March 04. 2013 9:00AM

Demand from young professionals drives downtown apartment development boom

Real Estate

By Andrew Weiland

  
Several apartment developments have either been completed recently, are under construction or are in the planning stages in downtown Milwaukee, the East Side and the Historic Third Ward.

Developers say young professionals in the so-called Echo Boom generation, highly interested in living in urban areas and resistant to home ownership, are providing the biggest source of demand for the new apartments. Most of those developers are expressing confidence that demand for downtown area apartments will remain strong for several years and that the planned apartment developments will be filled by tenants.

"Our studies have shown that there's a sustained demand for the next several years for several hundred units a year that could be absorbed into the market," said Wayne Wiertzema, executive vice president of Wangard Partners.

Completed

Recently completed apartment developments in the downtown area include: The Moderne, which has 203 apartments and 14 condominiums at 1141 N. Old World Third St.; General Capital Group's 140-unit Beerline B apartment development at 1716 N. Commerce St.; and Wangard's 1910 On Water development, with 68 apartments at 1910 N. Water St.

Under construction

Apartment developments under construction in the downtown area include: the second phase of Mandel Group Inc.'s North End project, which will add 155 apartments in two buildings southwest of Pleasant and Water streets; Dermond Properties Investments' 34-unit apartment development at the northwest corner of Pleasant and Jackson streets; Chicago-based Blackwatch '68 Properties' 14-unit apartment development at 1530 N. Jackson St.; Joseph Property Development LLC and Boulder Venture LLC are redeveloping the former Prospect Mall property (located just off North Avenue, west of the Prospect Avenue and Ivanhoe Place intersection) into a mixed-use building with 52 apartments and 10,000 square feet of retail space; and Sunset Investors owner Kendall Breunig is converting the third floor of the Plankinton Building at 133 W. Wisconsin Ave. from office space into 29 apartments.

Proposed

Apartment developments that are being planned in the downtown and nearby areas include: The Couture, a 44-story tower with 179 apartments, a hotel and retail space southwest of Lincoln Memorial Drive and Michigan Street at the lakefront; a third phase of Mandel Group's North End project; Domus, a 150-unit apartment development planned by Mandel Group in the Third Ward; Wangard will build a 104-unit apartment building southwest of Lyon and Jefferson streets in the Park East corridor; Wangard also plans to build a 150-unit apartment building at Brady and Water streets; HSI plans to build a 99-unit apartment development (which will include a library space and 3,000 square feet of retail space) on the site of the East Library at 1910 E. North Ave.; HSI also plans to build an 87-unit apartment development at 1887 N. Water St.; Breunig plans to create 110 apartments in the Pritzlaff Building at 305 N. Plankinton Ave.; Wisconsin Redevelopment LLC and Impact Seven Inc. want to convert a 105-year-old warehouse building northeast of North 4th Street and West McKinley Avenue into a 65-unit apartment building; Bear Development LLC plans to convert a 57,626-square-foot office building at 700 W. Michigan St. into a 50-unit apartment building; and Chicago-area developer Yiannis Konstantinou wants to build a 40-unit apartment development at 1400-1430 E. Boylston St.

Despite the large number of apartment developments that are in the works in the downtown area, most developers say they are not concerned that the market could be overbuilt.

Most of the apartment developments are fairly small and it will take time for all of them to get built, which will provide time for the units to be absorbed, said Mandel Group Inc. chief operating officer Robert Monnat.

"There are a high number of projects but the actual number of units (planned) is relatively small," he said. "And there's strong demand. We don't see any imbalance (between supply and demand) coming."

"I don't think we're in danger (of overbuilding) at all at this point," Wiertzema said.

However, unlike many of his peers, Joseph Property Development owner Robert Joseph expressed concern about the number of apartment developments proposed in and near downtown Milwaukee.

"I have a concern there's too many," he said. "I feel like the best units, in the best locations with the best price points will do very well."

Young professionals are the biggest driver of downtown apartment demand right now, developers say. Members of the Echo Boom generation, larger than the huge Baby Boomer generation, are now "coming into the job market in droves," Monnat said. Many of those young professionals are starting families later than previous generations and prefer to live in dense urban areas within walking distance of amenities such as stores, bars and restaurants, developers say.

"There definitely is a bigger demand for young people to be in urban areas and have the amenities and meeting places in close proximity," Wiertzema said.

In addition, most young professionals prefer to rent because they lost faith in the housing market during the Great Recession and need to maintain flexibility to move as their careers develop.

"They really don't want to be tied down to anything," said Bretty Haney, co-owner of HSI Properties. "Flexibility is huge. Young professionals don't know if they're going to be living in Milwaukee in a couple of years."

Just as the huge Baby Boomer generation changed America and bolstered suburban development patterns, the even bigger Echo Boom generation with their preference for urban living could permanently change and revitalize American cities, developers say.

"This is not some trendy little thing," Monnat said.

"There's a shift in the lifestyle choice people make now," Haney said.

Empty nesters also make up a significant portion of the downtown apartment market demand, but less so than the young professionals, developers say. More empty nesters could enter the downtown apartment market if they are able to sell their suburban homes as the housing market recovers. Many empty nesters may now prefer to rent after losing a significant amount of their net worth during the recession, but some may be reluctant to rent downtown apartments which are generally smaller living spaces than that demographic prefers, Monnat said.

"We're trying to build larger luxury apartments in suburban seetings because these communities have people selling their homes who want to stay in those communities," he said.

But some empty nesters may want to move to downtown apartments to take advantage of downtown amenities, including entertainment venues and restaurants. There is a niche need for larger downtown apartments to appeal to that market, Monnat said.

The gradual recovery of the downtown condo market, which collapsed as the Great Recession began, could also bolster demand for downtown apartments, Monnat said. Based on its analysis of the market, Mandel Group believes there is a shadow market of about 375 condos that are temporarily being rented by owners who will eventually sell those units to owner occupants, which will push the current occupants into the downtown apartment market, he said.

Despite the strong demand for downtown apartments, high construction costs in the area and other high operating costs (including high property tax rates) make it difficult for developers to build large projects without some level of government assistance, Monnat said. Current rental rates in the market, despite a three percent apartment market vancancy rate downtown, are not high enough to cover the costs for large market-rate apartment developments, he said. That's why there are a lot of small market-rate projects and why there are several projects seeking affordable housing tax credits, he said.

Wisconsin Redevelopment LLC, Impact Seven Inc. and Bear Development LLC are seeking affordable housing tax credits for their projects. Mandel Group used affordable housing tax credits for the second phase of The North End and 20 percent of the units will be leased at lower rents to residents whose household income is less than 60 percent of the county's median income.

Demand for the affordable units is high, Monnat said. At The North End the affordable units are indistinguishable from the market rate units.

"These just go," he said. "It's not a problem."

As downtown area apartment development continues the population of the downtown, East Side and Third Ward areas will continue to rise, which could help attract more retailers and restaurants to those neighborhoods. However, it takes a lot of additional residential units to draw more retailers, Monnat said. A general industry rule of thumb is that one residential unit supports 15 square feet of retail space, he said.

"You need several thousand units of housing to make a meaningful dent," Monnat said. "Everybody wants to see the downtown neighborhood spring to life. You're starting to get it, but we've got a few more years to run here to get retailers' attention. We are seeing more interest in our street level retail space." n

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