The southeastern Wisconsin commercial real estate market still faces significant headwinds. The metro area’s office space vacancy rate is at about 22 percent, and the class B office space vacancy rate is close to 25 percent.
The downtown area has a large amount of vacant office and retail space and the Shops of Grand Avenue was recently taken over by Bank of America. Very little new development is under construction. Job growth is weak. Financial markets for commercial real estate have improved a bit, but remain tight.
Yet despite those issues, momentum is growing for a recovery, and some major commercial real estate development projects in southeastern Wisconsin could break ground this year.
In downtown Milwaukee, construction began recently on a 30-story residential tower, three hotel developments are in the works and the Godfrey & Kahn S.C. law firm recently committed to anchor a new office tower that would be built near the Pfister Hotel.
Outside of downtown, more hotels are planned near the airport, the Forest County Potawatomi Community is planning a $25 million redevelopment of the former Concordia College campus, Walmart plans to build several new stores in the region and the owner of Southridge Mall is planning a makeover that could include the addition of a Macy’s department store.
Several southeastern Wisconsin commercial real estate professionals are optimistic that the market will improve in 2011.
“I’m cautiously ecstatic,” said Steve Palec, senior vice president of CB Richard Ellis.
“Overall I’m optimistic,” said Lyle Landowski, principal with Inland Companies. “We saw an uptick in activity, particularly in the fourth quarter. We saw more activity with new companies, and with small users of 2,000 to 5,000 square feet. Those tenants were missing for 24 months.”
“I think it’s steadily improving,” said James T. Barry III, president of Cassidy Turley Barry. “Certainly we are seeing more activity in terms of showings. We’re seeing more expressions of interest, letters of intent and offers.”
However, Barry said he expects a slow recovery this year that will be an improvement compared with 2010, but still far weaker than a typical robust recovery from a recession.
The commercial real estate market will remain sluggish without significant improvement in employment.
“In order to have demand for space, you need to have people working,” Barry said.
Office market
Office space vacancy rates in the Milwaukee area remain high at about 22, according to Xceligent and the Commercial Association of Realtors Wisconsin (CARW).
Class A space is performing better with a 15.47 percent vacancy rate in the metro area and a 13.89 percent vacancy rate downtown, according to Inland Companies. However, class B space has a 25 percent vacancy rate in the metro area and a 30.14 percent vacancy rate downtown. The market favors tenants, who are gravitating to higher quality buildings.
“In every submarket the quality (buildings) are doing very well,” said Ned Purtell, a partner with RFP Commercial.
One prominent downtown Milwaukee property owner, who declined to comment on the record, predicted that 2010 will be a “terrible” year for the downtown office market because the city is attracting very few businesses to move in.
Still, construction of the first new multi-tenant office tower in downtown Milwaukee since 2003 could begin this year. Godfrey & Kahn recently announced that it has signed a lease to be the anchor tenant of a new office tower called Washington Square, that is proposed for a vacant lot southeast of East Mason Street and North Jefferson Street, across the street from the Pfister Hotel. The building will be developed by a joint venture of Wauwatosa-based Irgens Development Partners LLC and Milwaukee-based Van Buren Management Inc. Irgens said it expects the project to break ground this year and will take two years to build.
Depending on how many tenants commit to the project, the Washington Square building will be between 20 to 26 stories tall with between 200,000 to just over 300,000 square feet of office space, said Jackie Walsh, executive vice president of Irgens. The project will also have 10,000 to 15,000 square feet of retail space and at least 800 parking spaces.
Von Briesen & Roper S.C. and Baker Tilly Virchow Krause LLP are also considering plans to move to a new office building downtown and could decide to join Godfrey & Kahn in the Washington Square project. However, Von Briesen and Baker Tilly are also considering a 15- to 17-story, 200,000-square-foot office building proposed by Weas Development for the southeast corner of Broadway and Michigan Street.
Another major tenant in the market for space downtown is the Harmony Initiative, a collaboration of the Milwaukee Ballet Company, University of Wisconsin-Milwaukee and the Medical College of Wisconsin, which plans to establish a 70,000 to 75,000-square-foot location in downtown Milwaukee. The initiative is considering development proposals and existing buildings in the Water Street corridor.
Suburban office development this year is expected to be limited to build to suit projects. For example, Actuant Corp. this year will move its corporate headquarters to an 80,988-square-foot office building that is being built by Irgens Development Partners on Westbrook Crossing in Menomonee Falls.
Hotels
The hospitality industry rebounded in 2010 and the Milwaukee area could have several hotel developments under construction in 2011.
At least three hotel developments are in the works in downtown Milwaukee. Jackson Street Management LLC, which includes Ed Carow and Mark Flaherty of Milwaukee-based hotel development firm Wave Development LLC, wants to build a 200-room, 10-story Marriott hotel southwest of Wisconsin Avenue and Milwaukee Street. The developers are not seeking any city subsidy for the $50 million project. However, it is controversial because the developers want to tear down five buildings that are more than 100 years old and are located in a historic district. At presstime the developers were seeking approval by the Common Council to overturn a ruling by the Historic Preservation Commission.
The other two downtown Milwaukee hotel developments that are being planned would be developed in historic buildings that would be restored, instead of torn down.
Oregon, Wis.-based Gorman & Co. is planning an $18.8 million plan to redevelop the former Brew House building and the Mill House building located northwest of West Juneau Avenue and North 10th Street in the former Pabst brewery complex in downtown Milwaukee into a 90-room extended stay, beer-themed hotel.
Rosemont, Ill.-based First Hospitality Group Inc. is working on plans to convert the 124-year-old Loyalty Building at 611 N. Broadway into a boutique hotel. The company also plans to acquire the 136-year-old Mackie Building at 225 E. Michigan St., which would still be used for office space, but the Grain Exchange Room in the building would provide meeting and banquet space for the hotel in the Loyalty Building.
Retail
With few exceptions, retail development was almost completely shut down in southeastern Wisconsin during and after the Great Recession. However, several major retail developments are planned in the region this year.
Indianapolis-based Simon Property Group Inc. is planning a major redevelopment for the 1.2 million-square-foot Southridge Mall in Greendale. The project is expected to include several new tenants. Most notably, according to a commercial real estate source, Simon is talking to Cincinnati-based Macy’s Inc. about filling the former Younker’s space at Southridge with a Macy’s department store.
The Village of Greendale recently approved a development agreement, including in $10 million tax incremental financing (TIF) for the Southridge project. Initial renovation work at the mall is expected to begin in early 2011 and is expected to be completed in the spring of 2012.
Bentonvile, Ark.-based Wal-Mart Stores Inc. plans to add several news stores in southeastern Wisconsin. So far the company has disclosed plans to add stores in Menomonee Falls, Milwaukee, South Milwaukee, Greendale and Kenosha. According to a source the company is planning to add several other stores in addition to those that have already been announced.
“There’s no magic number,” Wal-Mart spokeswoman Lisa Nelson said. “We’re looking to expand access to the Walmart brand and be as close to our customers as possible. We look at where our customers are. We’re looking (for new store locations) all over (the Milwaukee area), including the city.”
Some of the new Wal-Mart stores are expected to be significantly smaller than its standard 140,000-square-foot store size, which include grocery departments. The company is introducing new store concepts with a grocery store of about 20,000 square feet and a neighborhood market grocery, pharmacy and general goods concept of about 30,000 to 60,000 square feet, Nelson said.
Another major retail development expected to break ground this year is in Pewaukee. Issaquah, Wash.-based Costco Wholesale Corp. plans to build a 150,000-square-foot store on a vacant, 19-acre site in the Village of Pewaukee northwest of Highway 164 and Capitol Drive, and north of a Wal-Mart store at that intersection.
In addition, Janesville-based Woodman’s Food Markets, which opened a store last year along Highway 41/45 in Menomonee Falls, is looking for another Waukesha County location for a store. Trader Joe’s, which has a store at Bayshore Town Center in Glendale, is looking for a location for a store along Bluemound Road in Brookfield, according to commercial real estate sources.
Industrial
Little industrial space development is occurring in southeastern Wisconsin, but it is the region’s strongest commercial real estate sector. The region’s industrial space vacancy rate is at 8.6 percent, down from 9.0 percent in the third quarter of 2010 according to Xceligent and CARW. Several manufacturers are reporting stronger earnings and growth, which could eventually result in expansions and relocations.
“I haven’t heard this much optimism from the manufacturing community in three years,” said Jeff Hoffman, an industrial real estate broker and vice president of Pewaukee-based Judson & Associates. “Last quarter they were very busy.”
Barry said he expects industrial space vacancy rates to dip in southeastern Wisconsin this year.
“I do think we’re going to see continued positive absorption in 2011,” he said. “Relative to office and retail (in southeastern Wisconsin), industrial is probably stronger. I do think industrial will lead the way.”
Speculative development for industrial space has been virtually nonexistent in the Milwaukee area since the end of 2008, Barry said. Any speculative development this year would probably be just a component of a building that has an anchor tenant, he said.
Most industrial space development in the region this year will probably be build-to-suit projects for specific tenants, industry professionals say.
One build-to-suit project that is planned: Menomonee Falls-based Bradley Corp. plans to build a 177,000-square-foot plant, which could be expanded in the future to 290,000 square feet. The company said it is considering three locations in the “metro-Milwaukee and Washington County corridor.” One possible site is a property owned by the company in the Germantown Business Park.
Another build-to-suit industrial building under construction is a 140,000-square-foot plant in the Menomonee Valley in Milwaukee for Bilbao, Spain-based Ingeteam Inc.
