2018 Milwaukee Market. Make more sense to build than buy?

[William S.]

With current housing prices and the age/condition of homes in Milwaukee, does it make more sense to build than buy? Many SFR in Milwaukee need $50k give or take of work and the size of homes are small. Anyone doing this? Not building homes to sell, but rentals. Homes that meet today's space, layout needs of renters. Areas such as Tosa, The Falls, 53222, etc (better areas).

[Marcus Auerbach]

@Nathan Schoenborn I know that menards number makes everyone go wow! However, the devil is in the details, of course. Once you run the numbers you'll find out out that that is actually not a very good deal at all. And it's only about a quarter of your total build cost.

For a quick reference and depending on your finishes you can assume that your build cost will be somewhere between $120 and $200 per SF, not inclusing land, architctual plans, developemnet costs, impact fees, overhead and holding cost. 

We have some high end appartment buildings in Milwaukee pushing the top end of that range building at $200. That's why when you look closley you will see that they are extremely greedy with sf per unit. The floorplans are very smart, so they can make a small unit feel bigger. Also a lot of money in the common areas, lounges and lobby. Rents are accordingly high at $1500 to $1700 for one and two BR. My commercial colleagues are already speculating that these new developments will be for sale in the next downturn at significant discounts. 

Do the math: cost per unit inclusing common areas and anemnities is pushing $250k per unit - at $1700 rent who would consider that a good deal? As a reminder, not long ago 60k per unit was kind of a normal price for an appartment building in Milwaukee (granted, much lower standards). MF follows nice cycles from boom to bust and once supply hits the top and vacancies start to increase, rents will erode and incentives blow up eating into the cash flow quickly to the point were debt service becomes an issue. Highly leveraged players will get knocked out first, large players with deep pockets will weather the storm and will start to acquire the excess supply.

I had a very interesting conversation with a guy who's job it is to crunche numbers for REITs and pension funds - they will go all across the country for a solid 3% ROI. Their problem is that they have large amounts of cash sitting at no interest they need to find homes for. So they can fund large developments with very little debt service cost.