Supply and demand in the Milwaukee multifamily market has remained balanced despite the economic slowdown. “Scarcity of developable land, combined with the “not in my backyard” attitude by many suburban communities, has constrained growth,” says Patrick Dempsey, director with L.J. Melody & Company. “The slowdown in economic growth caused only a small increase in vacancy rates.”

Municipalities prefer condos to apartments because condo residents are permanent. Downtown condos are being developed because there is an ample supply of capital to fund the conversion of older warehouse and light industrial buildings in Milwaukee’s Downtown/Third Ward.

Strong growth rates westward, northwest and southwest along the freeways created demand for more multifamily units. “A resurgence of downtown has spurred substantial interest in development of condos and multifamily communities along the river on the westside of downtown, the Third Ward and the lake north of downtown,” Dempsey says.

A $300 million development, by a Chicago-based investor, of the Pabst Brewery will contain condos, apartments, restaurants, storefront retail, bars and nightclubs adjacent to the west side of downtown.
Marcus & Millichap Research Services recently identified 15 new multifamily development projects, most under 100 units but totaling over 1,190 units combined, with a value of $116 million. Eight of these are in Milwaukee County and seven are outside Milwaukee County.

Average monthly rents for studio, one-, two- and three-bedroom apartments are $480, $596, $755 and $946, respectively. “Rent growth has been generally flat the last year for the market as a whole, and concessions have become more common,” says Michael Dean, director of Marcus & Millichap’s national multi-housing group. However, by submarket, the Brookfield-Waukesha average rents increased 2.2 percent this year while the northwest submarket showed a 0.6 percent decrease in average rent. Brookfield-Waukesha is the most expensive submarket, reporting an average rent of $921 while the northwest market is the least expensive, averaging $616 per month. The high end of the market tops out at $1.35 per square foot, with the low end of the range at $0.75 per square foot.

Vacancy has been edging up to between 6 and 7 percent. “This is the result of slower job and household creation and the continuing transformation of tenants to homeowners in response to historically low mortgage rates,” Dean says. Apartment managers report an above average number of residents are not renewing leases to purchase homes. “As interest rates return to normal levels and job growth increases, vacancy rates should trend downward closer to our historical average of 5 percent,” Dempsey says.
Investor demand for apartments continues to be strong even as some of the market fundamentals have slipped. This is attributed to historically low interest rates and good recent cash flow performance for apartments in general. The amount of property that is trading hands is historically high.

Sale capitalization rates have declined by more than 50 basis points since the first of the year. The loss was driven by long-term rates, which recently hit their lowest point in more than 40 years, and the poor performance of alternative investments.

“Trends currently impacting the apartment market are low interest rates; rising homeownership; a declining population in Milwaukee County, while the Milwaukee metropolitan statistical area (MSA) as a whole grows slowly; and softer economic conditions due to the national economic slowdown,” Dean says. The Milwaukee MSA is dependent on manufacturing employment, which has been hurt by lower economic activity.

“As always, the Milwaukee/Wisconsin multifamily market is steady and slow to change direction,” Dempsey says. Even with rate swings and the national economic slowdown, the Milwaukee apartment market should continue to see positive rent growth for at least the next 5 years.
Waukesha County should see continued growth and development. It is the second fastest growing county in Wisconsin with favorable zoning regulations and a supply of vacant land for development. Also, the downtown market will see condominium conversions, apartment rehabilitations and limited new development.


©2002 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.