We can expect to see a combination of new and familiar trends in the Milwaukee apartment sector in 2016 that will continue to attract investors to the local apartment market.
What makes the start of 2016 different from 2015 is progress toward the normalization of monetary policy. In December, the Federal Reserve Board decided to raise the federal funds rate by a quarter percentage point, the first such increase in nearly a decade.
The Federal Reserve Board’s widening may have an impact on the short-term rates, but the long-term interest rates that impact real estate values the most are influenced by the yields on the long-term U.S. Treasury bonds.
We expect the long-term interest rates to stay low for the foreseeable future.
When there is high demand for the Treasury bonds, the price of the bonds increase and the yields decrease, keeping long-term lending rates low. The two factors responsible for driving rates down in early 2016 are the high levels of volatility in stock markets around the globe and the drastic drop in oil prices.
The volatility in the stock markets drives global capital to flow into the safe haven of bonds, and specifically the U.S. Treasury bonds, as the largest beneficiary of those capital flows. An important influence that helps investors accept low yields is a low inflation outlook, and the recent drop in oil prices has helped keep inflation risks in check.
These are two key indicators to watch in 2016. Until they change course, we believe long-term lending rates will remain attractive.
Private capital drives market
Matthew Ewig
Berkadia
Private capital groups are the leading investors in Milwaukee’s apartment housing market. The area is often overlooked by institutional investors for three primary reasons:
• The assets tend to be relatively small.
• It can be challenging to achieve scale and operating efficiencies.
• Apartment properties don’t trade as frequently as they do in other markets nationally, which gives the perception of a lack of liquidity.
While these factors tend to keep the institutional capital out of the Milwaukee apartment market, it also presents an opportunity for private capital groups when they don’t have to compete with the institutional groups that generally have deeper pockets and are willing to accept lower yields.
The smaller asset sizes work fine for most private capital investors. The local operators tend to be more nimble and can achieve operating efficiencies because they are operating in their backyard. Private capital groups are better suited to make long-term investments as they don’t have to make decisions based on predetermined fund lives like many institutional investors are faced with.
We expect to see the private capital groups take advantage of the low interest rate environment and execute longer term fixed-rate debt in 2016. Many have historically utilized five-to 10-year loan products, but we are seeing a migration to even longer term loans as the rate premium to go longer is narrow from a historical perspective.
Fannie Mae is offering a 12- and 15-year product that has been very competitive, the life companies are offering terms of 15 to 25 years at fabulous rates and even going as long as 40 years on select deals. HUD also offers fixed-rate terms for 35 years or longer.
The patience and flexibility of the private capital groups is allowing them to capitalize on the rate environment and minimize the risks of refinancing into a potentially higher interest rate market in that five- to 10-year horizon.
For all these reasons, we expect that private capital will continue to flow into the Milwaukee apartment market and experience strong returns in the well-located, well-capitalized properties.
Fundamentals are healthy
Thanks to healthy job growth in 2015, which is likely to spill over into 2016, the apartment market has witnessed strong absorption and a moderate level of new supply that has helped drive down vacancies to below-average levels.
According to Axiometrics, employers in metro Milwaukee are expected to add approximately 10,589 jobs this year, a growth rate of 1.2 percent. The overall occupancy rate locally was 96.6 percent at the end of the third quarter of 2015, above the national average of 95.3 percent, according to Axiometrics.
The vacancy rate in metro Milwaukee is projected to finish 2016 at 95.9 percent.
Buoyed by an expanding economy and strong consumer demand, effective rents in the Milwaukee apartment market at the end of the third quarter of 2015 were 2.4 percent higher on a year-over-year basis. Axiometrics projects that effective rents will increase 1.9 percent in 2016. The long-term average since 1999 has been 1.7 percent.
Active development pipeline
Developers delivered approximately 1,500 new rental units in 2015, an uptick from approximately 600 units the prior year.
The apartment market is primed for a continuation of this trend in 2016. Delivery of new apartment product is also expected to enhance the Milwaukee apartment scene’s appeal to renters.
A few standout projects include HKS Holding’s MKE Lofts project at 725 N. Plankinton Ave. in the downtown area. The project was delivered last fall and is currently in lease-up. The building was a redevelopment of an office property and offers high-end modern finishes, expansive natural lighting, an impressive fitness center and a full menu of amenities including hotel-type services like room service.
In the suburbs, there are exciting projects such as the Echelon at Innovation Campus in Wauwatosa and The Corners in the Town of Brookfield. The Echelon was developed by the Mandel Group and offers an extensive amenity package and a great location with easy access to the Mayfair corridor shopping, downtown Wauwatosa, the Medical Campus, the Milwaukee County Research Park and close access to the Zoo Interchange, which provides routes to all of the Milwaukee area.
The Corners Development in the town of Brookfield will offer 244 rental apartments managed by Mandel as part of a 750,000-square-foot premier mixed-use lifestyle center anchored by Von Maur and featuring many great retailers and restaurants. It is an exciting project that is well located and has great access to transportation networks.
“The Corners will deliver an unmatched living, shopping and dining experience to western Milwaukee,” according to Steve Pagnotta, president of Bradford Real Estate, a co-developer of the property along with IM Properties.
The factor to keep an eye on in the development pipeline is the rapid escalation of construction costs. If the costs can be kept in check, the projected solid rent increases combined with the market’s healthy real estate fundamentals should yield another good year for apartment housing in Milwaukee.
— By Matthew Ewig, Managing Director, Berkadia. This article originally appeared in the March 2016 issue of Heartland Real Estate Business.