By Sean Ryan
Stepping into the void left by gun-shy private lenders could be the best way for Milwaukee to brighten its development horizon.
The first step came with the city’s decision to give a $9.3 million loan to the $55.2 million Moderne project, which will have 203 apartments and 14 condominiums. It was a unique move for a city that in the past has not loaned money to projects.
In the past, such loans were not necessary.
“The big difference is, I think again at least with the Moderne, is the city’s willingness to look at different forms of economic development to bring construction and growth and jobs into the city,” said Milwaukee Comptroller W. Martin Morics.
If Milwaukee wants to remain competitive in the development game, the city must continue aggressively chasing projects private lenders avoid, said Rick Barrett, developer of the Moderne. Without those new projects, which, in turn, improve Milwaukee’s leverage for more projects in an increasingly conservative nationwide market, the city will be left in the dust, he said.
“The city of Milwaukee, with the change in the capital market, and cities around the nation are going to be competing for developers and development projects for the next five to 10 years,” Barrett said, “and that is going to be a very competitive place to be in.”
The lending climate is the result of the nationwide economic slump, said Cheryl Malloy, consultant to the Mortgage Bankers Association. People without jobs cannot afford rent, and the demand for apartments decreases as people who would have rented alone take on roommates.
The number of private lenders interested in investing in new projects has dropped, Barrett said, because those lenders can make more money buying foreclosed properties that are already built. And those lenders willing to back new construction want more proof that there is a demand for housing in the market.
“Where underwriting used to be done to a rosier picture,” Barrett said, “I think underwriting is now done with a worst-case scenario.”
Those lenders also want bigger and better guarantees they will get a return on their investments in case projects do not play out according to plan. So the competition to get support from private lenders extends to public programs, such as a U.S.
Department of Housing and Urban Development loan guarantee program that backs private loans. Barrett used the program to back a $41.4 million private loan he received from the AFL-CIO Investment Trust to pay for the Moderne.
The HUD program, which is run by the Federal Housing Administration, is the key to getting investors interested in large multifamily housing projects, Malloy said. In the fiscal year ending September 2009, the national program had paid for 90 projects with $1.4 billion, she said.
“I don’t really know that there is much new construction at all without FHA,” she said.
“There’s no question that real estate is a locally based business,” Malloy said, “so they look at each location, even within a city, differently.”
Morics said Milwaukee, when venturing into a loan private lenders would not touch, was careful to protect its money and make it clear one loan does not represent an open offer to all future developments. But he said he recognizes the need to start projects now, rather than letting the market slump take Milwaukee down.
“If I were going to bring new condo projects to the market,” Morics said, “I’d say I’d want them for sale two years from now, which means you need to put the spade in the ground now.”