Is apartment construction the next BUBBLE?

constructionMadison, WI is building apartments at break neck speed.  Everywhere you go there seem to be cranes in the air.  Cranes here.  Cranes there.  Cranes everywhere!  Of course the indomitable EPIC with their thousands of employees and plans for continued hyper growth has cranes scattered across their campus as well.

Whenever something seems to be too good to be true it usually is.  So am I the bearer of bad news on all of this new construction?  Nope.  Everywhere I look and most everyone I speak to seems to have many reasons that apartments will continue to boom in Madison and beyond.

From National Real Estate Investor(NREI):

Multifamily still strong

Lenders continue to provide capital for new apartment properties, though some of the largest banks cannot lend as much as they might like to. Developers continue to add new multifamily units at a quick rate, according to McGraw Hill.

Strong demand for rental apartments keeps many lenders coming back. “It’s constantly surprising how strong multifamily demand is,” says Hendrickson. “I think the demand will fill the units now under construction and we are still going to be short.”

However, many of the largest commercial banks are now close to their limit on how many construction loans they can carry on their balance sheets at one time.

“A lot of lenders have filled up on multifamily,” says Hendrickson. That means several large commercial banks can only make new construction loans to apartment projects as their existing loans are paid off. “The top 10 banks are kind of going as fast as they can go.”

That has given smaller, regional banks an opportunity. “This is the first time they can really compete for those top quality deals,” says Hendrickson.

The regional banks may often have limits on the size of loans they make, so that several banks may join together to finance a large multifamily project. “Instead of one bank on a $100 million development, there might by two or even three.”

So while my gut is telling me this boom can’t continue, it sure seems like most prognosticators hold a different opinion.

What are your thoughts?