Five developers offer proposals to spruce up East Wash

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Looks like some high quality developments are being proposed to the city of Madison for commercial real estate development.  The East Washington corridor has seen recent life brought to it with ShopBop.com moving into the former Gisholt/Marquip properties,  1200-1400 block of East Washington Ave.  The former Mautz property, 900 block of East Washington Ave, has development plans announced by Hovde Properties.  And now, the city has recently announced several potential plans for the former Don Miller commercial real estate properties on the 700-800 blocks of East Washington Ave.

There are now many high quality commercial real estate developers engaged with the city of Madison in an effort to create real, positive change on this important entrance corridor to our city.  Business owners and tenants have an opportunity to be part of a once in a lifetime redevelopment opportunity.  This urban core is surrounded by lakes, parks, bike paths, public transit, and many nearby amenities, including Williamson St (Willy St) and the capitol with the central business district surrounding it.

If you are a neighbor, a small or large business owner, or any other interested citizen, be sure to show your support for this important redevelopment corridor.  This is an opportunity to turn an old historic entrance to our city into an important grand entrance to Madison, WI.  An entrance that will make us all proud.

Apartments Shine as Beacon of Hope for Eventual CRE Recovery

(from: http://www.globest.com/blogs/streetsmart/-312587-1.html)

The nation’s apartment market continues to beat expectations as it speeds along to a full-scale recovery. Vacancy rates peaked in early 2010 at 8 percent and have since dropped to a healthy 5.9%. Effective rental rates have been moving upward for a year-and-a-half now, by 2.5% per year on average, and picking up pace to the 4% to5% range this year.  Select markets are registering high single-digit rent growth.

The outlook is quite positive. Tenant demand appears likely to continue to swell, driven by a still-recovering economy, unbundling of households that doubled up during the Great Recession, continued weakness in the for-sale housing market and movement of the relatively large Generation Y (those born between 1983 and 1992) into their peak renter-household-formation years of their 20s and early 30s. While the number of planned projects is picking up, and the risk of overbuilding by 2013 is increasing in certain pockets, overall construction activity remains very restrained. These factors strongly suggest that vacancy rates will soon fall into the 5% range nationwide, and into the low single-digits in a number of high-beta areas (MSAs, primarily in the Sun Belt and in the West, with above average job growth and net absorption during recovery years) and in a number of supply-constrained areas, primarily coastal MSAs. As it does, rent growth will likely escalate sharply.

How long will the up market last? Probably through at least 2014 or 2015. It will take at least that long for construction completions to pick up enough to cause vacancy to climb significantly once again. Also, while at some point there likely will be some shift back toward home ownership as consumer confidence in the for-sale market improves, that probably won’t happen to the degree that significantly impacts the apartment market for at least another three to four years. In the meantime, these should be great years for apartment investors.

The investment community already has already anticipated this. The total dollar volume of apartment sales priced at $1 million or greater climbed by an exceptional 77% in 2010 over 2009, albeit from a depressed level in 2009. During the first half of 2011 apartment sales volume reached $25 billion, a 67% jump over the first half of 2010. The average price per unit climbed by 16% in 2010 and by an additional 7% so far in 2011. Median cap rates across the United States have dropped from 7.5% in 2009 to 6.8% as of mid-year 2011, which masks the dramatic drop in cap rates among top-tier assets in primary markets. Prices for large, Class A apartment complexes have come back first, with appreciation starting in late 2009. Class A cap rates in primary markets have re-compressed by 150 bps to 200 bps since the market bottom with many reporting 4% to 4.5% averages, and some below 4%. Given the extraordinary levels of capital looking to enter the sector, the razor-thin cap rate to interest rate spread in upper tiers of the market place, is causing a capital migration to Class B and secondary markets. Value-add, a shunned strategy viewed as too risky just 12 months ago, has reemerged as a viable alternative, even for some institutional investors.

Price support in the future will come from significantly above-inflation rent growth and low vacancies. In addition, the spread between average, overall cap rates and underlying mortgage rates is near record highs, providing exceptional opportunities for apartment investors.

While many investors are concerned about future funding from the GSEs and their eventual restructuring, the biggest risk to this forecast is the economy. This is because other sources of financing are rapidly entering the multifamily market led by life insurance companies and healthy commercial banks. Although the recent boom in rental demand appears to defy weak employment, the tie between apartment absorption and job creation is still significant. Approximately 78% of the jobs added in the last 12 months went to young adults between the ages of 20 years old and 34 years old. While the release of pent up-demand and reversal in home ownership are important drivers, jobs still matter the most. Even modest job growth should continue to support base line demand for apartments but should the unlikely scenario of an economic contraction materialize, apartment occupancy gains will lose steam, at lease temporarily. The other risk is the lack of economic recovery in the tertiary markets. While the capital migration will bring more capital to secondary markets, and secondary submarket within major metros, true tertiary locations will continue to lag for some time.

Hessam Nadji is managing director, research and advisory services, for Marcus & Millichap Real Estate Investment Services. Contact him at hessam.nadji@marcusmillichap.com.

Low Vacancy Rates in Madison, WI

(from: http://www.mge.com/ecodev/business/rental_vac/index.htm)

The percentage of apartment buildings in MGE’s service area that appear to be vacant because the gas and electric service is inactive or the service has been moved to the owner’s name.

Second-Quarter 2011