Madison Multifamily Market Report
Madison, Second Half 2016
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Considerable Strength and Opportunity Found in Madison Apartment Market
Accelerating rental demand brings development to new highs. Home to the University of Wisconsin and the state capitol, Madison has an economy largely driven by government and education entities. A large labor pool in these sectors, coupled with the vast number of college students in the area, is benefiting apartment occupancies. Leasing momentum has been picking up as demand for rentals increases, sustaining rent growth and holding the vacancy rate at perpetually low levels. Construction activity has been elevated to meet the demand with nearly 4,000 new apartments added to Madison since 2013. This year development will continue with the largest annual addition to the multifamily market this cycle. Concerns of oversaturation will be quelled as favorable tuition policy draws more out-of-state students to the university, filling new apartments as they come online. Vacancy will remain tight this year, rising slightly in the short term as lease-up of new properties stretches into 2017, supporting the fifth consecutive year of rent growth.
Motivated investors push prices higher. The strength of the Madison apartment market fuels investor interest from primary markets as tight vacancy and steady rent growth provide greater returns than what can be found in their areas. Buyers ready to deploy capital are met with a shortage of listings, generally holding quarterly deal flow to single-digit levels and boosting offer activity for complexes on the market. Prices on a per unit basis have risen to new highs, compressing cap rates at the same time to the low-5 percent band. Initial yields in this range are more common in the heart of Madison while buyers in search of greater first-year returns have been focusing on the outlying areas of the metro. The area of East Madison has stirred the most activity this period as a greater number of Class A and B offerings were available. Private equity investors do not face the competition usually found in primary markets with institutional buyers, making Class A listings more accessible. With plenty of room for rent growth and strong renter demand, Madison is a highly sought market for these types of investors.