Louisville’s in the midst of an apartment boom, with thousands of new units going up or planned in Downtown and surrounding neighborhoods. But what’s behind all of this construction? On Friday, the Louisville chapter of the Urban Land Institute convened a panel of four developers behind some of the most exciting projects to understand the dynamics shaping multi-family development in Louisville today.
The panel included Bristol Development Group Principal and CEO Charles Carlisle who is developing the Main & Clay Apartments in Butchertown; Edwards Companies Vice President Jonathan Wood, the developer behind the Mercy Apartments in the Original Highlands and the Phoenix Hill Apartments along Baxter Avenue; Milhaus Development President Jeremy Stephenson, who is behind the recently completed Amp Apartments on Frankfort Avenue in Clifton; and Cityscape Associate Brian Evans, who is leading the under construction Axis Apartments on Lexington Road in Irish Hill.
Moderator Jack Newton, a project manager at the Louisville Downtown Partnership, went right to the point with his first question: What obstacles are you facing in developing apartments in Louisville and other markets?
Jonathan Wood was quick with his response: “For me in Louisville, it’s navigating the one-way streets and finding my way around town. They seem to always be pointing in the wrong direction.” The crowd agreed with laughter.
Many on the panel agreed that they faced significant neighborhood opposition and NIMBY-ism at the outset of their projects, but were able to win their respective neighborhoods over by listening and adapting their proposals. “The challenges we’re facing here in Louisville are not germane to Louisville,” Wood said, citing well organized neighborhood groups, NIMBY-ism, and navigating the nuances of historic districts.
Still, developers need to meet the bottom line, Milhaus’s Stephenson said. “We’re trying to create real estate projects that have a financial component to them,” he said, “and we’d be lying if we said it didn’t have a strong importance to what we do.”
Finding the money
Charles Carlisle pointed to a major problem in Louisville that has made urban infill difficult for many developers: the equity holders won’t buy in.
“The other challenge we had, oddly, in Louisville, is when we started at Norton Commons, we went to our normal list of institutional capital partners about investing there in a project,” he said, noting that the economics of that residential building were in the same ballpark as neighboring suburban developments. “We could not get a single institution to invest in that project. We had to turn around and go raise capital from high net worth individuals.”
We’ve heard this from other developers who are interested in breaking the suburban model of development with mixed-use projects. Those with the financing often view the latter as more complicated and risky than business as usual. And while Carlisle said the situation in Louisville has improved slightly in the past four years, there’s still a problem. “I think it still has a ways to go before you get a healthy number of institutions willing to invest here,” he said. “That will certainly help support the market.”
While some developers have previously told us that banks have been reluctant to fund mixed-use projects with a high variety of uses, Carlisle said his experience with banks at Main & Clay, which is predominantly single use with only a tiny sliver of retail, has not been a challenge. Instead, equity funding, which fills the 25–40 percent funding gap once bank financing is secured has been difficult.
Finding the right neighborhood
Given that the panel was comprised solely of out-of-town development companies (although one panelist, Evans, was a Louisville native), it’s understandable that a challenge for the developers was finding the right neighborhood that would continue to grow around their apartment projects.
“Trying to identify the neighborhood locations that will turn and bring capital investment into those areas are really important for us,” Stephenson said. “It’s a matter of trying to identify where development patterns are moving.” He added that because Louisville has a lack of supply of new urban apartments, it’s trickier to find the right place to invest. His company ended up along the bustling Frankfort Avenue corridor with their first local project. “Partly it’s trying to test the market in these neighborhoods to see how well some of the multifamily will absorb into the market, which is the risk we take,” Stephenson said.
While Stephenson’s Amp Apartments located in an already built-up area, the other three developers are treading a lesser traveled path. Evans said the Axis Apartments, located on a sleepy curve of Lexington Road punctuated only by Headliners for existing nightlife, are hoping to spur new activity by bringing hundreds of new residents to the area. Wood’s dual projects are building up a forgotten corner of the Highlands, pushing the activity of the corridor north. Carlisle is working on the edge of Nulu where a retail and restaurant strip has been growing for years, but has struggled to expand off a couple key blocks of East Market.
“I think one of the things that will help all of us is to get a critical mass of urban residential in some location,” Carlisle said, noting the challenge of Louisville’s spread-out urban geography. “If you’ve been to Nashville, there’s a place called the Gulch where a critical mass has formed. The Gulch has reached a critical mass of residential and brought other new development with it. If you can get that critical mass going, I think you’ll see that same phenomenon here.”
Is the rent high enough?
Several of the panelists noted that Louisville rents for new urban apartments are below markets in other competing cities like Nashville or Indianapolis, making it more difficult to deliver a modern product. “Rent is probably the biggest [challenge] we see in this market,” Evans said. “To be able to do these class A, highly amenitized projects.” Stephenson noted that his company is continuing its push to revise Kentucky’s building code to make building multi-family projects easier.
Is the rent too high?
The highest rents of any apartment development announced so far are at Main & Clay, but Carlisle isn’t worried about filling the projects 270 units.
“Our rent forecast at Main & Clay is well above anything else in the market,” Carlisle said. “What gives us confidence that we can get that at Main & Clay—and that some of these other developments can do that as well—is we’ve seen a pattern starting in 2008 and 2009 in Nashville.” Carlisle’s company is among the pioneers who developed the now burgeoning Gulch district in that city.
“There were no new urban rental projects, and we started something that was 30 cents, 35 cents a square foot above anything that was in the market at that point in time,” Carlisle said. “Two of those came out of the ground almost back to back and rented at record rates and started off a wave of development there.” He said that pattern has been repeated in Birmingham, Ala., Huntsville, Ala., Jacksonville, Fl., and Orlando.
“These are projects that haven’t existed before,” he said. “So the way I like to look at it, I only have to believe there are 270 people that will pay that kind of rent. I don’t need 4,000 of them. We think that’s something that will be sustainable. We believe there’s room in the market for more of that.”
“We’re in what I think of as the euphoric stage of development where we don’t have to prove yet that the rents are there,” Carlisle said. “We’re just building the project and we can pretend that they’re where we want them to be. In about 18 months, we’re going to have to prove they really are there.”
Do we still need development incentives?
When asked about how dependent development remains on government subsidy and how to wean off of that artificial support, the panel agreed that urban development still needs assistance.
“Today development in [Louisville’s] urban core doesn’t work without incentives,” Carlisle said. “Nashville was in that position 10 years ago, and then six or seven years ago removed all incentives.” He said it’s important for cities to “intelligently use incentives” to support an initial wave of development that creates momentum that keeps development happening naturally. “There’s likely to come a time when those incentives can go away. That’s not today.”
Stephenson added that for incentives to go away, a city really needs to flourish with job growth opportunity, especially in its urban core. He noted that Nashville “caught fire” because it fostered a flourishing jobs market, which enabled it to eliminate incentives. “There has to be confidence that real job growth happens,” he said, noting that in Louisville uncertainty over Humana is a challenge to that confidence.
Pampered residents and pampered pets
Newton’s final question asked the developers what trends they’re following with their projects, and the clear front-runner are amenities. “There is an amenity battle going on among developers,” Carlisle said. “We are starting to spend small fortunes on amenity areas.”
Amenities proposed at various apartment buildings in Louisville include fitness centers, pools, rooftop space, lounge space, rooftop yoga studios, fire pits, party rooms, pet spas, and even private dog runs.
“Amenities are the biggest thing right now, whether it be a maker’s room, bike amenities, a resort style pool,” Evans said. “Those things I think you’ll see stick around and probably grow. Especially as we get into urban projects, the living space gets smaller and social spaces get more elaborate.”
Many agreed that this push for these amenities is about knowing the audience for urban apartment units, namely millennials and empty nesters. Wood noted that he was inspired by an architect who studied how to keep people in retail stores longer by design. But in the end, these amenities help fill up the units. “It gets people to sign leases,” Wood said. “It’s no different than anything else.”
Stephenson said his experience in Indianapolis, where apartment buildings have been one-upping each other’s amenities for years, the trend has moved toward smaller, boutique experiences with private art galleries and bespoke design.
But with the increase of urban living, part of the point is experiencing the city around the building itself, and several of the developers agreed that the city itself is an amenity. But others noted that until a vibrant city is in full swing, these amenities are necessary to keep the interest of tenants. “With Amp, there is a great neighborhood there,” Stephenson said. “Some of these other locations, the neighborhood is kind of there, [so] you need to build these amenities.”
Stephenson added that his company is beginning to consider the retail line-up in its mixed-use projects ahead of time to ensure that the retail serves its residents as much as the surrounding community. “One of the things we’re particularly doing of late is to identify retailers we want to add into our project and go get them earlier,” he said. “Do we want IU Health as a wellness center in our space? Yes, so we go get them and put that in there so we have a wellness center in our property. We’ll take a little more risk there because it’s an amenity to us and we don’t have to provide some large amenity space because we’re allowing someone else to take some of the risk on that.”
[Correction: A previous version of this article stated that banks were reluctant to provide financing for urban mixed-use projects, when it should have read that equity financing was reluctant. The article has been updated. (4/20/2016)]