Apartment Finance Today

REGIONAL MARKETS

MIDWEST

Madison Begins Again

APARTMENT FINANCE TODAY • June 2008

Limited new construction and for-sale slowdown allow rent growth.

BY JERRY ASCIERTO

Madison, Wis. — A condominium and single-family housing boom that began earlier in the decade has abated here, allowing owners to raise rents and eliminate concessions for the first time in years.

The Madison market is expected to add about 450 units this year, up from 220 in 2007. The limited construction activity helped vacancy rates to drop in 2007, and the doubling of units expected to come online this year still constitutes only 0.5 percent of the market’s entire stock.

“We absorbed about 1,500 units marketwide in 2007, so we had a nice reduction of vacancy in the market,” said Mike Dean, a Middleton, Wis.- based vice president of investments for apartment broker Marcus & Millichap. “We’ve seen a really dramatic change in concession activity.”

From 2004 to 2006, one month free with a year lease was the standard concession throughout the market. But last year, that offer shrank to two weeks, and this year, very few developments, mostly Class C properties in Class C locations, are offering concessions.

The single-family housing meltdown has also helped to reduce the market’s vacancy rates. Last year, Madison’s vacancy rate dropped 1.4 percent, and this year, vacancies are forecast to drop another 60 basis points to reach 5 percent by yearend. Effective rents are forecast to grow 2.8 percent to reach $807 per month by the end of the year, according to Marcus & Millichap.

The area’s strong local economy— which relies on education, state government, and the insurance industry —has helped insulate Madison from the economic malaise affecting many Midwest markets. Employers are expected to add 2,100 positions in 2008, bucking the trend of job losses occurring in nearby Rust Belt cities. “We really don’t boom when others boom, but we don’t generally bust when others bust,” Dean said.

And sales velocity is picking up. The subprime mortgage meltdown all but froze sales of multifamily properties in 2007, as sellers weren’t sure how to price properties and buyers weren’t sure what kind of financing they could get. But once the capital markets began to settle down toward the end of the year, Madison was again attracting investments. “We’ve already had more sales in 2008 than we did in all of 2007,” said Dean, declining to provide specifics.

Lucky Apartments to contribute to student housing market

The student housing market makes up a large part of the rental inventory in Madison. About 40,000 full-time students at the University of Wisconsin’s flagship school, UWMadison, and the students going to Edgewood College and Madison Area Technical College push Madison’s student population above 50,000. So it’s no surprise that the largest development being built in Madison is a student housing property. With 359 units, Lucky Apartments will make up about 78 percent of the city’s total unit production for the year, according to Marcus & Millichap.

“If you’re not capturing that student market and you want to rent downtown, you’re basically turning your back on a captive audience of 40,000,” said Dan Seeley, the community manager for Lucky Apartments.

Developed by Steve Brown Apartments, the property Seeley manages is part of a large mixed-use development in University Square, an area of downtown Madison that sits in the middle of UW-Madison’s East Campus. In addition to the 10- story apartment tower, the development will include 134,000 square feet of retail space on the ground floor and an 11-story tower owned by the university, which will be used for offices, student organizations, and even the campus radio station.

The rental units are priced for a broad range of incomes. The first three floors are the most affordable, but as you go up the 10 stories of Lucky Apartments, the finishes, appliances, and furniture become more impressive and the price more expensive. Rents range from $465 for a studio to $4,000 for a four-bedroom on one of the top floors.

“One of the goals of the organization is to provide something for every single economic bracket, and Lucky is sort of a microcosm of our overall portfolio,” said Seeley.

Lucky will offer concierge services such as housekeeping, as well as shuttle services. The development features 40 studio apartments and 30 four-bedroom, 40 three-bedroom, 139 two-bedroom, and 110 one-bedroom units. The company anticipates that more than 850 residents will move in when doors open in August, and at press time, the property was more than 90 percent pre-leased.

Lucky will also feature several green building features such as a green roof, a park-like environment of vegetation that absorbs rainwater to prevent runoff; porous concrete, which allows water to seep down into the water table; and a heatpump loop system, which saves energy by recycling heat.

Other student properties are in development near campus. Stevens Construction Corp., known more as a general contractor, is developing a student property at 1022 W. Johnson St. in the city’s Near West neighborhood, about a quarter of a mile away from Lucky Apartments. The 14- story, 162-unit building is expected to come online in 2009.

And Steve Brown Apartments is eyeing a redevelopment of a 120-unit downtown property on the west side of campus.

“A lot of our construction of late has happened around the student area,” said Dean. “Developers figured out that there was a market for higher-end, well-located product, and the market has paid up for that.”