Madison, Wis. – As the state capital and home to one of the nation’s largest universities, this city has always had an extremely tight multifamily market. However, the unbridled development of condos, student housing, and single-family homes over the past three years has created a renter’s market with lots of concessions and no rental rate growth for owners.
“If you’re a developer in Madison, you’d certainly like to see less development,” said Gary Gorman, president of Gorman & Co., Inc., a Madison-based firm that owns eight apartment and condo properties totaling about 200 units. “With the amount of new projects in the pipeline, it will take five or six years to absorb everything.”
Steady economy can’t float rentals
More than 500,000 people call the Madison metro area home, and roughly 208,000 of them live in the city of Madison, according to the 2000 census. Many of the city residents are either students at the University of Wisconsin, which has an enrollment of more than 40,000 in Madison, or they work for state-funded organizations.
“A decent chunk of the housing market is driven by the state and county government and the university,” said Tom Landgraf, principal of Madison-based Dimension Development, LLC, and a senior lecturer in the University of Wisconsin’s real estate department.
The university’s presence in Madison has helped to diversify the area’s economy, bringing high-tech and biotechnology jobs. Historically, the Madison metro area has boasted an unemployment rate of less than 4 percent and job growth of about 1 percent annually. At the end of the first quarter of 2006, the unemployment rate was 4.7 percent, as it has been for the past 12 months, according to the Bureau of Labor Statistics.
“Madison’s economy is fine, but it’s not translating into the multifamily market,” said Nancy Jensen, executive director of the Apartment Association of South Central Wisconsin (AASCW). “The multifamily market is really struggling.”
Before the rapid influx of new units in the past few years, Madison, which is part of Dane County, boasted an occupancy rate of 99 percent, Jensen said, but demand and supply have gotten out of whack. The soft market can be blamed on several key factors, she said – the rush to home ownership, cutbacks in government employment, and stagnant student enrollment at the university.
From 2000 to 2005, Dane County added 14,679 new single-family homes – an increase of more than 10 percent to the single-family housing inventory. During that same period, the region’s multihousing inventory increased by 13,192 units, bringing the total number of available apartments and condos to more than 50,000 units, according to the U.S. Census Bureau.
“Until recently, development was rather aggressive,” said Bruce A. Martin, director of operations for JSM Properties, LLC, which currently manages approximately 1,400 apartments in downtown Madison and on the city’s west side. “It seemed like every week another project was either approved or starting construction – everything from houses to condos to apartments.”
Despite the fact that the university capped student enrollment, it worked with several private developers during that housing boom to embark upon an ambitious student housing development program, Landgraf pointed out, something that hasn’t occurred since the 1970s. In fact, a well-known student housing developer recently told Landgraf that current rates for his units are the same as several years ago.
“The capped enrollment and new product has created a renter’s market near campus,” Gorman said, “something I’ve never seen in my lifetime.” Moreover, the new housing options for students have gutted the market for low-end rental housing, notes Eileen Bruskewitz, an apartment owner and founder of the Madison Landlords Association. “That section of the market is not filling up,” she said, adding that a lot of renters have been able to trade up into nicer units or transition to homeownership over the last few years.
The area’s average occupancy rate today is just 92 percent, according to the AASCW. In fact, many properties have 12 percent to 15 percent vacancies rates, and even subsidized housing is 9 percent vacant. Madison Power & Electric, which also measures vacancy, reported a 5.4 percent vacancy rate at the end of the first quarter.
“I would warn developers not to be overly persuaded by the strong economy and low employment, because that doesn’t translate into feverish housing demand,” Gorman said. “Concessions are rather commonplace in the market, and one to two months free rent has become standard.” He doesn’t expect to see any rental rate growth for at least two to three years, though he does expect occupancy to increase as interest rates rise further and fewer residents become owners.
Condo developers maintain frenzied pace
“In the last few years we’ve not been able to absorb what’s been constructed, but we all hope that we’ll get back to equilibrium soon,” said James Stopple, president of Madison Property Management, Inc., a locally based firm that owns and manages 2,000 units throughout Dane County.
Single-family home and apartment development has tapered off quite a bit over the last 12 months, industry experts note. While rising interest rates can be blamed for the slowdown in single-family properties, a new zoning ordinance enacted in 2004 – the inclusionary zoning (IZ) ordinance – has damped rental development in the city, Jensen said.
The IZ ordinance requires that 15 percent of any new rental property be rent-controlled and income-capped. Since the ordinance was adopted, no rental projects have been developed within the Madison city limits. Instead, all of the new apartment development has occurred in suburban areas such as Monona and Verona. “Now, developers are getting approval for apartments in downtown and then changing their mind and building condos,” Jensen noted.
Or investors are buying downtown condos and then leasing them as apartments, said Peter Korotev, president of The Korotev Group, a Madison-based property management company. “This has really added a bizarre element to the rental market,” he said.
Madison’s downtown is the healthiest rental market and most active condo development market, Martin said. “The downtown market has seen pockets of vacancies here and there, but overall it’s very strong,” Martin said, explaining that downtown units are attracting young professionals and empty nesters.
For example, Urban Land Interests, LLC’s Tobacco Lofts at Findorff Yards is completely leased. The 61-unit project came online last summer and all of the units were leased by December 2005, said Debra Mickelson, controller with Urban Land Interests, a locally based firm that owns, manages and develops apartments downtown.
Of the 244 rental units that Urban Land Interests manages downtown, only one was vacant as of mid-May, Mickelson said. “We enjoyed a monopoly of having the only high-quality apartments in downtown, so we’ve been achieving 3 percent to 5 percent increases in our rents,” she said. “We’ve never had to offer any concessions.” However, she said there’s been a lot of turnover in the complexes as residents have purchased nearby condos.
And apartment residents looking to become condo owners have plenty of options.
“The condos sell just about as fast as they go on the market,” Landgraf said.
Currently, there are nearly 1,000 condos under development in downtown alone, said Randall Alexander, CEO of the Alexander Co., a local developer. Alexander Co. is currently building 400 condos plus retail and office space two blocks west of the Capitol. Dubbed Capitol West, the project will include several buildings ranging from mid-rise townhouses to a 14-story building. The development is scheduled to be completed in 2008 and 12 percent of the units will be affordable, even though the for-sale units don’t fall under the IZ requirements.
Capitol West is just one of several downtown condo projects that are either under construction or in the pipeline. For example, Madison-based Cliff Fisher Development is in the midst of constructing Metropolitan Place’s second phase, which consists of a 13-story, 164-unit luxury condominium building with ground-floor retail, and Gorman & Co. has a 160-unit condo project called Avenue 800 that is waiting for approval.
“There’s more risk in the Madison market than there used to be,” Gorman said. “It’s not [in] danger from the economy collapsing, but [from] supply and demand for housing. Demand will increase incrementally, but if supply continues to grow at the pace it has, then we have a long-term problem.”