2021?
“Development economics, basically. The most straightforward example is an elevator has a certain capacity, and you need two elevators anyway for code reasons. So, with two elevators you can serve a building of 20 stories, and you can build and serve a building of 30 stories. If you divide the cost of the elevator by the number of units, with the number of elevators not increasing you can see that basically, per unit, the elevator gets cheaper. And this kind of development economics applies to a lot of the building infrastructure as well, like heating and cooling.”
Can you talk about the journey to finance the project?
“It was a complicated market. This post pandemic environment, both on the procurement side and the financing side, interest rates are significantly higher than they used to be, so that certainly didn’t make it easier for us to get the project underwritten and to put an architectural concept together that is feasible.
“Again, we have additional requirements in our company based on our sustainability-focused approach. So, we are very, very happy that we were able to close this financing (in early January) without sacrificing the mass timber aspect, without sacrificing the sustainability certifications, but it was certainly a tough road.”
How do you balance sustainability and making a project financially viable?
“Investors are predominantly looking at the returns, and the returns are somewhat a function of our cost. The sustainability comes at a premium, but we actually feel that sustainability strategies provide a better product, better user experience. These things are inherently linked.”
How did financing this project compare to financing your two projects in downtown Madison?
“It’s the same team. So, we have (Little Rock, Arkansas-based) Bank OZK, who is the construction lender on Baker’s Place, and (Chicago-based) Pearlmark, who is the mezzanine lender on Baker’s Place. The relationships we have built over the years with that team were instrumental in closing The Edison.”
Neutral held a lot of investor meetings for the project and pretty widely circulated invitations to people that don’t typically invest in real estate, sources have told BizTimes. Why did you take that approach and was it successful?
“For the equity portion of the financing, we are trying to go beyond typical real estate financing strategies. A portion of the equity comes from us, the partners of the company, a portion comes from trusted investors, but then a portion comes from the community. We are approaching the community with the mailers, and we’re doing it because it’s successful. It’s a significant percentage of the equity stack that we’re able to procure with that strategy.
“What I really like about that is that it gives people who typically don’t benefit from the real estate development in their city a chance to participate. It’s somewhat the counter strategy to gentrification. So, it’s basically allowing the neighborhood to participate in the development that happens right in their front yard. Next to The Edison is a small condo complex, and we actually had some people from there also approaching us. I mean, that’s a relatively small number, of course, but it’s a really nice case study.”
Were there any other ways you tried to attract atypical real estate investors?
“We partnered with Charles Schwab, so people with a Charles Schwab account, they can buy shares directly in the process without going through any complicated process of a separate investment. It also makes investment of the projects much, much easier.
“In terms of process, it makes it similar to almost investing in a REIT, which is a much more simple experience. Typically, investing in a private real estate deal requires you working with legal documents, going through a longer paperwork process.”
