SAN JOSE – A large housing project near a train station in San Jose will be redeveloped by converting it to hundreds of affordable apartments. The previous proposal called for building market-rate housing.

The latest version of the project calls for the creation of 215 affordable apartments at 1221 Lick Avenue, near the Tamien train station and the intersection of State Route 87 and Alma Avenue.

“With this affordable housing project, we will try to find the ‘missing middle,'” says Michael Van Every, president and managing partner of Republic Urban Properties, the primary owner and developer of the residential village that is beginning to emerge next to Tamien Station.

The missing middle-class housing projects typically include housing for middle-income people such as police officers, firefighters, teachers, and ordinary retail and office workers.

This is all part of a residential complex that, when fully built, would comprise 565 residential units and would ultimately be constructed in three phases.

Core Cos. and Republic Urban are collaborating on a project under construction at 1197 Lick Avenue. This development consists of 135 affordable housing units.

The second phase, according to Van Every, would be a 215-unit affordable housing project aimed at the “missing middle” demographic.

The third phase would consist of 215 market-rate units, the timing of which would depend on future real estate conditions.

Due to the difficult economic environment for real estate, Republic Urban has decided to take a new approach.

“This is a turning point that will benefit the community,” Van Every said. “Affordable housing for the middle class seems like the right thing to do, especially if you can build it close to transportation.”

The Santa Clara Valley Transportation Authority (VTA) recently agreed in a meeting to create affordable housing in the second phase and to keep market-rate housing units in the third phase.

Republic Urban is unsure when it will be able to bring to market the affordable middle-income housing in the second phase or the market-rate housing for the third and final phase of the development.

New real estate projects face major problems due to the costs of money, labor and materials.

“As long as interest rates remain at this level, as long as capital markets for construction loans are frozen, as long as building costs remain at current levels, the real estate market faces a real hurdle,” said Van Every.

The agreement with VTA gives Republic Urban and Core Cos. more flexibility in scheduling the final two phases of the residential complex.

When all 565 housing units are built, an estimated 62.5% of the units will be affordable housing—nearly two out of every three. Just over a third of the units will be market-rate housing.

Van Every believes that real estate market conditions are worse this time than during the recession and financial crisis of 2007, 2008 and 2009.

“This recession was terrible for single-family homes, but there were still people building homes,” Van Every said. “Banks were still lending for commercial real estate.”

This time, market conditions appear to be far worse, according to Van Every.

“Now it’s beyond bad,” Van Every said. “They’ve lost the entire office market. There’s no demand for hotels, which are in trouble. They still see some opportunities for industrial. Retail is still in trouble.”

Van Every believes the downturn in commercial real estate is as bad as any previous cycle for the sector.

“We are experiencing a recession in the commercial real estate sector,” Van Every said. “We are experiencing a perfect storm.”