For Rent: Downtown apartment market booms

Cover Story

Last updated on May 15th, 2019 at 05:06 pm

Prior to the Great Recession, the population of downtown Milwaukee surged as part of a national trend of many empty nesters and young professionals reversing a decades-long population shift to move downtown from the suburbs to seek a more vibrant urban lifestyle.

From 2004 to 2007, 3,615 new multifamily housing units, mostly condominiums, were added in downtown Milwaukee, according to the Department of City Development. From 2000 to 2010, the population of downtown Milwaukee rose 25.5 percent to 21,395, according to Census data used in a market study conducted for the Downtown Milwaukee Business Improvement District.

However, the downtown condo market bubble burst as the national housing market collapsed and the Great Recession took hold. The number of multifamily housing units built downtown from 2008 to 2011 was 1,477, according to the DCD, and many of those were likely in projects that began before the Great Recession hit.

Although the recession and the collapse of the housing market put a halt to condo development downtown, there still is no shortage of people who want to move downtown. Many young professionals in the large millennial generation prefer the lively, dense downtown lifestyle. Saddled with college debt as they start their careers, many of these young professionals cannot afford to own a home or condo and are flocking to downtown apartments.

“We have a huge number of millennials coming downtown,” said DCD Commissioner Richard “Rocky” Marcoux.

Not all, but many, millennials want to live close to restaurants and entertainment amenities in the dense, dynamic heart of the city and prefer to get around without a car.
“The millennial generation is not engaged or married to the automobile,” said Stewart Wangard, chairman and chief executive officer of Wauwatosa-based commercial real estate development, investment and management firm Wangard. “They look for a transit-friendly place to live and if they can find a transit-friendly place to work, so much the better.”

In addition, some empty nesters also want to move downtown. As the economy recovers and the housing market has improved, they are now able to sell their suburban homes and move to experience a new lifestyle downtown.

“The (baby) boomers want to come back into the city,” Wangard said. “They want to enjoy the benefit of the nightlife, restaurants and the arts scene, including music and theater.”

After years of little to no apartment development downtown during the condo boom, apartment development has taken off as developers supply housing to meet the needs of those who want to live in the city center.

Only 140 new multifamily housing units were added downtown in 2011. But from 2012 to 2014, 1,256 multifamily housing units were built downtown, most of them apartments, according to the DCD. Currently, there are 765 apartment units under construction downtown, according to the DCD, and another 1,000 apartment units are planned, according to Marcoux.

However, some estimates of the downtown apartment development pipeline are even more robust, if neighborhoods near the downtown are included. Milwaukee-based Mandel Group Inc., one of the area’s most prominent multi-family housing development firms, says more than 4,900 apartment units are planned for 2015 to 2018 in an area that includes downtown, the East Side, the Historic Third Ward, Walker’s Point and the Marquette University area. In that same area, 1,234 apartment units were built from 2012 to 2014, according to Mandel Group.

“Something significant is going on both in terms of investment and population growth in the heart of our city,” Milwaukee Mayor Tom Barrett said in his recent State of the City address.

Wangard

‘A perfect storm’
Prior to the Great Recession, federal government policy, carried out by the Federal Housing Administration and government-sponsored enterprises Fannie Mae and Freddie Mac, strongly encouraged home ownership in America, said Mandel Group chief operating officer Robert Monnat. During that time, it became much easier for consumers to get a mortgage. The homeownership rate increased significantly, which boosted the U.S. single family home and condo markets.

“Anybody who could fog a mirror was able to buy something,” Monnat said.

With low interest rates and lax mortgage approval standards, mortgage payments for condos often were comparable to apartment rents. That made apartments far less competitive, since given similar costs, consumers preferred to own and build equity rather than rent.

“There was no distinguishing in cost because it was so easy to get a mortgage,” Monnat said.
So developers built condos instead of apartments downtown. For about a decade, construction of new apartments in the United States was well below historic norms, Monnat said.

Homeownership in the U.S. climbed to record highs of about 69 percent in 2004, but the problem was that many loans were given to consumers who could not afford to pay the mortgages. The excessive amount of financing artificially inflated the housing market. Eventually, the financial markets collapsed when many consumers defaulted on the mortgages they could not afford. Without the support of the overzealous financial markets, the housing bubble burst. The economy is still trying to recover fully from the impact of the Great Recession.

It has taken several years, but the single family home market is showing some signs of recovery in the metro Milwaukee area. Home sale prices in the region rose in 2013 and 2014. Housing starts in the metro Milwaukee area in 2014 were up 48.7 percent, to 1,277, from the market’s bottom in 2009.

Although suburban single family home building has improved in the region, there has been little to no condominium development downtown since the Great Recession. Banks remain extremely reluctant to finance downtown condo developments, Monnat said.

“I still don’t think (a developer) can get a condo loan,” he said.

The lack of apartments built prior to the Great Recession led to a significant shortage of supply of that product type.

At the same time, demand for housing was reduced for several years during and after the Great Recession. From 2006 to 2012, household formation in the U.S. was about 3.9 million short of the statistical norm, and about 3 million of those who chose not to form a household were 18 to 35 years old, Monnat said.

Many millennials decided to live with their parents or a roommate because they could not afford to live on their own, Monnat said. Household formation is critical to driving demand for housing, and for years household formation in the United States was well short of statistical norms.

A pent-up demand for downtown apartments was building during those years of little to no apartment development, as millennials delayed forming new households and empty nesters waited for their opportunity to move downtown.

Now, as the economy has recovered, millennials are finally moving out of their parents’ basements. Many of them are moving to downtown apartments. Many millennials prefer the flexibility of renting and many also carry significant amounts of student debt that makes it difficult for them to buy a home.

At the same time, empty nesters are now able to sell their homes and consider moving downtown. With a lack of condos available, many of them are seeking luxury apartments.

“You’ve got this perfect storm of conditions,” Monnat said. “Nobody had built any (apartments for years) and now everybody wants to rent.”

“It happens to be an opportunistic time,” said Mandel Inc. president Barry Mandel. “You have overwhelming demographics.”

As a result, developers are now rushing to build apartments.

“You’re going to see a lot of apartment construction,” Monnat said. “In theory, this trendline is going to continue. There are going to be more and more apartments built to catch up.”

Jim Torvik, Barry Mandel and Bob Monnat of Mandel group inc.

The buildings
Mandel Group and Wangard are two of the most active local developers that have been building downtown Milwaukee apartment developments and are planning to build more to take advantage of this strong cycle in the market.

Mandel is currently building the third phase of its North End development at Water and Pleasant streets. The third phase of the project will have 168 apartments and a Fresh Thyme Farmers Market store.

By the end of the year, the firm plans to break ground on the fourth and final phase of the project, which will consist of two buildings and 250 to 260 apartments. Amenities will include an outdoor pool facing the Milwaukee River. The North End will have a total of 650 apartments, once it’s fully developed.

This spring, Mandel Group plans to break ground on Domus, a 132-unit apartment development in the Historic Third Ward, and a 46-unit apartment development at North Avenue and Commerce Street in the Riverwest neighborhood that will include an Adventure Rock climbing gym.

In addition, Mandel Group is working on plans for a 20-story luxury apartment tower with about 225 units at a vacant East Side site, which the firm calls Block 9, at Ogden and Prospect avenues. Construction on that project could begin this year.

“We are actively working to bring that project to fruition,” Monnat said.

The Block 9 project and the upper floors of the Domus project are being designed to appeal to empty nesters. Most apartment developments built in recent years and proposed downtown have targeted the millennial market, offering smaller, lower priced units, Monnat said. The Block 9 project and the upper floors of Domus will be larger, higher priced units comparable in quality to condos.

With a lack of new condo development downtown, some empty nesters are looking for high-end apartments but find the supply lacking, Monnat said.

“With the aging baby boomers, we think there is going to be a demand for this product type,” he said. “We think that this is a demographic that is going to be returning to the market during the next 10 years.”

Wangard recently completed the first phase of its Avenir development, which has 104 apartments and is located on the west side of Jefferson Street between Lyon Street and Ogden Avenue. The building also has 7,000 square feet of retail space that is fully leased. Construction for the second phase of Avenir, a 90-unit apartment building that will be built on the same block along the east side of Milwaukee Street, will begin in July or August. The third and final phase of the project will have 60 to 100 units and will be built sometime in the future.

Also this year, Wangard plans to begin construction of a two-building development along the Milwaukee River at Brady and Water streets, with 160 to 200 apartments and up to 12,000 square feet of retail space.

“We think it would be a great space for a coffee shop and a great spot for a restaurant,” Wangard said.

The Wangard project at Brady and Water and Mandel Group’s North End project are two of several projects that have been built or are planned in the North Water Street corridor between Ogden Avenue and Humboldt Avenue. This corridor is the hottest spot of the hot downtown apartment market. Apartment developers have been drawn to the corridor because of available sites along the river and its location between the downtown business district and the Brady Street area on the Lower East Side.

In addition to the Wangard and Mandel projects, other apartment developments planned in this area include Atlanta-based Atlantic Realty Partners’ proposed four-building, 450-unit apartment development planned for the former Gallun tannery site along the river, and Rhythm, a seven-story, 140-unit apartment building planned by Tim Gokhman and Jim Wiechmann at 1632-40 N. Water St.

The development surge could transform the North Water Street area.

“Everything that’s planned (along North Water Street) is just going to make that area more dynamic,” said Wangard president Wayne Wiertzema.

Wangard also plans to break ground around July 1 on the mixed-use Freshwater Plaza project northeast of South First Street and Greenfield Avenue in Walker’s Point. The project will include a Cermak grocery store, 70 apartments, 16,000 square feet of retail space, two outlot retail buildings and a future office building. Wangard said early interest in the Walker’s Point apartments has been significant.

The Atlantic Realty Partners project demonstrates that it is not just local developers such as Mandel and Wangard working on projects in the downtown Milwaukee apartment boom. Another example is a 37-story, 275-unit apartment building planned by Chicago-based Carroll Properties northeast of Van Buren Street and Kilbourn Avenue.

The out-of-state developers say job growth in the Milwaukee area is driving their interest in building apartments here. The metropolitan Milwaukee area has the fourth-best employment outlook in the nation, according to the latest ManpowerGroup survey of employers. Among employers surveyed in the Milwaukee area, 31 percent plan to hire more employees from April through June. Developers say residents of downtown apartment buildings work throughout the metro area, not just downtown.

“As long as you have job growth, you are going to have a strong apartment market,” said Carroll Properties president Bob King. “It would be nice if more of the world knew about the positive things happening in Milwaukee.”

Although conditions are right to build apartments downtown, projects still need to have good locations and be done well to be successful, Mandel said.

“Even with overwhelming demographics and job growth, you have to be able to satisfy your residents,” he said. “There are going to be subtle nuances between those that are ultimately successful and those that are not.”

Gallun Tannery site

The impact
The downtown Milwaukee apartment boom could bring a significant increase in population density that transforms the heart of the city.

The controversial $124 million downtown streetcar project is based on the belief by Barrett and other city officials that the population surge, especially of young professionals, will justify the project and that the streetcar will help attract even more development.

The population surge has already helped spark several new restaurants in the downtown area in recent years and it could help turn around the downtown area’s long-struggling retail scene.

“There hasn’t been enough (population) density (for retail downtown),” Monnat said. “That’s why the street level retail has been so anemic.”

“As we add more density and add more feet on the street, it is going to become more appealing,” said Beth Weirick, CEO of the Milwaukee Downtown Business Improvement District. “That density will create the need for more services and retail to serve those residents.”

However, Wangard said the Third Ward has already established itself as the shopping district for the general downtown area.

“There’s a lot of fashion retail moving into the Third Ward,” he said.

But the population density must increase dramatically to make a significant improvement in the downtown retail market, Mandel said.

“Cities have to get really, really dense before you are going to have retail on the first floor of every building,” he said.

The Couture

How much is too much?
With so many apartment developments under construction and planned in the downtown area and surrounding neighborhoods, some observers are wondering if the market will be able to support all of them.

Based on Mandel Group’s estimate, downtown Milwaukee and surrounding neighborhoods could add more than 1,000 apartment units per year from 2015 to 2018. At the same time, the suburbs could add a similar amount of apartment units, based on the projects that are planned.

Can the downtown Milwaukee apartment market support the addition of  more than1,000 units of new supply per year for the next four years?

“We’re going to find out,” Monnat said. “That’s going to be driven by how many jobs are created. We like our product and we think our product will compete very successfully.”

Currently, the downtown apartment market has an occupancy rate of about 95 to 96 percent, Monnat said. But if that occupancy rate dips into the low 90s, apartment building owners will be hurting.

“The margins are tighter in our business,” Monnat said.

Wangard says downtown apartment building developers and owners should be prepared to weather an oversupply. However he expressed confidence that, based on demographic trends, the market will eventually absorb the onslaught of new supply.

“I think we will have a period of over-building, a 12- to 18-month period of too much product,” Wangard said. “We’re going to be in a very competitive marketplace over the next 18 months. It’s going to take a little longer to absorb. In 2016, we’re going to be in a period of oversupply. Developers better be prepared for a little bit of a slower lease-up. We build that into our pro forma. Sometimes there’s a period of oversupply. To be successful in this business, sometimes you have to be patient. You have to have resources, and you have to be disciplined.”

“Developers with the most experience, the best locations, the best product and the ones with holding power are the ones that are going to survive,” Mandel said.

Rhythm

Get our email updates

Andrew Weiland
Andrew Weiland is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, Weiland is a lifelong resident of the state. He lives in Muskego with his wife, Seng, and son, Zachary. He is an avid sports fan and enjoys coaching his son’s youth baseball and basketball teams.