Milwaukee economy - boom or bust?

[Marcus Auerbach]

A couple years ago I had an intern who was working on his Real Estate degree at UWM. He told me about his paper about the role of fresh water as a driver for economical development and why he would choose to invest in Milwaukee over many of the other booming cities in the US, many of them in hot and dry climates. After all, Milwaukee is right on the largest fresh water reservior in the world - the Great Lakes. His research was pointing to an increased importance of fresh water as a basis for economical development in the future. It made total sense to me.

Fast forward to today: Milwaukee has been in the news lately quite a bit - Foxconn (one of the largest manufacturers of consumer electronics with 1.3 million employees) has announced a 10 billion dollar investment in a new plant creating up too 13.000 well paying jobs in Southeast Wiscinsin, probably Racine or Kenosha - close to the lake. The facilities will be 20 million square feet - roughtly three times the size of the Pentagon. And guess what - water is a critical ressource for LCD production and clean room operations. A project this sice has economic ripple effects: it is estimated that the construction alone will create 10.000 jobs. Supporting industries and businesses providing infrastucture and services will benefit as well.

But that's not the only news. Downtown Milwaukee has seen a major turn around and building boom in the last years. The brew city has been voted as one of the most attractive places for enterpreneurs and millenials. And it shows, we have construction going on everywhere!

Among the biggest projects anchoring the boom:

• The $524 million Bucks arena.
• Northwestern Mutual's $450 million office tower and $100 million apartment high-rise.
• The $137 million BMO Harris Financial Center office tower.
• The $122 million Couture apartment high-rise.
• The $80 million conversion of the Warner Grand Theater into the Milwaukee Symphony Orchestra's performance hall.
• The $50 million Westin Hotel.

Large projects already completed over the past year include the $101 million 833 East office building, the $53 million latest phase in The North End apartments and retail development, and the $52 million Kimpton Journeyman Hotel.

Finally, there are several new and ongoing downtown-area developments below the $50 million mark, including apartments, offices and hotels.

Of course, Milwaukee has it's challanges too. The city is among the most segregated ones in the US and parts of the inner city have a bad reputation for crime and violence. It will remain a challange for the city leaders and the comunity to work on this issue. These are the area's where one can pick up houses for 50k, 30k or even 10k - but they come with their own set of issues and are in my opinion not a very good long term investment.

The surrounding areas and suburbs are doing quite well and demand for rental properties is high. While we have plenty of new multi family developments shooting up everywhere, many of the catering to high end tenants with rents around $1800 to $2600 and up, nice single family rental properties remain a rare comodity and are high in demand. The supply of sub $200k SF properties is limited to existing inventory, as new construction starts at about $300k, with the majority in the $300-$500k range. High cost of construction does not allow for new SF developments under $200k effectivly capping supply.

Demand and supply have been forcing SF prices up and will in my opinion (short of a major crisis) continue to do so. All good areas in the Metro area have seen double digit appreciation in the last years (while the inner city has been flat). My personal focus has been on single family homes in middle class areas, with rents typically around $1500.

Rents have gone up in the last years, but there is a limit in affordability based on household income and we make it a point to not participate in the annual rent increases, at least until we see substancial increases in average net wages. I feel it's worth it, based on basically zero vacancy rates and very low turn over (we are typically under 15%).

I expect the market for high end multi family to reach a saturation point soon, probably putting pressure on high end rents, but there will always be a subset of tenants who prefer the life style of a single family home in a residential area over an appartment building, even if it's really nice.

The idea of a backyard BBQ with friends and family is just too much engrained in the American dream.