BUSINESS

Downtown tough place for housing

Bowdeya Tweh
btweh@enquirer.com
  • Apartment high-rise planned at Fountain Place on drawing board until financing done.
  • Downtown residential developers face high hurdles with construction costs, providing enough equity.
  • Residential opportunities around urban core to grow but price for renters, buyers a concern.

Developers and city officials have been quietly talking for a few years about adding 168 luxury apartments on top of Fountain Place, the Downtown building featuring Macy's and Tiffany & Co.

Think sweeping views and units with high-end finishes. Living space in a revitalizing urban core, close to restaurants, professional sports venues, art galleries and theaters.

"We know it's doable," said Arn Bortz, partner at Mount Adams-based Towne Properties.

Despite the prime location on Fountain Square and demand for high-end Downtown rentals that far outstrips supply, the plan remains on a drawing board in part because of the difficulties of building rental housing in central Cincinnati.

For starters, it can be really expensive. High-rise construction requires costly reinforced steel and specialized expertise to use cranes safely in confined, populated spaces. Additional pricey structures to support the development, such as a parking garage, may have to built.

Multiple lending and equity sources usually are needed to put together sufficient financing to do the job. Then, apartment rents have to be high enough to provide a return on investment, but not so high that people can't afford them.

Add in the political considerations – often a requirement to advance a city project – and it's easy to understand why Downtown projects are few and far between.

"You want to have a building that's worthy of the location," Bortz said about the Fountain Place plans. Yet the realities of such a building are daunting. "We haven't gotten to the point where it's ... well-received by lenders."

Pent-up demand for housing: 'There's room for everyone'

Local real-estate analysts say Downtown, Over-the-Rhine and Pendleton can easily absorb the estimated 1,500 new apartments and condominiums planned or under construction.

For instance, General Electric Co. just announced it will build new offices for up to 2,000 employees at an as yet to be determined location in Southwest Ohio. One potential site is at The Banks in Downtown. Even if GE doesn't build there, about 650 company employees are expected to occupy temporary Downtown office space until the new offices are built.

Mayor John Cranley said the number of residents around Downtown could double in the next five years. About 5,660 people lived Downtown, according to the 2010 Census. Add up numbers from Pendleton, Over-the-Rhine, and the East End and West End, and the population count rises to more than 21,000 residents.

"The first one that gets their building out of the ground is going to win," said Keith Yearout, a CBRE real estate investment specialist in Cincinnati.

Rental and condominium developers are both concerned with cost, but not so much conventional financing is available to build condos. Most buyers want to see something built before commiting to a purchase since most lenders are reluctant to finance a project without presold units.

Four apartment projects are already under construction in and near Downtown:

• AT580, Sixth and Walnut streets: 179 units when complete later this year.

• Broadway Square, near 12th Street and Broadway: first phase to offer 39 units as soon as year's end.

• Mercer Commons, Walnut between 13th and 14th streets: second phase is to add 67 units.

• Seven at Broadway, Seventh Street and Broadway: 111 units should be ready in early 2015.

Two other large projects also are in the works:

• Hamilton County officials announced Thursday that construction on 291apartments planned for west of National Underground Railroad Freedom Center at The Banks, could get underway by the end of the month.

• Work on a luxury high-rise tower at Fourth and Race streets could get started this summer. It won't be ready until 2015 at the earliest.

Bortz said all those developments are "a drop in the bucket" compared to true demand.

"At this point, there's room for everyone," said Dave Lockard, a CBRE multifamily real estate analyst in Cincinnati. "Our supply pipeline is not that voluminous compared to peer markets as Indy and Columbus."

It's not uncommon for projects to take several years to move from concept to completion, Lockard said. With that in mind, developers now have to consider what demand will be in 2016, 2017 and 2018 when making investment decisions.

One thing that helped redefine what rent Downtown apartment units could fetch was the opening of Current@The Banks, Lockard said. Monthly rents at the 300-unit upscale development for studio, one- and two-bedroom units range from $1,225 to $3,205. It is fully occupied.

Derek Bauman, an Over-the-Rhine resident and supporter of urban living, said he believes the lack of supply is helping drive prices up for potential buyers or renters. He said there's nothing wrong with developers' pursuing higher prices, but the city could function best if there were a stronger mix of updated affordable housing.

"By creating a condition where we are providing housing for as many people to live Downtown as possible, now you're talking about job creation, economic development, all of that," Bauman said.

City adds critical pieces: 'We'll do everything we can'

If it were cheaper to do, developers would rush to redevelop the spate of outdated office space or build gleaming new towers Downtown where they could command among the region's highest rents. Even $2,000-per-month rent doesn't always translate to hefty profit margins, though.

"You have to get a return on your equity," Yearout said.

NorthPointe Group partner and real estate developer Rick Kimbler said Cincinnati has had low or no population growth for many years, which has caused many in real estate to seek returns elsewhere.

Kimbler, then with Al. Neyer, worked with North American Properties to redevelop a building bought for $475,000 in 1998 at 325 E. Eighth St. to hold 45 apartments units. The East 8 Lofts cost between $5 million and $7 million to develop, Kimbler said. Al. Neyer and North American Properties provided equity, the Cincinnati Equity Fund provided a $1.5 million loan and the developers borrowed remaining money for the project.

Kimbler said the city provided a critical project piece by granting residents free parking in a garage for about five years. Also, there was a real estate tax abatement.

"We literally said, 'We are going to put our toe in the water,' " he said. "We don't know how the costs are going to come out. We probably won't make a lot of money, but not lose a lot of money."

Tax credits, loans and grant programs at the federal, state and local level are among the ways developers stack capital for projects. The Cincinnati Equity Fund and Cincinnati New Markets Fund, both managed by the Cincinnati Center City Development Corp., and the nonprofit Cincinnati Development Fund are popular local equity pools tapped to provide project financing.

City support for projects ranges from letters of support to lobbying for a tax increment financing district to grants or forgivable loans. Cincinnati's budget issues are well documented, but Jeff McElravy, who works on the city's economic development team, expects the city to continue efforts to spur residential projects.

"If you have a good project that doesn't quite work on its own, come see us and we'll do everything we can to help make that project happen," said McElravy, interim director of the city Department of Trade and Development.

Developers could also find an investor with deep pockets to make projects work. Carter and the Dawson Co. successfully courted USAA Real Estate Co., which has $12 billion in assets under management, to be their equity partner in The Banks development on Cincinnati's riverfront.

"We think the market is looking for new, well-built, well-managed rental residences, and we think we can provide them at an appropriate price," said Kimbler, who is working with NorthPointe and North American Properties on the Seven at Broadway development.

Completing the vision for Fountain Place

Before Fountain Place was built, the site was called Fountain Square West and sat for 14 years without development amid what Bortz described as a "sea of parking meters." A cadre of developers decided to work together and approach the city with a mixed-use development plan that ultimately received support.

Fountain Place opened in 1997 with Macy's predecessor Lazarus as its anchor tenant. At the time, Fifth Third Bank considered building a 440,000-square-foot office tower on top of Fountain Place, so the existing base was built to support a tower. The region's largest bank instead chose Madisonville for a new operations center, citing lower costs.

After more than a decade and two recessions, city officials began to realize the growing success of residential development in the urban core. Bortz said it was about 2010 when former city officials Odis Jones and Milton Dohoney Jr. began pushing developers to look at using air rights above Downtown buildings for multifamily projects.

At Fountain Place, Fifth Third retained the air rights, although Bortz said his group has a letter from the bank stating its support for the apartment project. Towne and Belvedere Corp. are partners in pursuing the project. Alex Warm, who leads Belvedere, did not respond to requests for comment. Belvedere also owns the historic Carew Tower.

In November 2012, Bortz said a new tower at Fountain Place would hold about 175 to 225 apartments. Now, Bortz is eyeing an 18-story tower with about 168 apartments. No time frame was provided for the project to start.

McElravy declined to comment on the future of Fountain Place.

CBRE's Yearout noted that "we can't convert every building in the CBD (central business district) to apartments" even if demand is strong. "There's only so much debt capital" to go around, he said.

Keeping Tiffany from shopping

Developing an 18-story luxury apartment highrise on top of Fountain Place could be a strong enough carrot to keep one of its upscale retail tenants, Tiffany & Co.

Arn Bortz, a partner at Towne Properties and Fountain Place landlord representative, said the luxury jeweler has a lease at Fifth and Vine streets that runs through the end of December 2017. Tiffany's lease was slated to expire at the end of 2012, but it signed a five-year extension.

Terms of the deal were not disclosed.

Real estate sources have speculated Tiffany may be interested in following Saks Fifth Avenue to the Kenwood Collection. Last year, Saks signed a deal to leave its Downtown location in 2016 for a new two-level, 80,000-square-foot store to be built in Sycamore Township.

Bortz said he doesn't know if Tiffany has been reached by other brokers, but he said it wouldn't surprise him if that were the case.

David Birdsall, president of Phillips Edison & Co.'s strategic investment, did not return calls or email messages seeking comment. New York-based Tiffany representatives could not be reached for comment.

The Cincinnati Development Group is the landlord for Tiffany and Fountain Place's other tenants, which include Macy's, Palomino and the Booksellers on Fountain Square. Macy's lease ends in January 2018.

The Cincinnati Development Group was formed nearly 20 years ago and is a partnership that involved Belvedere Corp., Duke Realty, Madison Marquette, and Towne Properties. A building trades union pension fund provided equity to help develop Fountain Place.