Who’s Renting All Those New Apartments?
Millennials or aging baby boomers? Experts disagree on why the building boom.
It’s no secret that Milwaukee is in the midst of an apartment building boom. Northwestern Mutual has begun prep work for a 33-story apartment tower in downtown Milwaukee. The Mandel Group is about to open the doors on another phase of The North End on the Lower East Side. A 235-unit luxury building, part of The Corners of Brookfield lifestyle center, is nearing completion in Waukesha County.
What is a secret — or at least disputed — is who is driving this trend. Two schools of thought exist. One centers around a generation of Millennials delaying the traditional purchase of single-family homes and preferring more urban locations. The other theory posits that empty nester Baby Boomers are downsizing from single-family homes to urban apartments.
What’s driving this, according to Marcus & Millichap: “urban revitalization and downsizing empty nesters are fueling leasing in the rental market.” So improved downtowns, be it in Waukesha or Milwaukee, are being filled with a wave of retiring Baby Boomers? Anecdotally that makes some sense; the Mandel Group, for instance, is positioning their DoMUS apartments in the Historic Third Ward to sell to aging Baby Boomers.
But Fannie Mae director of strategic planning Patrick Simmons doesn’t buy this, arguing the trend is really about the Millennials. Simmons contends the theory that Baby Boomers are driving demand emerges from “confusion between changes in demand by generation (i.e., a group of persons born during the same period) and by age group.” Looking at available data between 2009 to 2014, Simmons states that “Boomers aren’t consuming many more apartments. Rather, for the most part, they’re simply aging in place, with those who previously occupied apartments in 2009 carrying that status with them into older age categories in 2014.” He finds there is some increase in the number of Baby Boomers living in apartments, but “the increase in Millennials’ consumption of apartments during this period was more than 10 times that of Boomers.”
Whatever the cause, demand is staying high in Milwaukee. As long as vacancy rates stay so low, expect more new apartment projects to be announced.
Rent Relief on the Way?
Despite the surge in new construction, don’t expect to see a decrease in apartment rental rates. According to Marcus & Millichap, the average effective rent climbed three percent in 2015 to $965 a month, the fastest rate of growth in a decade. Can it get worse for renters? Apparently so: Marcus & Millichap’s 2016 Milwaukee outlook predicts a 3.6 percent increase to $1,000 per month.
Surprisingly, rental costs fell Downtown last year: 2015 rates were at 2012 levels. Profiled as part of the “Downtown/Shorewood area,” the market report notes that rents fell 3.6 percent in 2015 to $1,228, “the only submarket to have reduced effective rent in 2015.” The report also notes that the Downtown/Shorewood area has a vacancy rate of 3.9 percent, the highest of any submarket.
How Much Higher Can Rental Costs Go?
One limiting factor to rental costs might be the cost to own a home in the Milwaukee market. According to Marcus & Millichap “the monthly cost of homeownership assuming a 20 percent downpayment and including insurance and tax expenses is $1,178 per month.” The report goes on to note that even though “single-family homes are typically affordable in the Milwaukee metro area,” many renters are choosing to live in urban neighborhoods, “where single-family housing prices are generally greater than the median home price. As urban living becomes more attractive, this trend will continue.” If rents surge too much higher, an increasing number of Millenials could find it cheaper to purchase a home. Yet, as the report notes, it’s already cheaper to own a home in the metro area than to rent an apartment Downtown, yet occupancy rates there remain high. A growing number of people clearly value the walkable amenities of urban living over the cost-savings of owning a suburban-style, single-family home.