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Madison-area apartment construction still booming
Rise in development | Millennials, empty-nesters drive demand

Madison-area apartment construction still booming

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Tired of visiting Madison only on weekends, and paying for a hotel room to do it, Todd Grubofski decided to rent a place here after seeing a big hole in the ground while driving around Downtown with friends in 2013.

A billboard at the site read “Domain luxury apartments coming soon,” and Grubofski, 41, was intrigued.

“I thought, ‘Hey, this looks interesting.’ The word ‘luxury’ got me, because I like nice things,” said Grubofski, who’s single and owns a business running a residential care facility for adults with special needs in Oshkosh.

Grubofski, who is gay, said he found the Madison community more welcoming than Oshkosh and enjoyed its wealth of restaurants, bars and shopping Downtown.

“I just wanted to be in a bigger city, with more diverse people, and I couldn’t move to Chicago,” Grubofski said. “It’s too far away from work.”

If he could find the right place, offering high-end amenities and lots of professional services for comfortable, worry-free living — important to him because he still would spend days at a time in Oshkosh, living and working at the care facility — Grubofski was in.

And that’s how he came to rent a two-bedroom apartment at pool level with parking at the Domain, for $2,300 a month. He moved into the 12-story tower at Johnson and Broom streets when it opened in April, the latest in a string of luxury apartment developments built in Downtown Madison over the last few years offering features such as rooftop pools, spas and cafes.

Nearby Domain competitors include recent arrivals such as Ovation 309 by Hovde, Alexander Co.’s 306 West and Seven27, by Urban Land Interests. The rent charged at places like this didn’t bother Grubofski.

“I would have paid a little bit more,” he said. “It was extremely important to me that this was luxury living. I travel a lot between the cities, and I don’t have time to mow a lawn. I’m not in Madison enough to own a home. Who’s going to take care of it? And to me, the more money I spend, the more amenities I should get.”

Now, more than three years into an apartment construction boom nationally and in the Madison area, the work is driven in part by a housing-crash hangover that continues to funnel increased numbers of people into multi-family living, whether by choice or necessity.

Unlike in 2012, the single-family housing market is no longer weak, with both newly built and existing homes seeing increased demand and better prices. Interest rates remain low — a plus for would-be homeowners, if their credit is good enough to score a mortgage under tighter post-crash financing rules — though costs for construction labor and materials are higher now.

But those higher costs, tempered by a generally improving economy with modestly increased hiring, expansion and higher wages, in some sectors, has put little to no dent in the apartment construction boom.

Powerful demographic trends and multifamily buildings that continue to be packed, despite the thousands of new apartment units added in and around the Madison area since 2012, help explain and feed the demand.

But certain market challenges and unknowns inevitably raise questions and concerns. City officials know there is a strong need for more affordable rental housing, for lower-income workers who aren’t the market target for the high-end supply going in Downtown and in some hot-market suburbs like Middleton and Verona. They even have a plan to help developers add 1,000 such units over five years, starting with 200 approved for this year.

But making plans and getting it done are two different things, and hanging over all is the question of over-build, or when the new apartment inventory, either already built or in the still-packed pipeline, will be too much.

Many believe that’s still far down the road; others aren’t so sure. Steve Sosnowski, head of commercial lending for the Madison-area market for Green Bay-based Associated Bank — the state’s biggest bank — can site solid reasons fueling the apartment-market growth, chief among them Millennials looking for amenity-rich, well-located, but not too permanent, places to live.

But he noted there were factors that could slow down the boom, including any strong resurgence in the single-family home market, or if interest rates rise, making development more expensive, or because of new regulations, including one in January that required developers to come up with more equity to get financing.

As for over-build, Sosnowksi said that was inevitable.

“We know that this level of growth is not sustainable in the long run,” he said. “We expect some developers will continue to bring product to market even after actual demand ceases. There’s always developers that develop into the tail end of the cycle. And some of these reports (used to monitor the market) lag at least by a quarter.”

“People need to keep an eye on the amount of projects that are being approved for the city,” Sosnowki added, “be careful about what’s being developed and be smart about trying to control it if there is a lag in demand.”

To Gary Gorman, a local developer of both market-rate and more affordable housing, the boom in apartment construction is tied to the continued good fortune of one company — Verona medical records software giant Epic Systems Corp., where rapid growth in recent years has resulted in the hiring of thousands of young, mobile employees, many of whom want to live Downtown.

“Epic is driving the market,” Gorman said. “Those folks are paid well, so they can afford to pay relatively high rents. So that’s the market right now.”

“I was on a panel where I was asked if a bubble was developing (in high-end apartments),” he added, “and I answered, ‘Tell me if (Epic Systems CEO) Judy Faulkner is going to keep hiring or not.’ If she does, the market is fine. If not, it collapses. To me, it’s that simple.”

But hiring by other growing companies in the area also has contributed to the incoming stream of young people, with broader demographic trends, choices by older people and other factors also fostering demand.

Matt Wachter, a housing initiatives specialist for the city of Madison, has been studying census trends and other data for the past two years. He staffs a new city committee on housing strategy that has been looking into issues of affordability and the variety of housing types available in Madison, with an eye toward adopting best practices seen nationally and producing a housing report with practical recommendations every two years.

Wachter said the committee’s work showed the growing demand for apartments was based on “four big things”:

  • Strong population and household growth rates. Unlike some other places, Madison grew even during the ‘07-’09 Great Recession, and that growth has reliably increased in the last five years, Wachter said, from a long-term rate of 1 percent annually to more like 1.5 to 2 percent. “There’s been no dip in growth,” he said. “There’s just more people coming here and that’s driving a lot of this.”
  • It’s not just Millennials. While a majority of the newcomers are in their 20s and 30s, another big group are the aging, empty-nest Baby Boomers. What both groups share is they tend to form smaller households — singles or couples, mostly — so they are drawn to apartments over single-family homes.
  • A reduction or correction in the homeownership rate. Nationwide, homeownership hit historic highs from the late 1990s to the mid-2000s. That ended with the housing crash and may not return soon or ever. “Some people who owned went back to rental who traditionally would have rented,” Wachter said.
  • A new preference for rentals among high-earners. Wachter said there’s been a measurable change in high-income families of all sizes and ages “who traditionally never would have rented who are now. That’s a small but fast-growing group.”

In addition to those demand factors, a lack of adequate supply has helped trigger apartment construction, Wachter said. Between 2007 and 2012, during the recession and weakest part of the recovery, construction slowed so much that it couldn’t keep pace with the people arriving, Wachter said, producing a hole that builders and developers have yet to fully close.

City officials and many industry observers believe that’s true in part because of the oft-cited vacancy rate — a measure tracked by Madison Gas and Electric based on the percent of utilities either turned off or switched to owners in multifamily buildings — which has remained very low in recent years. The rate has been in the 1 to 2 percent range, with 5 percent considered normal, suggesting supply is more than being absorbed.

“Despite the (many) units we’ve put up, our vacancy rate hasn’t budged,” Wachter said. “We’re barely keeping up with demand. And assuming these factors continue, we’re going to keep building at this rate into the future. As long as we have a strong economy that attracts young workers, this is going to keep happening.”

Sosnowski noted the vacancy rate simply measures whether someone is living in a unit, not what it took to get them there. If a landlord had to offer a month’s free rent, for example, that could be an early sign of market weakening that the vacancy rate wouldn’t pick up.


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