An outsider’s perspective

Which proposed commercial real estate development projects deserve public subsidies and which should be left to fend for themselves in the marketplace?

The City of Milwaukee perpetually grapples with that question as its downtown continues to be transformed.

For answers, the city turned to Tony Smith, a practice leader for S.B. Friedman & Company, a Chicago-based real estate and development consulting firm. Faced with several proposed mixed-use developments for downtown Milwaukee that were seeking tax incremental financing (TIF) assistance, city officials hired S.B. Friedman  to analyze the downtown Milwaukee real estate market and recommend which projects should receive city subsidies.

In its analysis, S.B. Friedman noted that the downtown Milwaukee condominium market has been the only real estate sector that has been able to develop without public subsidy.

The city should resist subsidizing condo, hotel and retail projects that are competing with other downtown condos, hotels and stores, the S.B. Friedman study said. The only exception to that recommendation, the study said, was The Ghazi Co. development, a proposed condo, hotel and retail project (see accompanying story), because its location next to the Midwest Airlines Center and the Shops of Grand Avenue would have a catalytic affect that would boost the rest of downtown.

The office market in downtown Milwaukee, however, is soft, and office developments need subsidies to cover the costs to build parking facilities, the company concluded in its study.

Subsidizing office developments, such as the $25 million in TIF funds provided for the new Manpower Inc. headquarters, is a good idea, but only if the project attracts a new employer to the city or retains a key employer whose space needs cannot be met with the existing downtown office inventory, the study says.

Powered by the condo boom, downtown Milwaukee has experienced an impressive resurgence in recent years, Smith said.

“It certainly seems like downtown Milwaukee has gone through something of a transformation in the last few years,” he said.

In 2001, the downtown Milwaukee condo market absorbed about 100 to 150 units. From 2004-06 the downtown absorbed 340 to 380 condos per year.

“That’s a substantial ramp up,” Smith said. “You might not be able to maintain that pace.”

However, the company’s study said that the number of young professionals and empty nesters in the Milwaukee area with a household income of more than $100,000 is expected to grow through 2011, meaning the pool of potential downtown condo buyers will also grow.

It will take awhile for downtown Milwaukee’s housing boom to increase the population enough to attract a significant amount of retail development, Smith said. Restaurants, bars and entertainment venues will come first, he said. Clothing retailers are the hardest to attract and several more years of development is necessary to have enough population density to attract them. Downtown Milwaukee needs more large employers as anchors to bring more workers downtown, which would help attract more stores, he said.

“The size of the downtown housing market is not yet big enough to have a dramatic effect on retail downtown,” Smith said. “I would expect that to come in down the road.”

Downtown areas these days are considered entertainment destinations moreso than shopping destinations, Smith said.

“Cities are no longer places where you go to get a lot of stuff,” he said. “Now they are places you go to have an experience and maybe you pick up a thing or two.”

Although it may not be ready to attract a lot of clothing retailers, downtown Milwaukee may have developed enough to support a major entertainment development such as The Ghazi Co. project, Smith said.

“I’m not sure if downtown is absolutely ready for that yet, but I think that is coming in a few years,” he said.

The city might want to create areas for big-box retailers on the fringe of the downtown area that can serve the downtown and nearby neighborhoods, Smith said. Many people living in those areas are driving to the suburbs to shop at those stores.

“The city is a bit under-retailed,” he said.

Although about a dozen hotel developments have been proposed in the downtown area, Smith expects few of them to be built. Occupancy rates are rising, but Smith said downtown Milwaukee can probably only support two or three additional hotels.

The surge in hotel development proposals is likely a result of the industry finally recovering from the Sept. 11, 2001 terrorist attacks, which devastated the national travel industry, Smith said. In addition, the collapse of the national housing market has led many investors to put their money into hotel developments instead of housing developments, he said.

The new Harley-Davidson Museum, which will open next year in the Menomonee Valley and the new Manpower Inc. headquarters will help increase demand for hotel rooms in downtown Milwaukee, Smith said.

The downtown office market is showing some signs of improvement, as vacancy rates are dipping. The downtown office space vacancy rate declined from 15.3 percent at the end of the first quarter to 14.1 percent by the end of the second quarter, according to Colliers International. The downtown class A office space vacancy rate fell from 12.1 percent to 9.5 percent.

The revitalization of downtown Milwaukee has improved its image, and that could attract businesses that want the prestige of being located downtown to move their offices there, Smith said.

The most important thing that downtown Milwaukee needs to continue its revitalization is a rail transit system, Smith said, acknowledging that he is well aware of the political environment in the Milwaukee area that makes establishing such a system extremely difficult.

“One of the things that keeps striking me about downtown Milwaukee is the lack of a fixed guided transit system that spurs development, density and establishes a hub,” he said.

Cities with massive, dense, prosperous downtowns are accessible via roads and transit, Smith said. They could not support a large amount of office development and move workers in and out each workday without rail transportation, he said. In addition, cars take up large amount of valuable real estate for parking spaces.

“Without a fixed rail transit system, the capacity to bring people downtown is the same as Wauwatosa,” Smith said. “Rail would send a signal from the public sector to the private sector that downtown is being elevated. It does more than take people around. It signals to the private sector that the public sector is putting assets in place.”

Proposals for commuter rail and downtown streetcar systems have been debated, but local and state officials have not agreed about how to implement them or pay for them. Both systems are worthy, and light rail systems can function like a commuter rail service in outlying areas and like a streetcar in a downtown area, Smith said.

“A transit system is really the most important step that the region can take to revitalize the downtown,” he said.


Tony Smith  Practice leader S.B. Friedman & Company
Headquarters: Chicago
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