It is widely acknowledged among commercial real estate professionals in the Milwaukee market that we are in the midst of a renaissance of sorts — certainly the most exciting period in the past few decades to be actively involved in the industry. From the Harbor District to the Deer District (the newly branded area around Fiserv Forum), new neighborhoods and exciting destinations are sprouting up. This resurgence continues to attract residents and developers who are quickly creating the critical mass necessary to make Milwaukee a viable 18-hour city.
On the multifamily front, new supply that has come online in the past few years is driving both average rental rates and overall vacancy higher. As of the first quarter of 2019, the average rental rate in the metro Milwaukee market increased 0.8 percent from the previous quarter to $1,075, continuing an upward trend that saw a 2.2 percent annual increase at year-end 2018, according to real estate data provider CoStar.
Matson Holbrook, MBH Investment Real Estate
The vacancy rate hovered around 5.9 percent during this same period, slightly higher than the year-end 2018 level of 5.6 percent, but lower than the recent high of 6.1 percent established in 2017.
The average rental rate in the first quarter of 2019 for the upper end of the market, classified as 4- and 5-star properties by CoStar and including newly constructed Class A properties, was $1,543, or $1.60 per square foot, up 2.6 percent since 2017. The average vacancy rate for 4- and 5-star properties was 13.1 percent during the same period, up 90 basis points from the level established in 2018.
Oversupply risk
One of the common topics of discussion over the past several years has been the potential risk of an oversupply of multifamily units in certain pockets of the city, and the metro area’s ability to absorb all these new units. This was especially concerning considering the metro area had only added roughly 20,000 new residents between 2010 and 2017, according to the U.S. Census Bureau. In addition, annual non-seasonally adjusted employment growth as of preliminary reports from February 2019 was only 0.6 percent, according to the Bureau of Labor Statistics, reflecting an increase of only 5,200 net new jobs over the one-year period.
Despite the tepid population and employment growth, multifamily permit data show that an oversupply of new units may be averted. After peaking at 2,141 multifamily permits issued in the Milwaukee metro area in 2016, annual permits issued have declined by 31 percent to 1,476 permits in 2018. Actual deliveries have continued to grow each year since 2013, with the highest level of 2,591 units delivered in 2018, according to CoStar. But deliveries may now be cresting as a result of the pullback in permits, which will bode well for market fundamentals.
Perhaps a bellwether for the luxury segment of the apartment market in downtown Milwaukee, Northwestern Mutual’s 310-unit 7Seventy7 apartments by all accounts has had a successful lease-up period. Asking rents for available studio, one-bedroom and two-bedroom units range from $2.42 to $2.80 per square foot, while three-bedroom and penthouse units are asking from $3.60 to north of $4.00 per square foot, by far the highest rents per square foot in the Milwaukee market.
As of April 2019, less than one year after pre-leasing began, it was reported that the property is over 80 percent occupied and roughly 90 percent leased, with no rent concessions currently being offered.
Another top performer is Mandel Group’s DoMUS Apartments along the Milwaukee River in the Third Ward neighborhood. This 132-unit property was completed in September 2017 and lists only two available units as of April 2019, asking $2.47 and $2.57 per square foot. Similar to 7Seventy7, no rent concessions are being offered. It seems like only yesterday that the idea of underwriting rents above $2.00 per square foot in development and investment pro formas was aggressive, but the market is proving that demand does indeed exist at these higher rent levels.
Investor appetite
With solid performances at the top end of the market, investor appetite for newly constructed product is becoming more prevalent. Cap rates continue to be at or near their cyclical lows, with Class A assets reportedly trading in the mid-5 percent range, Class B assets in the +6 percent range and Class C (as well as any deal with hair on it) breaching 7 percent.
According to CoStar, the Milwaukee multifamily market experienced a record-setting quarter in the fourth quarter of 2018 in terms of sales volume, capping off a stellar year in which roughly $205 million of multifamily product traded hands. Leading the charge is Kirkland, Washington-based Weidner Apartment Homes, which has acquired over 1,000 units in seven properties — a mixture of both new construction and seasoned product — across the metro area since October 2017.
As 2019 moves along, it is expected that more multifamily transactions will occur as sellers capitalize on current pricing while buyers lock in favorable interest rates that have even come down since the recent uptick around the third and fourth quarters of 2018. With the Fed signaling no additional rate hikes in 2019, this buying opportunity should at least continue through year-end and into 2020.
Also worth watching in 2019 is whether the successful absorption of units at recently delivered luxury properties will drive construction starts at other high-profile, luxury developments that lie in wait, namely the 44-story Couture in downtown Milwaukee and the 27-story Goll House apartments on Prospect Avenue.
— By Matson Holbrook, Principal, MBH Investment Real Estate LLC. This article originally appeared in the May 2019 issue of Heartland Real Estate Business magazine.