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Road to nowhere: Housing projects on indefinite hold

Mike Ivey  —  4/30/2008 7:18 am

It was billed as a $100 million "urban village," a project to energize the entire east side.

Union Corners promised to transform the site of a contaminated battery factory three miles from the Capitol into a mix of condominiums, offices and retail shops. There was talk of shady green public plazas, bubbling water features, even a light rail transit stop.

But today the 15-acre site is a tangle of empty lots, broken concrete and piles of gravel along one of the city's busiest corridors. The only things standing are three mature oak trees where employees of Rayovac once enjoyed their lunch breaks before the aging brick factory on Winnebago Street was shuttered by new corporate owners five years ago.

Plans unveiled with much anticipation by McGrath & Associates in 2004 called for 450 housing units and 100,000 square feet of commercial space in buildings from two to six stories, with parking for nearly 1,000 vehicles. The layout included a full-service grocery, pharmacy, hardware store and restaurant. The city of Madison enthusiastically got on board with a promised $4.9 million in tax increment financing.

But with the new housing market here at a virtual standstill, Union Corners remains on hold. The developers maintain they will eventually get the project moving, although dreams of landing a full-service grocer to anchor it vanished when Iowa-based Hy-Vee purchased the former Kmart site on East Washington Avenue barely a mile away.

"At this point we're basically just looking to get the commercial going," says Lance McGrath, who, with older brother, Todd, has completed several well-received housing projects in the central city over the past two decades, including Capitol Point, Fourth Ward Lofts and Nolen Shores.

Normally the arrival of spring means the home building season is in full swing. But concerns over the economy, coupled with the fallout from the global mortgage lending crisis, is reverberating throughout the local community.

From flooring and lighting to lawn care and furnishings, it's hard to find a sector of the economy that hasn't been affected by the housing slowdown. Earlier this month, Sub-Zero Inc. of Fitchburg announced it was laying off 235 workers because of a softening market for its high-end appliances. Many other firms are tightening their belts for what could be a lean year.

"Things have absolutely come to a halt," says John DeWitt, CEO of DeWitt Real Estate Development in Madison.

DeWitt says developers throughout the area are sitting on acres of land, with no interest from buyers or builders. One 179-lot subdivision in Waterloo east of Madison that was platted in 2006 has yet to sell one lot, he noted.

"The question is, how long can you keep sitting on this stuff? I guess the answer is until you go broke," says DeWitt, who also lectures on business law at UW-Madison.

Already, developers have put the brakes on condo projects at the Hilldale Shopping Center and near Wingra Park on Monroe Street. Phase II of Metropolitan Place downtown is unfinished and in receivership. The backlog of new and existing homes on the market remains high, with buyers cautious about the overall economy and banks tightening their lending standards.

And while commercial construction here has remained solid, it is down from last year, with total nonresidential construction starts in Dane County falling from a total of $741.2 million in 2006 to $577.7 million last year.

Bill Jackson, vice president of business development at Engineered Construction, Inc. in Verona, says the slowdown is affecting everyone, including construction workers, engineering firms and building supply houses.

"Nobody really wants to talk much about it, but a lot of guys are really struggling," he says.

The number of housing starts -- permits issued to build single-family homes or duplexes -- paints a dramatic picture of how much the residential building boom has cooled. There were just 164 such permits issued in Dane County through March, down from 246 for the same period in 2006. Overall housing starts are off some 70 percent compared to the boom years of 2001-02, according to figures from MTD Marketing Services LLC of Neenah.

At the same time, the Madison area housing market has held up better than a lot of places. In Nevada, for example, nearly one in 140 households was facing a mortgage foreclosure last month. In Dane County, the figure was just one in 2,598, according to RealtyTrac.

Rather than a "bust," many observers see it more as a return to normal.

"We are optimistic that activity for new construction will pick up in the coming weeks," says Randy Handel, vice president of McGann Construction Inc. "It's a great time to build, with the current rate environment and with the competitive pricing we are seeing."

Jim Garner, president of Sergenian's Floor Coverings, has been in the business since 1963, so he's lived through recessions before. He says the current housing market slowdown is nothing compared to 1980, when interest rates were running at 20 percent and few were building new homes.

Sergenian's has avoided any layoffs of its 93 employees, but Garner says businesses that were banking on the housing boom continuing at a frenzied pace are getting a dose of reality.

"No doubt we're heading for a soft year, and that is going to weed out some people," he says.

Other firms have shifted gears as construction of new homes has slowed. Bella Domicile, formerly Modern Kitchens, says almost all inquires this spring are for remodeling projects.

"I didn't look at one floor plan for a new house last year," says senior designer Al Curran. "Four or five years ago that was all I did."

The construction slowdown hasn't hit all sectors equally.

Scott Vaughn, executive director of the Building and Construction Trades Council of South Central Wisconsin, says many of the union's 4,000 members have been fortunate to find work at the UW-Madison, on municipal road projects and with the public schools.

But he says the residential housing slowdown has been felt.

"One thing that did hurt was canceling the two high-end condos at Hilldale."

The underlying issue, experts say, is that the booming housing market and easy credit led to tremendous growth in direct construction and related services like mortgage lending, title insurance or appraisals. There was also a big jump in consumer spending as millions of Americans took out home equity loans to buy televisions, trucks or other hard goods.

In fact, economic activity linked to the real estate sector accounted for nearly three quarters of the nation's job growth since 2001, according to the Washington Post. Consumers borrowed an estimated $2.5 trillion over that period, spending it on everything from college tuition to overseas vacations.

"Many re-embraced the mantra of consumerism and the American Dream and the economy began to recover anew," writes Wall Street insider Michael Panzner in his new book "Financial Armageddon," which lays out the details of the financial developments that have left the nation's economy teetering.

But the house of cards from all that borrowing was ultimately due to collapse, Panzner writes, and the ripple effect is being felt around the globe. Lenders have gone under, workers have lost their jobs and stock markets are still reeling.

Still, Madison has avoided the worst of it. The unemployment rate here, buoyed by the steadying influences of the University of Wisconsin and the state government, has remained among the lowest in the nation, at 3.5 percent.

"What we're seeing is a crisis of confidence as much as anything," says Colleen Dunlavy, economic historian at the UW-Madison.

Dunlavy noted that the U.S. economy has been closely tied to the housing industry since the 1950s and the explosive growth in suburban development. What's different now, she says, are the complex financial instruments pegged to real estate markets -- like collateralized mortgage obligations -- that have pushed the economy into uncharted waters.

"In terms of the number of defaults it doesn't look that significant, but there certainly is a heightened sense of risk," she says.

Local real estate attorney Harvey Temkin agrees, saying that the concept of buying a house, living in it and building up equity remains sound. The problem, he maintains, is that credit markets roared out of control and nobody stepped in to limit the damage.

"This is a crisis created by Wall Street," he says. "I mean, getting calls at home at 7:30 p.m. from people trying to sell you a credit card or home equity loan, that's where the problem is."

A partner at Reinhart Boerner Van Deuren, Temkin is confident that once the credit markets shake out and banks can write off their bad loans, the housing market will bounce bank.

"This too will pass," he says. "Sure, we've been overconsuming and living off borrowed money but don't blame the housing market. The bottom line is you can't spend more than you make and that is coming home to roost."

One entrepreneur who wouldn't mind seeing the Union Corners project get off the ground this summer is Bill Rogers.

Active on the local beer brewing scene and a fan of historic watering holes, Rogers recently purchased the Civil War-era Union House Tavern at Milwaukee Street and East Washington Avenue, directly across from the development site. He plans to reopen next month as the Malt House, with 18 different beers on tap regularly.

Rogers wasn't counting on the development project when he made the decision to get into the tavern business. But he says more activity there sure wouldn't hurt.

"I've heard that construction workers like to drink beer, so it would be great just to see something going on over there," says Rogers, whose day job is at CUNA Mutual Group.

The city of Madison would like to see things move, too. It isn't on the hook with any direct loans or grants to Union Corners LLC, but it has invested money in new infrastructure and staff time in working with the developers.

The city is working to finish up public road construction that connects Winnebago and 6th streets to a new traffic circle. The project also includes reconfiguring the La Follette/Winnebago intersection, ending the quirky merge lane with East Washington Avenue.

There is also the question of lost property tax revenue as long as the parcels stay undeveloped. Several other properties in the area remain vacant, and neighbors have long wished for something to replace the Red Letter News adult bookstore.

Vicky Selkowe, a member of the city Economic Development Commission, was involved in the early neighborhood discussions about Union Corners and says many east siders remain sympathetic to the developers even as the project has stalled.

"Lance and Todd (McGrath) did such an excellent job communicating with the neighborhood initially, I think people aren't being as harsh as they might have been otherwise," she says.

At the same time, Selkowe and others are concerned about what might eventually be developed, since condos and a grocery store are looking less likely at this point. A large Walgreen's-like pharmacy or even an automobile dealership have been mentioned as possible users of the sites.

"You'd hate to see another auto dealer going in," says Selkowe.

Just how long the developers can hold on without getting something in the ground remains up in the air.

Property taxes alone on the four parcels that make up Union Corners LLC amounted to nearly $95,000 last year, according to city real estate records.. The owners are also facing some $320,000 in special assessments from the city for street, sewer and water improvements. And those figures don't include the interest payments on undeveloped land valued at $4.4 million.

But Lance McGrath isn't panicking yet.

"Bottom line: It's better to be holding vacant land than holding vacant buildings," he says.

mivey@madison.com

Mike Ivey  —  4/30/2008 7:18 am