Wisconsin needs more affordable apartments. But inflation is hampering new developments in Milwaukee, Green Bay and other cities.

Tom Daykin
Milwaukee Journal Sentinel
Rising construction costs have delayed work starts on several Wisconsin affordable apartment developments, including a project planned for Milwaukee's Riverwest neighborhood.

New affordable apartment buildings throughout Wisconsin are facing delays as developers scramble to fill funding gaps caused by double-digit construction cost increases since late 2020.

Many of those planned projects in Milwaukee and other cities are facing uncertain prospects despite obtaining a chief financing component — state and federal affordable housing tax credits.

"We're stuck," said David Weiss, a partner and chief executive officer at Fox Point-based General Capital Group LLP, which has affordable apartment developments pending in Milwaukee, Ashwaubenon and Stevens Point.

"It's just crushing budgets," said Ted Matkom, Wisconsin market president for Gorman & Co., an affordable housing developer based near Madison.

General Capital, Gorman and other developers annually compete for state and federal affordable housing tax credits. In Wisconsin, that process is overseen by the Wisconsin Housing and Economic Development Authority.

The authority in April 2021 awarded about $35.1 million in tax credits to help finance 33 housing developments in 19 communities throughout Wisconsin. Those projects total 2,343 units, including 2,200 units for low- and moderate-income people.

Developers that receive tax credits must generally provide at least 85% of a building's apartments at below-market rents to people earning no higher than 60% of the local median income.

Developers sell the tax credits, often to banks and other investors, to raise capital for their projects. Most of the additional funds are usually provided through commercial loans.

It's not unusual for an affordable apartment development to still have a gap in its financing.

Those gaps can be filled with such options as federal grants, deferred fees for the developers and tax incremental financing districts — which use local property tax revenue generated by the new developments.

While not unusual, the funding gaps have widened because of spiking construction costs over the past year or so.

Those costs are up roughly 10% to 20%, said Weiss.

"That's creating some pretty substantial gaps," he said.

Matkom estimates that overall construction costs have increased about 25%.

Another affordable apartment developer, MSP Real Estate Inc., is generally seeing 10% cost increases, said Mark Hammond, vice president of development for the Mendota Heights, Minnesota-based firm.

Those costs increases affect lumber and other building materials, Weiss and Matkom said.

The higher prices are fueled by a big jump in inflation.

Many economists say that's tied to labor shortages as well as supply chain lags at catching up with revved-up growth in 2021 following 2020's abrupt downturn due to the COVID-19 pandemic.

The nation’s gross domestic product, the value of all goods and services produced in the United States, grew 5.7% in 2021 — the economy's highest annual growth rate since 1984.

Meanwhile, the inflation rate last year was 7%, the biggest increase in prices for consumer goods since 1982.

Costs force design changes

Along with material price increases, labor costs are higher because masons, electricians, plumbers and other construction trades people are retiring — without being replaced by as many younger workers, said Warren Jones, Milwaukee Housing Authority vice president of construction.

The construction cost increases are particularly difficult for affordable apartment developers because their below-market rate rents are capped by federal regulations tied to the tax credits.

The Housing Authority's multiphase Westlawn Gardens development, south of West Silver Spring Drive, between North 60th and North 68th streets, is making design changes to reduce construction costs, Jones said.

Those include using steel siding and other finishing materials instead of brick and rock facades, he said.

The authority also is using some of the funds set aside for future phases for more immediate construction at Westlawn, said Fernando Aniban, chief financial officer.

"We'll figure out later how to get funding for the next phases," Aniban said.

MSP Real Estate has delayed construction on two Wisconsin projects, including the second phase of River Parkway Apartments and Townhomes, 6400 River Parkway, in Wauwatosa, Hammond said. The other one is Madison's The Heights Apartments.

"Both of these cities have prioritized the creation of additional affordable housing units in their communities." Hammond said.

"We are actively engaged with both cities to make both of these projects financially feasible and are hopeful that we will be able to proceed with both projects in the near future," he said.

'Going backwards'

Gorman has a $25 million project pending in southeastern Wisconsin that is facing a $7 million funding gap. 

Before the 2021 inflation spike, that gap would have been around $2.5 million, said Matkom, He declined to specify the location because of "sensitive" negotiations with local officials about helping fund the development.

Meanwhile, Gorman in the 2022 round is seeking tax credits to help  finance developments in Wausau and Green Bay.

Each was initially planned for about 75 apartments. But officials in both cities were concerned about filling the looming funding gaps.

So, Gorman reduced the size of each planned development to around 50 units in order to narrow those gaps.

With the ongoing need for affordable housing throughout Wisconsin, he said, such actions amount to "going backwards."

General Capital is seeking additional funds to help finance two Milwaukee developments, and two others in Wisconsin, which received tax credits as late as 2021.

In Milwaukee, the firm is joining with KG Development Group LLC to create the 91-unit Riverwest apartments and food accelerator in the 1100 block of East North Avenue, just west of University of Wisconsin-Milwaukee's RiverView Residence Hall.

A four-story building that would combine a new King Library branch with affordable apartments is among the Milwaukee developments delayed by rising construction costs.

Also, General Capital is partnering with Emem Group LLC to build 93 units in the 2900 block of North King Drive. That includes a four-story building, at the northwest corner of North King Drive and West Locust Street, with a new King Library on the first floor and 41 apartments on three upper floors.

In addition, General Capital is working on the 75-unit Berkshire development, in Ashwaubenon, and The Grove, a 102-unit project planned for Stevens Point.

Of the four projects, The Grove is the only one that has proceeded to where a construction start in 2022 seems certain, Weiss said.

The Grove was helped, in part, by using state and federal historic preservation tax credits to help pay for converting a 120-year-old convent to apartments, he said.

The other three projects are seeking additional funding sources.

Weiss said that could include money made available for Wisconsin affordable housing projects through the American Rescue Plan Act that Congress passed and President Joe Biden signed into law in 2021.

Gorman also is vying for ARPA dollars, Matkom said.

Grants may not close all gaps

Gov. Tony Evers on Wednesday announced that Milwaukee is getting $15 million from the state's ARPA-financed Neighborhood Investment Fund.

That includes $12.9 million that will be used to help develop more than 400 affordable rental units, according to the announcement.

That includes $6 million for Westlawn Gardens and $2.9 million for the King Library apartments, along with $1 million each for the Riverwest project; the five-story, 55-unit Five Point Lofts at North King Drive and West Concordia Avenue; the conversion of the former Edison Middle School, 5372 N. 37th St.,, into 75 apartments, and 30 single-family and duplex housing rentals to be developed primarily on North Fifth, Sixth and Seventh streets, between West North Avenue and West Chambers Streets, according to the office of Acting Mayor Cavalier Johnson.

All of those projects had earlier received affordable housing tax credits.

In addition, the Common Council and then-Mayor Tom Barrett agreed in October to set aside some of the city's ARPA cash for affordable housing.

Both Matkom and Weiss are concerned, however, that the ARPA grants may not be enough to fill the gaps at all developments that have been delayed by inflated construction costs — or continue to meet future housing needs.

Milwaukee's Department of City Development said it will keep working with state officials and local developers to identify funding sources for affordable housing.

Meanwhile, developers are facing other financial challenges.

The Federal Reserve has indicated it will likely raise interest rates in March in an effort to reduce inflation. That will make it more expensive to borrow money for commercial developments.

Also, the price investors are paying for tax credits has dropped as they face more economic uncertainty.

It all paints an uncertain picture for affordable housing developments in 2022, and perhaps beyond.

"I've never seen it like this before," Matkom said.

Tom Daykin can be emailed at tdaykin@jrn.com and followed on Instagram, Twitter and Facebook.