At the 2021 groundbreaking for the 44-story Couture on Milwaukee’s lakefront, city leaders celebrated the development as a sign that downtown is on the upswing.
The Couture, the tallest residential building in Wisconsin, opened this year along with a second apartment tower, 333 Water, in the city’s Historic Third Ward neighborhood.
However, the number of occupants in luxury high-rises has declined compared to previous luxury towers.
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Couture began leasing in January. As of mid-August, 30% of the building’s units had been leased, said Rick Barrett, CEO of Barrett Law, the real estate developer that operates Couture.
333 Water opened in March, and by mid-August, 15 percent of the units had been leased, according to Ricky Miner, project manager for 333 Water for national developer Hines.
As is common in multifamily real estate, occupancy rates lag behind rental rates while new residents move in. As of mid-August, Couture’s occupancy rate was nearly 20 percent, while 333 Water’s was 7 percent.
Rents at Couture range from $1,795 to more than $8,000, while units at 333 Water start at $1,945 and go up to $6,205.
Previously, high-rise buildings were in high demand.
The two residential towers will be Milwaukee’s third and fourth, featuring enhanced amenities including a pool, retail space and fitness center.
These include the lakeside 7SEVENTY7, commissioned by Northwestern Mutual in 2018, and the Ascent MKE, which is scheduled for construction in 2022 and has been hailed as the world’s tallest mass timber building.
According to developers, Ascent MKE was already 45% leased when it opened, and OnMilwaukee reported that 7SEVENTY7 was 30% leased just two weeks after opening.
Dan Parekh, director of research at Milwaukee real estate brokerage Bork, said multifamily developments typically aim to have 30% to 50% of the apartments already leased when construction is complete, and he believes the two earlier towers were better positioned to achieve that goal.
“Both are around 10 per cent cheaper than Couture and 333 Water. So when Ascent was completed, I think it was in the price range that the market was accustomed to. And now, with inflationary pressures and rising land prices, the developers of Couture and 333 have had to increase rents,” Parekh said.
Rising construction costs since the pandemic have also made it harder for developers to price new apartments below the luxury mark.
Finally, unlike lower-rise buildings with similar amenities, these high-rises are opening apartments in phases, delaying initial leasing, and the ground-floor retail space in both buildings is still under construction.
“The average consumer is looking at all these options and is actually choosing the mid-rise and tower apartments that are already on offer,” Parekh said.
Couture developer Rick Barrett said he’s “thrilled” with the rents for Couture, especially for the most expensive units on the top floors of the building, and that the ground-floor retail space will likely include a steakhouse.
Ricky Miner, project manager for 333 Water, said the community is “pleased with the rents they’re generating” and expects “a great deal of leasing activity” once the building is fully completed this fall.
Possible sign of market saturation
Tim Gokhman is the developer of Ascent MKE, a 2022 mass timber tower.
He believes the rental slump is a symptom of a larger trend: Milwaukee’s market, which has been struggling to catch up with other similar mid-sized cities in terms of high-rise construction, is reaching a saturation point.
“Clearly, the market is showing a slowdown in terms of how much it can absorb,” Gokhman said.
Mark Epley, director of the Grasskamp Center for Real Estate at the University of Wisconsin-Madison, agreed.
“I think it’s going to be saturated over the next few years. It’s going to be hard to add anything new to this market,” Epley said.
But Eppli noted that Milwaukee has very little luxury development planned for the next two years.
“Is it possible that some of this could lease more robustly? Yes, it seems plausible. So, yes, there is overbuilding, but there is every reason to believe that some of this is likely to disappear,” he said.
Competing visions for the skyscraper of the future
Neutral, a Madison-based sustainability-focused development company, is planning to build two adjacent high-rise buildings at 1005 N Edison St. and 1001 N Water St. Combined, the two buildings will bring more than 1,000 luxury apartment units to the western edge of downtown Milwaukee.
“We see an opportunity to absorb several hundred units downtown from 2028 onwards, otherwise we wouldn’t have submitted that level of density,” said Daniel Graessl, Neutral’s chief product officer.
He said the first of the two buildings could open as early as early 2027.
Gokhman’s company had also proposed developing the North Water Street site but withdrew it hours before the city was set to publicly select Neutral’s plan.
“The nature of the competing proposals was very different,” Gokhman said of the proposals.
“When we look at market trends, we see two things happening: One, luxury high-rises are no longer a requirement of the market, and there is clearly a desperate need for workforce housing,” he said.
Gokhman said all 192 rental units in his proposal meet the criteria for workforce housing: For people making 100% of the area median income, workforce housing would make up less than 30% of their salary. In the Milwaukee metropolitan area, that equates to about $1,790 a month for an individual living in a one-bedroom apartment.
Gokhman’s proposal also called for an increase in city coffers through a Tax Increment Financing District (TIF), which would have allocated new revenue from increased property taxes around the proposed site toward certain construction costs.
Alder wants independent research
Councilman Robert Baumann represents the proposed development areas on the Milwaukee City Council. He has filed a motion with the council’s Zoning, Neighborhoods and Development Committee calling for an independent study of both proposals.
“The general consensus I hear from other developers is that a residential tower of that scale would push the boundaries of what’s feasible in the Milwaukee market,” Bauman said, adding that piecemeal development has “devastated” Milwaukee in the past.
“Once they get control of the land and get a foothold by actually building something there, we’re pretty much in their hands. And what if phase three never happens? Oh, too bad, things change, interest rates go down, the recession goes down, whatever,” Baumann said.
Neutral’s Graessl said the current proposal was “nowhere near a final design”, adding that the company would “refine” the design over the next year “to ensure that what we build is acceptable to the market”.
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