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Milwaukee’s multi-family real estate market has been a bright spot throughout the COVID-19 pandemic. Apartments remained occupied. Developers have put forward more projects than in recent years to meet strong demand. National firms have brought new investment dollars into the market.
Industry experts say they expect that strength to continue into the new year.
“I think, overall, we’re in for an exciting 2022,” said Rick Stoll, managing partner at Milwaukee-based Harmoniq Residential, which manages 2,200 apartment units in Wisconsin and Illinois, from the Fox Cities to the northern Chicago suburbs.
Stoll predicted apartment unit occupancies will continue rising, as will market-rate rents. He added there will also likely be fewer concessions from landlords, such as promotional rates or rent discounts, despite new supply coming online.
Milwaukee is in desperate need of more units. Gard Pecor, senior market analyst with CoStar Group Inc., said Milwaukee has lagged behind other major markets in new apartment construction over the past couple years. Demand for apartments in Milwaukee boomed during that same period.
“That’s what has led Milwaukee to have some of the lowest vacancy rates in the country,” Pecor said.
The Milwaukee market has a roughly 2.9% apartment vacancy rate, he said. This is the lowest rate in the Midwest and one of the lowest among the top 100 markets across the U.S.
Milwaukee peaked for new apartment construction in 2017, when it had about 4,300 new units underway. In 2020, fewer than 2,000 new units were under construction in the metro area.
One driver of heightened apartment demand is the lack of single-family homes for sale. The Greater Milwaukee Association of Realtors reported this month that 2021 was a record-breaking year, with 23,827 homes sold in the metro area. The problem is that there aren’t enough homes listed for sale or under construction to meet homebuyer demand.
Metropolitan Milwaukee only had enough single-family home listings to satisfy 1.9 months of demand (the time it would take to sell all of the homes on the market at a given time), according to GMAR. Subtracting listings with an offer, inventory stood at 0.7 months. Six months is considered a balanced market; anything less than that is a seller’s market. As a result of tight inventories and high demand, area home prices climbed about 10.8% in 2021.
Pecor said people who normally would be able to buy homes are being priced out of the market. They are turning to apartments.
More apartment units are on the way throughout metro Milwaukee. Headlining those projects are three new market-rate towers at various stages of development in downtown Milwaukee and the Historic Third Ward neighborhood.
Ascent, a 259-unit mass timber tower at 700 E. Kilbourn Ave., is scheduled to open later this year. The Couture, a 322-unit, 44-story building under construction at 909 E. Michigan St., is slated for 2023 completion. Another project, yet to start construction, is a 295-unit tower at 333 N. Water St. in the Third Ward.
“We are starting to see a surge in construction activity, and I think the demand is absolutely there for downtown Milwaukee,” Pecor said.
The downtown area itself has an apartment vacancy rate of 5.6%. Even though downtown vacancy is higher than the Milwaukee area as a whole, it is still quite low in comparison to other metro city centers. The vacancy rate in downtown Minneapolis is 13.2%, for instance.
Milwaukee’s downtown has about 1,100 apartment units under construction, Pecor said. That amounts to about 6.8% of current inventory and is similar to the average rate of construction in other markets.
Downtown Minneapolis, with its notably higher vacancy rate, is building at a rate that amounts to 11.2% of current inventory. That’s almost twice the rate at which downtown Milwaukee is building, with a vacancy rate that’s more than double Milwaukee’s.
As another example, downtown Cleveland has an 11.6% vacancy rate and has units under construction that equal 12% of current inventory.
Communities outside of Milwaukee are also seeing their fair share of apartment projects. The west suburban area of Wauwatosa and West Allis is especially busy, Pecor said.
“Demand there is also extremely high, but they have not been building,” he said, minus a few projects such as the Crescent Apartments in Wauwatosa, which opened last spring.
There is a backlog of as many as 1,500 units that are in the planning or approvals process, Pecor said.
The lack of supply tied with tight demand is made clear in what landlords are charging for rents. Wauwatosa had the highest rent growth in the area last year, of around 9.5%, Pecor said.
“We’re going to continue to see that rent growth if they don’t keep up that rate of supply,” he said. “If they don’t build this inventory to meet this demand, landlords have the power to keep pushing rents at that rate.”
Stoll also pointed to strong apartment growth in outer-ring suburbs and exurbs, including Mequon, Cedarburg, Grafton and Hartland.
Apartment projects there look different than the downtown towers. Stoll said developers are building apartments that feel like single-family homes, with private entrances and attached garages. Developers are also starting to introduce better amenities to these areas, such as restaurants.
“A lot of our clients have gotten really smart at looking at those markets,” he said.
One such project is the proposed redevelopment of the Wilo Machine Co. plant in Cedarburg. The plan calls for 220 new residential units, including a pocket neighborhood of 26 single-family homes, 44 townhouses and two apartment buildings totaling 150 units.
Another consequence of rising rents, low vacancies and higher yields is an increasing level of investor interest.
Recent investment deals include California-based Hilbert Properties’ acquisition of two apartment properties in Milwaukee for nearly $39.4 million. The two properties included the Easton on the city’s East Side and the Quartet in Walker’s Point. Illinois-based Next Realty LLC recently bought the Dolphin Square apartments in Wauwatosa for $10.3 million.
Pecor said total sales of area multi-family properties in 2021 reached about $420 million, more than double the previous year’s levels and a nearly 60% increase from the previous record set in 2019.
Out-of-state investors accounted for 63% of total sales volume, or a little more than $260 million, he said. In 2020, they accounted for 12%. The three-year average between 2017-‘19 was about 53%. The remaining $160 million in local investment deals last year marks one of the most active years for local investors as well, Pecor added.
Stoll said multi-family properties make for sound investments.
“What we really like about multi-family as it relates to being one of the stronger asset classes is it has very low volatility,” he said.
An office property could lose one big tenant and have a sizable chunk of space become vacant. In comparison, an apartment building rarely sees mass, sudden vacancies, short of a major insurance claim, he said.
One thing Stoll said he will have his eyes on is how quickly the new downtown Milwaukee luxury towers fill up. Those properties are pushing the boundaries of high-end rental rates, he said. While many high-end properties are charging $2 per square foot or more per unit, the newest ones will be around $3 per square foot.
Stoll said he wonders how much of an appetite Milwaukee renters will have for that high-end pricing. It is not a massively high-income market like Los Angeles or New York, he noted.
But there are signs that there’s appetite for that price point in Milwaukee. The 35-story, 310-unit 7Seventy7 apartment building at 777 N. Van Buren St. downtown, for instance, has high occupancy, Stoll said. Industry experts say that building paved the way for other luxury towers now under construction in Milwaukee.
Stoll also pointed out that Ascent developer New Land Enterprises said the project is drawing strong early interest from prospective tenants. The Milwaukee-based firm said in December Ascent had 26 reservations, something New Land hadn’t seen before at this stage of development.
“Is it a concern? No,” Stoll said. “It’s just going to be very interesting to see how that product gets absorbed.”