A real-estate firm out of Indianapolis with a keen interest in developing mixed-use projects plans to build a midrise apartment complex on 2 vacant blocks in Midtown, just south of the Pierce Elevated and 4 blocks east of the light rail line running down Main St. Like almost every other recent residential development in the area built before or after the Post Midtown Square about a dozen blocks to the west, though, the Milhaus Midtown won’t include any lease spaces for stores or restaurants. If you’re wondering why not, the company has a detailed explanation ready.
In a series of blog posts published last August — about the same time he was working to put together the project in Houston — Milhaus Development founder Tadd Miller walks through the financial ramifications of building 2 different prototypical structures: 3 stories of wood-frame apartments on top of a steel first floor full of commercial lease space, and an all-wood 4-story apartment building. His conclusion: “without free parking, [tax increment financing], tax abatement, or some other subsidy, it is nearly impossible to develop apartments on top of all-commercial space in a mid-market city today.”
Miller may be overstating the conclusion he spells out in a spreadsheet (PDF) comparing the 2 hypothetical options. The all-apartment option simply makes more money for investors:
Since the mixed use building had about $644,000 higher construction loan, there is that much more to pay back. So, the NOI and Cash Flow are similar on the two buildings; but the coverage ratio, expensive construction, lack of sufficient retail rent create a busted pro forma on the mixed-use side. We don’t have to ask our investors which building they want to have their money in: 8.6% versus 26.3% cash returns.
Add in what Miller describes as an additional risk of the mixed-use path — unleased retail space that “undermines the leasing of the residences” — and the firm’s decision is made.
Return on investment isn’t the only consideration everywhere Milhaus operates. “There are actually some cities that require some degree of commercial space at the ground level of every new building,” Miller writes. “To do it in a mid-market city, it requires shrinking the retail space down to a very limited component of the project. . . . The solution in most places is to keep it in all wood construction and provide flexibility in the design so that it can also be residential space or office space or whatever the market brings.”
The company’s Houston development will be the first new major Midtown apartment complex east of Main St. and north of Elgin, local blog InnerLooped notes. It’ll sit on the 2 blocks between Crawford, Austin, Webster, and Gray, and — yes — there’ll be plenty of ground-floor residences available. The western block has a central courtyard and is shown 4 stories tall in drawings; the 5-story eastern block, wrapped around a parking garage, is linked by a bridge across La Branch St. Variances that would allow reduced setbacks on all sides will be voted on by the planning commission this Thursday.
- Milhaus in Midtown [InnerLooped]
- Does Mixed Use Really Work? Part One, Does Mixed Use Really Work? (Part Two), and Making Mixed Use Work Financially (Part Three) [Milhaus Development]