Milwaukee area residents are making more money, and that’s good news for multifamily owners who’ve seen occupancies tighten and rental rates increase.
“People seem to be financially healthier today than they have been,” said Jadine Chou, property manager with Urban Solutions LLC, a local apartment owner and manager. “We are seeing applicants with higher incomes, and that gives us the ability to increase our rents.”
In 2006, the average household income grew by 4.7 percent, close to twice the 2.5 percent pace in 2005, according to Reis, Inc. This year, average household income is expected to expand by 3.3 percent, and for the next five years, income growth is forecast to increase by more than 3 percent annually.
Over the past 12 months, Milwaukee’s multifamily market has seen its vacancy rate fall from 5.9 percent to just 4.8 percent, according to Reis. During that same period, rental rates increased 2.3 percent to an average of $807.
“It’s certainly a better time to be a landlord today than it was three years ago, as we see more people gravitate to apartment living,” said Gordy Welsh, assistant vice president of investment properties for Siegel-Gallagher Real Estate.
Higher paying jobs
The improved multifamily market can be linked directly to Milwaukee’s improved economy and an increase in better paying jobs, said Garry Benson, CEO of Garrison Partners, a Chicago-based company that is converting luxury apartments along Milwaukee’s lakefront into upscale condos.
“Milwaukee is creating jobs, but they’re not just any jobs—they’re white-collar management jobs, which have the best impact on the multifamily market,” Benson notes. “The city has transitioned from a manufacturing-based economy to a service-based economy.”
With companies like U.S. Bank, Northwest Mutual Insurance, and Blue Cross Blue Shield expanding, Milwaukee’s unemployment rate has steadily declined over the past three years and now sits at about 5.5 percent. At the same time, the number of jobs in high paying sectors has increased, according to the Metropolitan Milwaukee Association of Commerce.
For example, employment in educational and health services was up 2.6 percent in February, while financial employment jumped 2.1 percent, government jobs expanded by 2 percent, and professional and business service employment increased 1.3 percent.
“The mayor is trying very hard to bring headquarters jobs to Milwaukee, and those efforts have revitalized the city,” said Chou of Urban Solutions, adding that the company’s 300-unit portfolio, which is located in Milwaukee’s urban core, is about 98 percent leased. “Over the last 12 months, we’ve had no trouble renting our buildings and keeping them occupied with quality tenants.” The company increased its rental rates by between 6 percent and 7 percent in 2006 and expects to do the same this year.
Milwaukee-based Fiduciary Real Estate Development Inc., also has seen a significant improvement in its occupancies and rental rates, said Vice President Kathy Nettesheim. “We’re definitely bouncing back from the past few years,” she notes. “Last year, we had the best portfolio performance we’ve had in the past four years. This year will be even better.”
Fiduciary’s 1,200-unit portfolio is about 98 percent leased, and the company has been raising rates on new leases by between 2 percent and 5 percent depending on the floor plan, Nettesheim said. For renewals, the company is getting 3 percent increases. “We’re not giving any renewal incentives anymore—only capital upgrades like new paint, faucets or flooring,” she explained.
Across Milwaukee, most owners have been able to abandon the practice of offering several weeks of free rent to entice residents to their properties. “Over the past few years, we haven’t been able to raise rents because there wasn’t a lot of demand,” said John McCardle, senior vice president of NAI MLG Commercial, which manages 200 apartment units in and around Milwaukee. “If they had tried, people would have just gone to the competition to get free rent and a lower rate.” Today, NAI MLG Commercial is increasing rental rates by about 3 percent, generating $10 to $25 more per unit per month.
Few new units
Milwaukee’s multifamily market also has been favorably affected by a lack of new development and by condo conversion activity. Over the past three years, the city’s apartment inventory actually decreased 0.1 percent, according to Reis. In 2006, for example, only 85 units came online.
Unlike many other Midwestern markets, land zoned for multifamily is hard to find in Milwaukee, McCardle said. Plus, many municipalities have very difficult entitlement processes. Nonetheless, new development is expected to ramp up over the next few years, with 3,655 units coming online by 2011.
Most of the new apartment development is planned for Milwaukee’s urban areas. In particular, the Third Ward area just south of the central business district has morphed from a tired industrial area to a trendy residential neighborhood with loft apartments.
To date, the majority of the residential development in and around downtown has been condos, said Joshua Manchester, a broker with Coldwell Banker Commercial NRT who specializes in multifamily property. “There’s been an absolute surge of condo development throughout downtown,” he notes, adding that entry-level pricing is $250,000.
In addition to new condo development, many upscale apartment complexes have been converted. “Condo conversions have taken a lot of the product out of the market, helping the apartment market tighten,” Nettesheim said.
On average, downtown Milwaukee absorbs 600 to 700 condos per year, according to Benson. His firm is in the process of converting Lake Bluff Apartments into condos. The four-story mid-rise property is located along Lake Michigan and is selling for $325 per square foot. Of the 110 units, 22 are under contract, he said, adding that 20 percent of people who rented apartments in Lake Bluff bought condos.
However, most condo projects in Milwaukee aren’t generating buyers at the expense of the apartment market, said Joe Mandeville, assistant vice president of multifamily lender Red Capital Group. According to his research, condos are not even impacting Class A properties, where the vacancy rate sits at 3 percent.
Increasing property values
Milwaukee’s lack of new development, coupled with its increasing land values, makes it an attractive locale for investors. While institutional investors and real estate investment trusts exit the market, private buyers from across the nation are shopping the Brew City, according to Welsh.
For example, Welsh and his partner Patrick Gallagher recently brokered the sale of a three-property portfolio for Equity Residential. The 686-unit portfolio received six offers, while each property received about 18 offers, he said. Locally-based Mandel Group purchased the portfolio for an undisclosed price.
Similarly, Fiduciary Real Estate Development purchased two properties with 516 units in December 2006. One of those properties, the 236-unit St. James Place, traded at a 6 percent cap rate.
Properties in Milwaukee are selling for $50,000 to $150,000 per unit. The exception was Lake Bluff, which sold for $250,000 per door, according to Red Capital Group.
Average cap rates in Milwaukee are in the 7 percent to 8 percent range, according to Matthew Whiteside, a broker in Marcus & Millichap Real Estate Investment Co.’s Milwaukee office. However, better quality properties have dropped to mid-6 percent cap rates. “Compared to five years ago, investors used to get a double digit cash-on-cash return in year one,” he explains. “Now we’re selling stuff on 5 percent cash-on-cash one-year returns.”
Urban Solutions’ Chou said that property values have increased significantly. “We’re constantly being approached to sell our properties,” she notes. “We see Milwaukee as a growth market and so do a lot of other investors.”