2q18 | milwaukee, wisconsin market overview & multifamily ... · models foresee clouds on the...
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Market Overview & Multifamily Housing Update
2Q18 | Milwaukee, Wisconsin
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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
Milwaukee, Wisconsin
After a “lost” year in 2017 (Milwaukee payrolls increased only 2,800
jobs) the Milwaukee economy showed considerably more grit in the
first half 2018. Establishments added to payrolls at a 8,200-job, 0.9%
year-on-year pace, the fastest growth recorded in over two years.
Improvement in the manufacturing sector was largely responsible for
the rebound. Factory headcounts increased at a 3,400-job, 3.2% annual
rate in 2Q18, a growth trajectory unseen since the quarters
immediately following the Great Recession. Metals fabrication led the
charge, adding workers at a 700-job, 3.2% YoY pace, boosted by the
Administration’s steel tariffs and continued robust car and light truck
demand. In turn, factory wage growth remained strong, rising 5.6%
over the year in the first quarter before softening in the spring.
Rising incomes contributed to increased home building, elevating
construction headcounts at a brisk 1,000-job, 3.2% annual rate. At the
same time, hiring in the higher compensation professional and
healthcare service sectors caught an updraft, adding a combined 3,700
(2.0%) jobs YoY over the year’s first six months, well over two times the
growth observed in the comparable period of 2017.
A soft patch in late spring notwithstanding (Milwaukee payrolls slipped
a net of 6,100 jobs in May and June, according to seasonally-adjusted
data) the intermediate economic outlook appears bright. RED Capital
Research’s MILW payroll forecasting equation (adjusted-R2=96.1%,
SE=0.3%) projects that job growth rates in the low-1% area are likely to
persist through spring 2019, corresponding to fairly vigorous expansion
in the equation’s independent variables, notably U.S. and Chicago job
growth and U.S. industrial production. Unfortunately, our macro
models foresee clouds on the horizon for the U.S. expansion in the
form of higher interest rates and reduced net job creation.
Consequently, Milwaukee growth is likely to stall in 2020 and 2021.
Moody’s Analytics are moderately more optimistic than our models
through 2019, but this service also anticipates slower expansion during
the subsequent two years with negligible net employment growth.
2Q18 PAYROLL TRENDS
AND FORECAST
Payroll Job Summary
Average Payrolls 878.1m
Annual Change 2Q18 8.8m (1.0%)
RCR YE18 Forecast 8.8m (1.0%)
RCR YE19 Forecast 6.1m (0.7%)
RCR YE20 Forecast 2.1m (0.2%)
RCR YE21 Forecast 0.6m (.%)
RCR YE22 Forecast 2.1m (0.2%)
Unemployment (NSA) 3.8% (6/18)
Occupancy Rate Summary
2Q18 Occupancy Rate (Reis) 95.3%
RED 50 Rank 23rd
Annual Chg. (Reis) -1.0%
RCR YE18 Forecast 95.0%
RCR YE19 Forecast 96.4%
RCR YE20 Forecast 96.5.%
RCR YE21 Forecast 96.4%
RCR YE22 Forecast 96.2%
Typically among the most stable markets in the country, Milwaukee
experienced an uncharacteristically steep occupancy decline over the
course of the last year. Occupancy plummeted -100 basis points to
95.3%, the largest annual decline recorded in Milwaukee in nine years,
dropping MIL from 15th highest occupancy among the RED 50 large
market peer group to 23rd. The issue was not so much one of weak
demand. Indeed, tenants net leased 237 units of previously vacant
space in 2Q18, nearly equal to the 259-unit post-recession second
quarter average. Rather it was a surplus of supply. Developers
completed 2,335 units over the year, more deliveries than in any 12-
month period since 1991. Brookfield (5.7%), City East (4.9%) and Cudahy
(5.5%) submarkets recorded the largest inventory increases and the
biggest occupancy rate declines. Each saw submarket vacancy increase
by 190bps or more, while only City West (-1.9%) saw vacancy decrease.
Axiometrics surveys of 304 investment grade, stabilized same-store
properties uncovered somewhat higher occupancy. The sample was
96.28% occupied in 2Q18, down -74bps year-on-year. A 109-asset
sample of class-C properties (97.5%) reported the highest occupancy
among classes, and also the best YoY performance (unchanged). By
contrast, classes-A (94.4%) and –B (96.3%) suffered -140bps and –82
bps rate decreases over the year. Lease-up at 12 properties delivered
since 2016 was sluggish, averaging only 1 unit per month, compared
to 6 in 2Q17. Ten were more than 90% occupied in 2Q18, however.
Above trend supply will persist in the market through year-end. RCR’s
occupied stock growth (ARS=88.2%/SE=0.37%) model suggests that
occupancy is likely to decline another –30bps under the
circumstances. Conversely, we expect conditions to improve
significantly next year as supply recedes. Metro occupancy is likely to
claw back above 96% by the fall of 2019, and hover in the low– to mid-
96% area through the end of the 5-year forecast interval. Axiometrics
also anticipate further occupancy decreases for the balance of 2018,
and a degree of recovery afterward, but this services does not expect
metro occupancy to remain above 96% consistently through 2022.
2Q18 ABSORPTION AND
OCCUPANCY RATE TRENDS
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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
Milwaukee, Wisconsin
Effective Rent Summary
Mean rent (Reis) $983
Annual Change 4.4%
RED 50 Rent change Rank 23rd
RCR YE18 Forecast 4.2%
RCR YE19 Forecast 2.1%
RCR YE20 Forecast 1.5%
RCR YE21 Forecast 0.9%
RCR YE22 Forecast 1.4%
Trade & Return Summary
$3mm+/60+ unit Sales 1
Estimated Proceeds $6mm
Average Cap Rate (FNM) 5.7%
Average Price / Unit $47,083
Expected total Return 7.1%
RED 50 ETR Rank 12th
Risk-adjusted Index (ETR/OETR2) 7.24
RED 50 RAI Rank 5th
Rent trends rebounded from 1Q18’s unseasonably slow $1 (0.1%)
advance with a robust $16 (1.7%) gain during the spring quarter,
according to Reis. The performance compares well to the market’s
0.5% average increase during the previous seven post-recession
second quarter periods. Expressed on a year-on-year comparison
basis, rents increased at a 4.4% pace, up from the prior quarter’s 3.6%
metric and the fastest annual growth recorded since 1991. Milwaukee’s
spring surge was propelled by sequential gains of 3.1% or more in
Wauwatosa and City West submarkets, each benefiting from new
luxury supply representing 1% or more of the existing inventory.
Irrespective of heavy supply average concessions receded $1 from
1Q18’s record $54 (5.29%) level, the first quarterly decrease since 2Q15.
The Axiometrics same-store sample experienced considerably slower
rent growth in the spring quarter. Sample rents advanced at a 1.3% YoY
pace, up from 1.2% during the prior quarter. These were the weakest
sample growth rates observed since 2014. The “B” (1.8%) segment won
class honors, while classes-A (0.0%) and –C (1.2%) lagged. Only class-B
exhibited much vigor, accelerating from 1.5% during 4Q17. Only Racine
(4.3%) submarket posted a gain faster than 1.9%, while higher rent
Downtown (-1.0%) and Washington Co. (0.1%) continued to lag.
RCR’s MILW’s rent model (ARS=84.1%/SE=0.5%) is the weakest among
the RED 50 owing to the ambling, sometimes directionless nature of
the metro Reis data history. Nevertheless, the model has something to
tell us about probable rent behavior. Independent variables include
lagged CHI rents^2, job growth and occupancy. Each is expected to be
constructive through early 2019, giving rise to useful annual growth
rates in the mid-3% to low-4% range. The fundamental foundation of
the rent surge is likely to develop cracks and fissures by the summer
2019, though, causing rents to decelerate back to the metro’s ~2% long
-term average rate or slower. Rents seem likely to scrape along the
bottom of MILW’s cyclical range through decade’s end. Our 5-year rent
CAGR forecast is 1.6%. Axiometrics are largely on the same page,
projecting 2Q18 to 2Q23 CAGR rent growth of 1.8%.
2Q18 EFFECTIVE RENT TRENDS
The pace of investment sales activity in Milwaukee remained glacial.
CoStar report only one transaction in each of the first two quarters of
2018. Proceeds totaled less than $15 million in aggregate, the fewest in
a January to June period since 2011. The average price of units sold
was $77,072 for the first half, down –13% year-on-year, and –18%
sequentially.
Velocity increased over the summer. Four properties were exchanged
after mid-year as a portfolio, including two assets valued at more than
$10 million each. The portfolio consisted of class-B and -B+ rent
restricted senior apartments.
Year-to-date buyers consisted entirely of private entities to the total
exclusion of institutions and trusts. Since 2006, private buyers have
accounted for 88% of Milwaukee transaction volume.
Cap rate visibility is murky due to thin trade, but generalizations are
possible. Sixties and Seventies vintage gardens trade to low- to mid-6%
yields. More recent construction product commands prices equating to
mid-5% to 6% cap rates. Little or no evidence suggests that investors
will transact at sub-5.5% yields for metro market rate properties.
Considering available data, RCR maintain that a 6.25% rate represents a
valid proxy for Milwaukee B/B+ cap rates, about where we have been
for four years. With a 6.70% terminal cap rate assumption and model
derived rent and occupancy point estimates we calculate that a 2Q18
investor would expect to earn a 7.1% rate of total return over a five year
holding period. Relative to its RED 50 large U.S. market peers
Milwaukee ranks 12th highest in this regard, falling between Chicago
(7.0%) and Minneapolis among its Upper Midwest Region rivals.
Milwaukee’s unusually stable rent history reduces return uncertainty
and elevates metro investment risk-adjusted returns. The metro’s Risk-
adjusted Index (ETR/OETR2) derived from a 10,000-iteration Monte
Carlo simulation is 7.24, which ranks fifth among the peer group overall
and second in the East North Central Region after Louisville.
2Q18 PROPERTY MARKETS
AND TOTAL RETURNS
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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
Milwaukee, Wisconsin
Property Name (Submarket)
Property Class/
Type (Constr.)
Approx. Date
of Transaction
Total Price
(in millions)
Price /
Per Unit
Estimated
Cap Rate
The Marq (Near North-Westside / Marquette) Student/SR MR (‘57/’07) 19-Oct-2017 $42.3 $69,077/bed 6.5%
Sunset Ridge (Far North Side / Granville) B / WF GLR (1990) 19-Oct-2017 $12.8 $87,500 6.92% (UW)
Saint James Place (Far North Side / Calumet Farms) B+ / WF GLR (1989) 8-Nov-2017 $24.5 $103,813 5.8%
St. Catherine Commons (Kenosha Co/Pennoyer Park) B+ Sr./Masonry (2004) 16-Aug-2018 $24.4 (allocated) $132,500 5.0%
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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
Milwaukee, Wisconsin
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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
Milwaukee, Wisconsin
2Q17 2Q18 Change 2Q17 2Q18
Basis Point
Change
Brookfield 5.7% $1,100 $1,167 6.1% 3.3% 5.5% 220 bps
City East 4.9% $1,248 $1,310 5.0% 6.3% 8.6% 230 bps
City West 0.8% $891 $918 3.0% 8.1% 6.3% -180 bps
Cudahy / South Milwaukee 5.5% $830 $880 6.0% 2.1% 4.0% 190 bps
Greenfield 0.2% $785 $768 -2.2% 1.5% 1.5% 0 bps
Northshore / Northwest 0.6% $915 $940 2.7% 3.0% 3.4% 40 bps
Wauwatosa / West Allis 2.6% $911 $940 3.1% 4.2% 6.3% 210 bps
West Waukesha County 2.7% $918 $941 2.5% 3.4% 4.5% 110 bps
Metro 2.4% $942 $983 4.4% 3.7% 4.7% 100 bps
Submarket Summary (Reis)
Reis Inventory
Percentage Change Effective Rent Physical Vacancy
Submarket Units 2Q17 2Q18 Change 2Q17 2Q18
Basis Point
Change
Downtown / Shorewood 5,115 $1,449 $1,433 -1.0% 96.0% 94.4% -155bps
Far North Side 5,905 $1,078 $1,090 1.4% 96.1% 95.1% -96bps
Franklin / Oak Creek 6,831 $980 $997 1.9% 98.4% 98.3% -15bps
Near North / West Side/Wauwatosa 3,262 $1,202 $1,207 0.2% 95.4% 94.8% -61bps
Racine 1,882 $762 $794 4.3% 96.5% 97.0% 43bps
South Side / West Allis / Greenfield 8,299 $875 $890 1.7% 97.1% 97.3% 26bps
Washington County / Ozaukee County 1,313 $1,117 $1,123 0.1% 98.0% 97.2% -83bps
Waukesha County 9,952 $1,119 $1,135 1.7% 97.6% 95.9% -169bps
Metro 42,559 $1,074 $1,085 1.3% 97.02% 96.28% -74bps
Submarket Summary (Axiometrics Same-store) Submarket Inventory Effective Rent Physical Occupancy
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell
currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED Capital
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responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein
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Daniel J. Hogan
Director of Research
Tel (614) 857-1416
Tel (800) 837-5100
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