Market Overview & Multifamily Housing Update

2Q18 | Milwaukee, Wisconsin

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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

Milwaukee, Wisconsin

After a “lost” year in 2017 (Milwaukee payrolls increased only 2,800

jobs) the Milwaukee economy showed considerably more grit in the

first half 2018. Establishments added to payrolls at a 8,200-job, 0.9%

year-on-year pace, the fastest growth recorded in over two years.

Improvement in the manufacturing sector was largely responsible for

the rebound. Factory headcounts increased at a 3,400-job, 3.2% annual

rate in 2Q18, a growth trajectory unseen since the quarters

immediately following the Great Recession. Metals fabrication led the

charge, adding workers at a 700-job, 3.2% YoY pace, boosted by the

Administration’s steel tariffs and continued robust car and light truck

demand. In turn, factory wage growth remained strong, rising 5.6%

over the year in the first quarter before softening in the spring.

Rising incomes contributed to increased home building, elevating

construction headcounts at a brisk 1,000-job, 3.2% annual rate. At the

same time, hiring in the higher compensation professional and

healthcare service sectors caught an updraft, adding a combined 3,700

(2.0%) jobs YoY over the year’s first six months, well over two times the

growth observed in the comparable period of 2017.

A soft patch in late spring notwithstanding (Milwaukee payrolls slipped

a net of 6,100 jobs in May and June, according to seasonally-adjusted

data) the intermediate economic outlook appears bright. RED Capital

Research’s MILW payroll forecasting equation (adjusted-R2=96.1%,

SE=0.3%) projects that job growth rates in the low-1% area are likely to

persist through spring 2019, corresponding to fairly vigorous expansion

in the equation’s independent variables, notably U.S. and Chicago job

growth and U.S. industrial production. Unfortunately, our macro

models foresee clouds on the horizon for the U.S. expansion in the

form of higher interest rates and reduced net job creation.

Consequently, Milwaukee growth is likely to stall in 2020 and 2021.

Moody’s Analytics are moderately more optimistic than our models

through 2019, but this service also anticipates slower expansion during

the subsequent two years with negligible net employment growth.

2Q18 PAYROLL TRENDS

AND FORECAST

Payroll Job Summary

Average Payrolls 878.1m

Annual Change 2Q18 8.8m (1.0%)

RCR YE18 Forecast 8.8m (1.0%)

RCR YE19 Forecast 6.1m (0.7%)

RCR YE20 Forecast 2.1m (0.2%)

RCR YE21 Forecast 0.6m (.%)

RCR YE22 Forecast 2.1m (0.2%)

Unemployment (NSA) 3.8% (6/18)

Occupancy Rate Summary

2Q18 Occupancy Rate (Reis) 95.3%

RED 50 Rank 23rd

Annual Chg. (Reis) -1.0%

RCR YE18 Forecast 95.0%

RCR YE19 Forecast 96.4%

RCR YE20 Forecast 96.5.%

RCR YE21 Forecast 96.4%

RCR YE22 Forecast 96.2%

Typically among the most stable markets in the country, Milwaukee

experienced an uncharacteristically steep occupancy decline over the

course of the last year. Occupancy plummeted -100 basis points to

95.3%, the largest annual decline recorded in Milwaukee in nine years,

dropping MIL from 15th highest occupancy among the RED 50 large

market peer group to 23rd. The issue was not so much one of weak

demand. Indeed, tenants net leased 237 units of previously vacant

space in 2Q18, nearly equal to the 259-unit post-recession second

quarter average. Rather it was a surplus of supply. Developers

completed 2,335 units over the year, more deliveries than in any 12-

month period since 1991. Brookfield (5.7%), City East (4.9%) and Cudahy

(5.5%) submarkets recorded the largest inventory increases and the

biggest occupancy rate declines. Each saw submarket vacancy increase

by 190bps or more, while only City West (-1.9%) saw vacancy decrease.

Axiometrics surveys of 304 investment grade, stabilized same-store

properties uncovered somewhat higher occupancy. The sample was

96.28% occupied in 2Q18, down -74bps year-on-year. A 109-asset

sample of class-C properties (97.5%) reported the highest occupancy

among classes, and also the best YoY performance (unchanged). By

contrast, classes-A (94.4%) and –B (96.3%) suffered -140bps and –82

bps rate decreases over the year. Lease-up at 12 properties delivered

since 2016 was sluggish, averaging only 1 unit per month, compared

to 6 in 2Q17. Ten were more than 90% occupied in 2Q18, however.

Above trend supply will persist in the market through year-end. RCR’s

occupied stock growth (ARS=88.2%/SE=0.37%) model suggests that

occupancy is likely to decline another –30bps under the

circumstances. Conversely, we expect conditions to improve

significantly next year as supply recedes. Metro occupancy is likely to

claw back above 96% by the fall of 2019, and hover in the low– to mid-

96% area through the end of the 5-year forecast interval. Axiometrics

also anticipate further occupancy decreases for the balance of 2018,

and a degree of recovery afterward, but this services does not expect

metro occupancy to remain above 96% consistently through 2022.

2Q18 ABSORPTION AND

OCCUPANCY RATE TRENDS

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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

Milwaukee, Wisconsin

Effective Rent Summary

Mean rent (Reis) $983

Annual Change 4.4%

RED 50 Rent change Rank 23rd

RCR YE18 Forecast 4.2%

RCR YE19 Forecast 2.1%

RCR YE20 Forecast 1.5%

RCR YE21 Forecast 0.9%

RCR YE22 Forecast 1.4%

Trade & Return Summary

$3mm+/60+ unit Sales 1

Estimated Proceeds $6mm

Average Cap Rate (FNM) 5.7%

Average Price / Unit $47,083

Expected total Return 7.1%

RED 50 ETR Rank 12th

Risk-adjusted Index (ETR/OETR2) 7.24

RED 50 RAI Rank 5th

Rent trends rebounded from 1Q18’s unseasonably slow $1 (0.1%)

advance with a robust $16 (1.7%) gain during the spring quarter,

according to Reis. The performance compares well to the market’s

0.5% average increase during the previous seven post-recession

second quarter periods. Expressed on a year-on-year comparison

basis, rents increased at a 4.4% pace, up from the prior quarter’s 3.6%

metric and the fastest annual growth recorded since 1991. Milwaukee’s

spring surge was propelled by sequential gains of 3.1% or more in

Wauwatosa and City West submarkets, each benefiting from new

luxury supply representing 1% or more of the existing inventory.

Irrespective of heavy supply average concessions receded $1 from

1Q18’s record $54 (5.29%) level, the first quarterly decrease since 2Q15.

The Axiometrics same-store sample experienced considerably slower

rent growth in the spring quarter. Sample rents advanced at a 1.3% YoY

pace, up from 1.2% during the prior quarter. These were the weakest

sample growth rates observed since 2014. The “B” (1.8%) segment won

class honors, while classes-A (0.0%) and –C (1.2%) lagged. Only class-B

exhibited much vigor, accelerating from 1.5% during 4Q17. Only Racine

(4.3%) submarket posted a gain faster than 1.9%, while higher rent

Downtown (-1.0%) and Washington Co. (0.1%) continued to lag.

RCR’s MILW’s rent model (ARS=84.1%/SE=0.5%) is the weakest among

the RED 50 owing to the ambling, sometimes directionless nature of

the metro Reis data history. Nevertheless, the model has something to

tell us about probable rent behavior. Independent variables include

lagged CHI rents^2, job growth and occupancy. Each is expected to be

constructive through early 2019, giving rise to useful annual growth

rates in the mid-3% to low-4% range. The fundamental foundation of

the rent surge is likely to develop cracks and fissures by the summer

2019, though, causing rents to decelerate back to the metro’s ~2% long

-term average rate or slower. Rents seem likely to scrape along the

bottom of MILW’s cyclical range through decade’s end. Our 5-year rent

CAGR forecast is 1.6%. Axiometrics are largely on the same page,

projecting 2Q18 to 2Q23 CAGR rent growth of 1.8%.

2Q18 EFFECTIVE RENT TRENDS

The pace of investment sales activity in Milwaukee remained glacial.

CoStar report only one transaction in each of the first two quarters of

2018. Proceeds totaled less than $15 million in aggregate, the fewest in

a January to June period since 2011. The average price of units sold

was $77,072 for the first half, down –13% year-on-year, and –18%

sequentially.

Velocity increased over the summer. Four properties were exchanged

after mid-year as a portfolio, including two assets valued at more than

$10 million each. The portfolio consisted of class-B and -B+ rent

restricted senior apartments.

Year-to-date buyers consisted entirely of private entities to the total

exclusion of institutions and trusts. Since 2006, private buyers have

accounted for 88% of Milwaukee transaction volume.

Cap rate visibility is murky due to thin trade, but generalizations are

possible. Sixties and Seventies vintage gardens trade to low- to mid-6%

yields. More recent construction product commands prices equating to

mid-5% to 6% cap rates. Little or no evidence suggests that investors

will transact at sub-5.5% yields for metro market rate properties.

Considering available data, RCR maintain that a 6.25% rate represents a

valid proxy for Milwaukee B/B+ cap rates, about where we have been

for four years. With a 6.70% terminal cap rate assumption and model

derived rent and occupancy point estimates we calculate that a 2Q18

investor would expect to earn a 7.1% rate of total return over a five year

holding period. Relative to its RED 50 large U.S. market peers

Milwaukee ranks 12th highest in this regard, falling between Chicago

(7.0%) and Minneapolis among its Upper Midwest Region rivals.

Milwaukee’s unusually stable rent history reduces return uncertainty

and elevates metro investment risk-adjusted returns. The metro’s Risk-

adjusted Index (ETR/OETR2) derived from a 10,000-iteration Monte

Carlo simulation is 7.24, which ranks fifth among the peer group overall

and second in the East North Central Region after Louisville.

2Q18 PROPERTY MARKETS

AND TOTAL RETURNS

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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

Milwaukee, Wisconsin

Property Name (Submarket)

Property Class/

Type (Constr.)

Approx. Date

of Transaction

Total Price

(in millions)

Price /

Per Unit

Estimated

Cap Rate

The Marq (Near North-Westside / Marquette) Student/SR MR (‘57/’07) 19-Oct-2017 $42.3 $69,077/bed 6.5%

Sunset Ridge (Far North Side / Granville) B / WF GLR (1990) 19-Oct-2017 $12.8 $87,500 6.92% (UW)

Saint James Place (Far North Side / Calumet Farms) B+ / WF GLR (1989) 8-Nov-2017 $24.5 $103,813 5.8%

St. Catherine Commons (Kenosha Co/Pennoyer Park) B+ Sr./Masonry (2004) 16-Aug-2018 $24.4 (allocated) $132,500 5.0%

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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

Milwaukee, Wisconsin

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MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

Milwaukee, Wisconsin

2Q17 2Q18 Change 2Q17 2Q18

Basis Point

Change

Brookfield 5.7% $1,100 $1,167 6.1% 3.3% 5.5% 220 bps

City East 4.9% $1,248 $1,310 5.0% 6.3% 8.6% 230 bps

City West 0.8% $891 $918 3.0% 8.1% 6.3% -180 bps

Cudahy / South Milwaukee 5.5% $830 $880 6.0% 2.1% 4.0% 190 bps

Greenfield 0.2% $785 $768 -2.2% 1.5% 1.5% 0 bps

Northshore / Northwest 0.6% $915 $940 2.7% 3.0% 3.4% 40 bps

Wauwatosa / West Allis 2.6% $911 $940 3.1% 4.2% 6.3% 210 bps

West Waukesha County 2.7% $918 $941 2.5% 3.4% 4.5% 110 bps

Metro 2.4% $942 $983 4.4% 3.7% 4.7% 100 bps

Submarket Summary (Reis)

Reis Inventory

Percentage Change Effective Rent Physical Vacancy

Submarket Units 2Q17 2Q18 Change 2Q17 2Q18

Basis Point

Change

Downtown / Shorewood 5,115 $1,449 $1,433 -1.0% 96.0% 94.4% -155bps

Far North Side 5,905 $1,078 $1,090 1.4% 96.1% 95.1% -96bps

Franklin / Oak Creek 6,831 $980 $997 1.9% 98.4% 98.3% -15bps

Near North / West Side/Wauwatosa 3,262 $1,202 $1,207 0.2% 95.4% 94.8% -61bps

Racine 1,882 $762 $794 4.3% 96.5% 97.0% 43bps

South Side / West Allis / Greenfield 8,299 $875 $890 1.7% 97.1% 97.3% 26bps

Washington County / Ozaukee County 1,313 $1,117 $1,123 0.1% 98.0% 97.2% -83bps

Waukesha County 9,952 $1,119 $1,135 1.7% 97.6% 95.9% -169bps

Metro 42,559 $1,074 $1,085 1.3% 97.02% 96.28% -74bps

Submarket Summary (Axiometrics Same-store) Submarket Inventory Effective Rent Physical Occupancy

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell

currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED Capital

Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held

responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein

be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk.

Daniel J. Hogan

Director of Research

Tel (614) 857-1416

Tel (800) 837-5100

djhogan@redcapitalgroup.com

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