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Boom or bust?

With area rents as sky-high as the buildings going up, is the multifamily boom headed for a fall?

To meet continued demand, Greater Madison has been in the throes of a multifamily building boon for years. The City of Madison reports an increase of 1,500 to 2,000 renters per year.

To meet continued demand, Greater Madison has been in the throes of a multifamily building boon for years. The City of Madison reports an increase of 1,500 to 2,000 renters per year.

Ian Cameron

(page 1 of 3)

From the pages of In Business magazine.

Every yin has a yang. Every flow, an ebb. So when considering the strength of the multifamily market in this area, from 14-story behemoths downtown to multi-building developments stretching from Middleton to Fitchburg to the Sun Prairie/DeForest area, one might wonder if it will all come to a halt one day soon.

Is the area overbuilding? How can there possibly be enough renters to fill all the apartments? What happens then?

First of all, we’ve heard it all before. Madison is a unique and somewhat isolated market, being the seat of state government, the flagship of one of the best university systems in the world, and home to solid and storied businesses that have been around for decades. That’s all true.

And then there’s Epic.

One expert we spoke with suggested that Epic employees, who likely can afford the bumped-up rents, occupy as much as one-third of any of the higher-end apartment complexes in the downtown area.

In 2016, the U.S. Census reported that millennials (ages 15-34) made up 85.9% of residents in the downtown/isthmus area.

Obviously, a big chunk are students, but the multifamily buildings that many of them occupy, according to commercial real estate developer Oakbrook Corp., make up 13.4% of the city’s total tax base yet account for 28.4% of the real estate tax increase in 2017.

In total, Madison has 948 multifamily projects (eight units or greater) in its multifamily assessment pool. In fact, two buildings alone — Hub I and Hub II (aka The James) — represent a $120 million increase in assessed value and 20% of the total assessment increase.

But this story isn’t all about Epic employees or the Hub. This is about what happens when the area’s multifamily market builds up, up, up, reaches the apex, and then begins a backward slide. Can it happen here? Will it happen? And will there be telltale signs?

The city’s take

Matt Wachter, housing initiatives specialist for the City of Madison Community Development Authority, has just completed the first of what will be a biennial housing report. He admits that some current data is lagging because the city relies on other sources that may not have real-time numbers, but it’s the best look available, he says, and takes various reports into consideration.

Wachter states his case for continued multifamily housing. “From 2007 to 2015, renter households in the city increased by about 17,000. Most of those were under age 34, in the primary rental age group.”

Madison, he says, looks at several metrics when arguing for more development, including supply data and building permits. “For years we were gaining more renters than units. That’s when vacancy went from 5% to 2%,” Wachter explains. In 2014, building permits came up near the level of households added.

“Only since 2014 has vacancy crept up close to 3%,” he says, per a quarterly Madison Gas & Electric report that measures activity by zip code. The city considers a 5% vacancy rate to be a target rate. “When the vacancy rate is one or two percent, people don’t have choices,” Wachter explains. “So the balance of power between landlords and tenants favors landlords who can then afford to be choosy and raise rents.” Banks also hope for a 5% vacancy rate, but Wachter notes that hasn’t happened “since 2007 or 2008.”

Some zip codes are at 5% vacancy while others are far lower. The 53719 zip code, for example, has less than a 1% rate (.71). “On the demand side, we’ve been adding 1,500 to 2,000 renters per year, so when we talk about all the new apartment construction, the large developments may have 200 to 300 units but many have just 20 or 50 apartments. How many of those do you need to reach 1,500?”

Madison has been blessed for decades with demand growing about 1% per year and closer to 1.5% per year since the recession. On the supply side, new projects can take as long as two years to complete, sometimes more. “We look at the pipeline of products,” Wachter says. “What’s under development right now? What permits have been pulled? And we look at what is currently in the approval process, which can be hard to measure. Just because something gets proposed or submitted doesn’t mean it will cross the finish line.”

Does he see a softening of the multifamily market in the near future? “It’s tough,” he sighs. “On the demand side we look at leading indicators like unemployment rate and GED growth.” With Madison’s unemployment rate currently at 2.1%, he is confident that demand will remain strong.

On the supply side, Wachter says given the strengths of the local economy and the jobless market, multifamily construction needs to continue to meet existing demand, though he doesn’t think building will remain at 2014–2015 levels. “I’m sure it will slow down and taper.”

It may come down to a capacity issue, he suggests. “After the recession, the construction industry lost so many people. Developers are tied up in projects but there’s a cap on how much they have the capacity to do, and the lending community is in the same boat. They can’t get too far out with their money being lent out, so all of these things throttle how much development is happening.”


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