The Milwaukee apartment market continues to enjoy higher occupancies, less concessions and yes, some actual rent growth. The market saw less available units in recent years. As the old law of supply and demand dictates, that drop in the number of available units has led to a significant reduction in concessions, thereby increasing effective rents.
In some cases, not only was there an increase in effective rents, but in actual rents at some properties and within certain markets. What are the driving factors and what can we expect going forward?
There are a few components at work — more jobs and virtually no new developments. Another important, but less quantifiable factor, is the desire of some potential homeowners to remain renters.
When we talk about job growth, we are certainly not talking about a dramatic increase. Still, an increase is always better than a loss. After hemorrhaging jobs in the late 2000s, as the recession gripped the area and the rest of the country, Milwaukee began to rebound in 2010.
In fact, according to Manpower International, the area was one of the top job growth areas in the country, ranking sixth in fastest employment growth of the top 100 metropolitan areas in the country during the second quarter of 2010. And while the indicators weakened a bit in late 2011, they seem to have rebounded again in the last few months. Reis, a New York-based real estate research firm, projects continued moderate job growth for Milwaukee in 2012 and more substantial growth in 2013-14.
Dearth of development
Another factor has been the lack of new development. The Milwaukee market has never been an area of large-scale development in terms of annual units delivered per year. After some overbuilding, especially in the downtown and western submarkets in the early to middle part of the last decade, the development pipeline was essentially closed.
Few, if any, new market-rate apartments have been delivered during the last 5 to 7 years. While some condominium projects in the downtown market transitioned to rental units, the effect on the rental market was temporary.
A strong desire to rent verses buy has pervaded the marketplace. In 2009, Forbes magazine labeled Milwaukee as the “worst” housing market in the country, edging out the Denver area for the dubious distinction. This ranking was based on an analysis of year-over-year supply versus demand.
This sentiment, by the way, has been a driving factor in many apartment markets across the country. Due to economic uncertainty and the housing market crash of a few years ago, many potential qualified buyers are choosing to rent instead. They are not looking at homes as potential investments any longer, and they like the flexibility that renting affords.
This trend bodes well for landlords, especially for owners of newer, higher-end communities and buildings. And for the once-qualified buyers who are no longer qualified, the rental market is their only alternative.
All these factors have contributed to the higher occupancies and rents that we mentioned earlier. According to Reis and our own internal studies, the local vacancy rate at the end of 2011 stood at nearly 4 percent. The vacancy rate should trend downward this year and further in 2013. As a result, rents could possibly grow at an annual rate of 2.5 percent to 3.5 percent in coming years, depending on the submarket.
Investors Seize The Day
These factors, coupled with historically low interest rates and availability of money, have made more investors take notice of the market. Historically not a hotbed of sales activity, the Milwaukee apartment market has seen some significant transactions during the last 12 to 18 months. Some notable deals include the sale of Monterey (240 units) in Waukesha for $14.8 million, Briarwick Apartments (344 units) in Milwaukee for $17.8 million and the pending sales of Harbor Point, The Coventry and Trinity Courts, all under contract.
Strong property fundamentals, favorable interest rates for borrowers and the return of construction financing have also triggered some proposed new developments downtown and in the suburbs, including Fiduciary Development’s planned 330-unit development in Menominee Falls.
With new development likely to remain in check and the local economy on the mend, we anticipate that Milwaukee will continue to see a strong apartment market for some years to come, both in terms of continued demand from renters and investors.
— Ralph DePasquale is an associate partner in the Midwest office of Hendricks & Partners.