Heartland Real Estate Business

FEB 2018

Heartland Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Midwest.

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www.REBusinessOnline.com Heartland Real Estate Business • February 2018 • 15 M A R K E T H I G H L I G H T: M I LWA U K E E CONSTRUCTION PACE RAMPS UP FOR MILWAUKEE'S MULTIFAMILY MARKET Last year, Milwaukee's stable household growth and greater afford- ability in the rental market compared to that of homeownership supported demand for multifamily products. Area employers added 8,000 jobs in 2017, with hiring led by the leisure and hospitality sector, a segment with a large percentage of renters. In 2018, employers are expected to add an estimated 10,000 new posi- tions. Many of the new jobs will be re- lated to the construction of Foxconn's massive manufacturing facility in Mount Pleasant. The Foxconn facility project, once completed, will employ up to 13,000 people, help support the formation of approximately 5,200 new households this year and bolster demand for apartments in the metro and along the I-94 corridor south of Milwaukee. Elevated development activity will help meet surging de- mand. Increased deliveries Last year, the pace of construction ramped up with builders delivering 3,800 apartment units. In the third quarter alone, approximately 1,965 units were completed, which repre- sented the greatest number of comple- tions in a single quarter this decade. In the first half of 2017, develop- ers concentrated on the Downtown/ Shorewood submarket and shifted their focus in the second half of the year to the Near North/West Side/ Wauwatosa and Waukesha County submarkets. The largest project com- pleted last year was The Junction in Menomonee Falls, which comprised 318 units. Deliveries will reach a cyclical high in 2018 with 3,900 units slated for completion. Nearly every submarket is scheduled to receive new inventory. The bulk of the new inventory will be concentrated in the area extend- ing from downtown Milwaukee west along the I-94 corridor to Wauwatosa. The deluge of new apartment prod- ucts this year will further impact va- cancy rates. Last year, robust construction pushed the vacancy rate up 40 basis points to 3.6 percent. Given the mas- sive wave of new supply set to hit the market in 2018, vacancy will rise slightly. Over the course of the year, vacancy is predicted to increase 50 basis points to 4.1 percent, but rent growth is expected to continue. Impact on rental rates Substantial rental demand in 2017 brought the metro's average effec- tive rent up 3.5 percent to $1,040 per month, advancing at a moderately slower pace than the previous year. Class A apartments led rent growth, registering a 7.9 percent rise to $1,471 per month over the 12-month period ending on Sept. 30. In 2018, average effective rents are projected to rise for a seventh year, in- creasing by 3.4 percent to $1,075 per month. Rising rents will support a highly competitive sales environment for apartment assets. Stable rent growth, high occu- pancy and strong cash flows encour- aged many owners to hold onto their properties last year, which resulted in a sharp drop in sales that was com- pounded by a lack of available assets to trade into for 1031 exchange buyers. Those investors who successfully ac- quired multifamily products focused their purchasing on the downtown and surrounding neighborhoods where tenant demand was greatest. Looking forward, the factors that slowed investment activity last year will continue to be in play in 2018. That said, increased deliveries should create new acquisition opportunities. The expectation of rising interest rates this year may prompt some owners to list their properties while investor de- mand remains elevated. Still, available listings will be limited and further intensify the competition for multifamily assets, particularly those in the Bay View neighborhood of Milwaukee, Wauwatosa and Ra- cine County near Mount Pleasant. The tight supply will require buyers to have realistic pricing expectations and bring strong opening offers to en- hance their chances for success. Matthew E. Whiteside Senior Managing Director, Investments, Marcus & Millichap A Record of Success mavcm.com Learn More: Ben Kadish, President: 312.268.6000 312.953.4344 Ben.Kadish@mavcm.com Maverick Commercial Mortgage, Inc. is a Chicago-based commercial mortgage banking firm geared at funding mortgage loans for its clients on all property types ranging from $2- $50 million. As mortgage banking experts with more than 30 years' experience, we understand both the requirements of lenders and the needs of our borrowers and developers in completing the loan transaction. 2118 North Natchez: $17,650,000 Closing Date: October 2017 Chicago, Illinois Construction Loan, 108-unit Multi-Family Development Walker Building: $7,825,000 Closing Date: November 2017 401 SE Sixth Street, Evansville, Indiana First Mortgage Loan, 110,000 SF Office Building R E C E N T C L O S I N G S

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