Before the housing crash in 2008, most American cities saw their share of new condo projects and subdivisions of shiny new McMansions. The Madison area was no exception. All that growth, however, came to a halt with the economic downturn.
But five years later, the city is suddenly erupting with new construction -- almost exclusively apartment buildings. In 2012, more than 1,000 new apartments were approved by the city for large apartment complexes, according to the City Planning Division. That's more than double the number approved in the previous two years. In all, the Madison Department of Planning and Community and Economic Development has identified more than a dozen large apartment buildings that are under construction and as many as 25 apartment complexes planned in the next couple of years.
It is impossible not to notice the high-rise and multi-use buildings going up in and around Madison. These apartments are almost all high-end units targeting young professionals. "If you want to know what's going on, I can give you an answer in one word," says Alec Slocum, CEO and a cofounder of abodo.com, a Madison-based apartment search engine. "Epic."
In the past several years, the medical records software giant in Verona has hired thousands of recent college graduates. It is well known that working at Epic means long hours but also good pay. Landlords are hopeful that this army of young, highly paid professionals will want to live in or around downtown Madison in one of the many new apartments under construction. More new luxury apartments are also clustered around the company's Verona headquarters.
The theory is that young professionals moving to Madison are not ready to buy a home, but will want to rent apartments near the vibrant city center. "I think it's fair to say that many of the new developments going up in the immediate downtown area are designed to attract Epic's new hires," says Margaret Watson, chief operating officer for Steve Brown Apartments, which manages many student, residential and commercial properties in Madison. "I don't think developers are literally putting up apartment buildings because of Epic. They're considering Epic as part of the overall market they want to attract to their new building."
Low interest rates and strong demand for apartments are driving the boom. And developers acknowledge there is risk to the current development mania.
"There is always a potential for overbuilding when thousands of new units come on stream in a short time," says Brad Binkowski, one of the founding owners of Madison-based developer Urban Land Interests. "These are untested waters, and we're going to have to see the absorption rate downtown to gauge how well the market responds."
Binkowski points to a number of signs that demand for the new buildings is already strong. His company's Seven27 building near Monona Bay is still under construction but already 25% rented out. He says 30% to 40% of the units in his firm's new developments are being rented by Epic employees.
Unfortunately, this building boom is not going to do much to improve the housing opportunities for the majority of Madison's residents, including the thousands of students living in the campus area. And some predict the building boom may already be headed towards a bust.
"In order to support all this new supply, Madison and the surrounding area need about four more Epics," says Watson.
A city of renters
According to the most recent U.S. Census, almost half of the city's residents are renters, compared to 30% statewide. Unfortunately, Madison also has an apartment crisis. Madison Gas and Electric tracks the number of residences in the area that appear to be vacant, based on gas and electric usage. The utility estimates the vacancy rate is now 1.88%. Brenda Konkel, executive director of Madison's Tenant Resource Center, says that is the lowest rate she has ever seen in Madison.
In addition to a shortage of apartment units, the current rents are too expensive for many residents. The Department of Housing and Urban Development considers housing affordable if renters pay 30% of their income on housing. According to the U.S. Census Bureau, over half, or 37,000, of Dane County renters are paying above that line.
"Theoretically, all of the new construction should mean that vacancy rates will go up, but in fact the numbers have been plummeting," says Konkel. "It's impossible to find housing for many people."
The problem is that the new units are almost exclusively high-end apartments, priced out of reach for many city residents. Rents for the Constellation apartment complex on East Washington Avenue, which will begin leasing Aug. 1, range from $895 a month for a studio apartment to $2,165 for a three-bedroom.
"Unfortunately, demand still clearly outstrips supply," says Slocum of abodo.com. "Theoretically, these new units coming into the market would mean vacancy rates go up and it becomes easier to find a home. I'm afraid reality will be different."
Watson of Steve Brown Apartments says the roughly 2,000 units that have been built over the past two to three years are most likely a sign of overbuilding. While the new construction is filling up, older buildings are having more trouble finding suitable tenants.
"Many of the developments going up today are designed to get people to reach financially to live there. They're attracting a demographic that will pay more to live somewhere new," she says. "It seems more likely that we'll end up with a selection of high-end, expensive new properties with low vacancy rates and a selection of rundown, older, more affordable properties with high vacancy rates."
In other words, the building boom is likely to meet demand for new high-end construction, but the rest of the rental market may suffer while upscale renters move into the new construction. The only good news is that, if demand fails to keep up with the new construction, owners will eventually have to lower their asking price.
"The campus area in Madison has always had unusually low vacancy rates," says Slocum. "I don't know how long it will take, but from the standpoint of the rental market, the developments should make downtown into more of a real market."
Slocum says the asking price for rental units in the abodo.com database went up about 15% last year alone.
"The market needs to catch up to the pent-up demand," says Konkel. "I just wish they were building more than just these apartments most people can't afford."
[Editor's note: This article has been corrected to clarify attribution to a quotation of Brenda Konkel and provide the current URL for abodo.com.]