Fleur de LisThe Louisville Downtown Development Corp. will soon be issuing the results of a downtown residential demand study, and how to develop a strategy to best meet that demand.

Give the city credit for its ongoing concern. We have the Ohio River and now a burgeoning waterfront; we have the restaurants and bars and now the beginnings of retail; we have great hotels, the arts center and now a world-class sports and entertainment arena.

Developing downtown residencies seems like an obvious next step.

But one real estate professional is skeptical.

It’s important for the facts to get out, says E. Phillip Scherer, president of Commercial Kentucky Inc., so interested consumers will know their choices.

“I think the study will point to the fact that new housing construction downtown would have to be subsidized by the city, perhaps by underwriting some land costs or making land available to developers,” Scherer says.

“But on new construction, there are just not any subsidies available, nor have we been able to incentivize development – no investment tax credits, no real estate tax credits, no income tax credits.

“There’s a downtown housing loan fund, but it’s a loan. It has to be repaid. It’s not a good time to be looking for financial incentives. The city doesn’t have any money, and the state has less.”

Shortcut: We’re paying for two new bridges. And Frankfort doesn’t see downtown Louisville residential development as a high priority.

So we’re left with our current conditions and our near-term prospects. And right now, Scherer says, he’s afraid both those options will be surprisingly limited.

Existing, available luxury condominium space downtown is in much shorter supply than many interested buyers assume. Prospects for new development are almost nil in the short term, he believes.

And even rental, a viable option in the days of a dried-up financing spigot, is likely limited to smaller units – acceptable for single people, perhaps, but not as acceptable to empty nesters who think “downsizing” means going from 4,500 square feet in the suburbs to 4,000 square feet in the city.

“What you currently see is what you get,” says Scherer. “I don’t think we’re going to see significant new luxury condominium product being built in the next five to 10 years.”

There are only about 40 units for sale in the entire 101 blocks of Louisville’s downtown Central Business District, says the man who crunches all these numbers every quarter (as reported right here in Insider Louisville) “And most of those are on the small side – less than 1,000 square feet.”

That’s a conundrum for developers of For Sale properties. People who want to buy downtown, can afford to buy and will likely qualify for mortgages are more likely to want luxury living in large spaces. But, Scherer says, “the development community can’t develop larger properties and make the number work.”

Prospective downtown luxury buyers may think they have lots to choose from and time to dither. They don’t. Land is expensive, constructions costs are high and constructions loans are hard to get.

Worse, even if the projects were developed, most buyers can’t access 30-year fixed-rate mortgages at the currently low interest rates.

Scherer says some projects – he cites Park Place Lofts, Fleur de Lis on Main and SoHo Lofts – have sold a high-enough percentage of units to qualify for conventional secondary financing rather than the shorter-term portfolio loan.

But non-qualified properties seem doomed to fail because homeowners need financing. Only about a third of all sales in the housing market have been cash sales; the rest depend on available and affordable financing in order for the product to move.

And those paying cash – say because they just sold their house in the suburbs – probably won’t be willing to downsize to less than 2,000 square feet, and will expect luxury at that.

“We rarely see someone moving from 4,000 square feet in the suburbs who’s willing to move into 1,200 square feet in the city. And those large luxury units are not proliferating the market,” Scherer said.

On the other hand, renting is growing. Residents particularly attracted to downtown living are likely to be young and either non-married or newly married without children. Mortgage money is tight, which makes renting especially popular.

But even there, Scherer notes, while the potential rental market is better downtown, the ability to charge high-enough rents to make your project profitable may not be.

“How much rent can you charge downtown in a city like Louisville before people begin looking to buy in suburban neighborhoods, where housing is fairly affordable; or to rent in outlying areas – like East Market Street, The Highlands or Clifton/Crescent Hill – which aren’t that far from downtown anyway?”

Rents would need to be relatively high to justify developing a rental property – Scherer believes the sweet spot would be $1.40 to $1.50 per square foot. That makes rent for an efficiency-type 600-square-foot apartment nearly $900 a month; and for a spacious, luxurious 2,000-square-foot apartment, something close to $3,000.

Can landlords expect to get that from this young renter market? And if that renter wants to pay only $800 a month, developers have to ask themselves, “how much apartment can I afford to build if I can only get $800 a month?”

There are always rehabs but, Scherer notes, “while industrial loft spaces are interesting, charming, edgy, most people want new construction. They want traditional décor, walls around the bedrooms, doors that close, underground parking, courtyards and fitness rooms.

“And, unfortunately, builders can’t provide all that with a 15-or-20-unit development.”