Milwaukee's Tall Order

The Milwaukee area is in the midst of a solid recovery after three years of minimal development and slow rent growth.

The muted pace of new construction from 2008 to 2010 kept supply constrained during the downturn—an average of just 394 units were delivered annually during that period. But the recovery is now fueling a construction boom in the multifamily housing sector, particularly in the Downtown and East Side submarkets.

Nearly 2,100 units among 17 projects have recently been completed, are under construction, or are planned for completion metrowide by the end of 2014. The pipeline runs the gamut from student housing to low-income housing tax credit (LIHTC) projects and, of course, a complement of market-rate developments.

In fact, aside from limited construction in the industrial market, apartment projects represent the bulk of construction activity in the area.

Demand Won't Quit

All of this additional inventory is unlikely to have a significant effect on vacancy rates or asking rents, due to continued demand growth in the market. Consider that in the fourth quarter of 2011, 189 new units were delivered to the market, yet the vacancy rate fell another 20 basis points, ending the year at a very healthy 3.9 percent. And thanks to strong supply and demand fundamentals, the market is expected to improve upon that figure, with New York–based market research firm Reis forecasting vacancies between 3 percent and 4 percent through 2015.

Milwaukee's diverse economy and its quick rebound from the recession have kept its local unemployment rate in the high–6 percent range. Payrolls grew by a healthy 2.3 percent last year and are expected to grow another 1.2 percent this year. Construction activity has also been spurred by demographic trends among young adults, who show less interest in the suburban sprawl and more desire to live, work, and play in relatively concentrated urban areas.

These demographic and employment trends will likely maintain upward pressure on rents in Milwaukee for the foreseeable future. Annual rent growth of between 4 percent and 5.3 percent is being forecasted by Reis out to 2015.

Breaking Ground

The repositioning of assets during the recession has helped speed recovery in Brew City. Such was the case with Park LaFayette Towers, a condominium venture that became distressed after the original developer filed for bankruptcy. To reposition Park LaFayette, the Mandel Group, a prolific, locally based developer, converted the 280-unit complex into high-end apartments. The reincarnation was an instant success, and the complex is currently 96.4 percent occupied.

The Mandel Group also recently broke ground on Phase II of its North End project, which should be completed by April 2013. Phase II will add 155 apartments to the 83 condos completed in 2009. The new apartments will offer a blend of market and below-market rents.

Another recent development with a mix of product types has brought a new and welcome sight to the Milwaukee skyline. The 30-story Moderne, located along the vacant Park East corridor, is expected to be a catalytic project for the area, with hopes that it will spur development among adjacent vacant parcels. Comprising 203 market-rate apartments and 14 condos, the structure was financed through a combination of Department of Housing and Urban Development loan guarantees, a city loan, and private equity. Ground was broken in early 2011, and the project is on schedule to be completed by late summer 2012.

The affordable housing market has also featured in the city's construction boom. The reinvention of the Beerline B along the northern portion of the Milwaukee River has been a study in patience and perseverance. The area was primarily a center for major tanneries during the Industrial Revolution, but, over time, pollution and neglect led to consideration of the area for a prison in the 1990s. Ground was broken on the first condominium units in the fall of 2000, and, today, Commerce Street, the corridor's main thoroughfare, is a thriving area with 850 multifamily units.

The most recent addition to the area is the two-building, 140-unit Beerline B Apartments. The corner on which Beerline B Apartments now stands was vacant far longer than expected due to environmental concerns, so the completion of the project created a welcome entry point to the community. The development was completed in March and was financed by a mix of LIHTCs and bank debt, which is representative of most projects in the area.

Outside of the city center, privately fi- nanced projects have been leading the way in Milwaukee's urban suburbs.

The Mandel Group is constructing Light- Horse 4041, located immediately north of Milwaukee in Shorewood, with an expected completion date of August 2013. With 84 apartment units and more than 18,000 square feet of retail, the asset is a bright addition to an already successful community.

The Milwaukee multifamily market is as healthy as it has ever been, especially with the return of private equity to the market. Vacancy and rents are trending in the right direction, even with significant additions to existing product. Solid supply and demand fundamentals and a slow recovery in the for-sale market will continue to drive growth in the Milwaukee rental market for at least the next three to five years.

Benjamin Schmitt is a Milwaukee-based researcher and associate in the Capital Markets and Private Capital Group of CBRE.