CARW members see softness in office, retail markets

But overall optimism remains high

from downtown urban areas.

Last updated on May 15th, 2019 at 04:54 pm

Although not as optimistic as they were two years ago, members of the Commercial Association of Realtors Wisconsin remain upbeat about the southeastern Wisconsin commercial real estate market. But, they indicate there is weakness in the area’s office and retail markets.

That’s the outlook from the annual BizTimes Milwaukee survey of CARW members. This year, 77 CARW members responded to the survey.

When asked their impression on the current commercial real estate market in the area, 66 percent said “improving,” 34 percent said “flat” and none said “weak.” That is similar to last year, when 63.5 percent said the market was “improving.”

“Real estate fundamentals across the board are good,” said CARW president and chief executive officer Tracy Johnson.

But the impression of growth in the marketplace is down from 2013-’15, when each year more than 80 percent of CARW members said the market was “improving.”

CARW members remain optimistic about the market, but less so than in recent years. When asked if they thought the region’s commercial real estate market would improve in 2018, 70 percent of CARW members said “yes” and 30 percent said “no.” That’s down from previous years, when 73 percent predicted market improvement for 2017, 88.5 percent for 2016 and 94.6 percent for 2015.

The southeastern Wisconsin industrial market remains strong, but the office and retail markets are showing some weakness, based on the responses from CARW members to the survey.

For the area’s industrial market, 83 percent of CARW members say it is “improving,” 17 percent say it is “flat” and none said it is “declining.” That is an improvement from last year, when 73 percent said the area’s industrial market was improving.

According to Xceligent’s third quarter market report, the region’s industrial market has a vacancy rate of just 3.7 percent and it absorbed 1.68 million square feet in the third quarter. The region’s industrial market has absorbed 4.18 million square feet during the first three quarters of the year.

The region has a lack of industrial space inventory and brokers are having a hard time finding space for tenants that are in the market, Johnson said.

The outlook is less favorable for the region’s office market. Of the CARW members responding to the survey, only 43 percent said the area’s office market is “improving,” 57 percent said it is “flat,” while none said it is “declining.” Last year, 52 percent of CARW members described the area’s office market as “improving” and in 2015, 64 percent did so.

The Milwaukee-area office market had negative absorption of 77,961 square feet during the third quarter, according to Xceligent. The vacancy rate rose slightly during the quarter to 16.8 percent, compared to 16.5 percent in the second quarter. Meanwhile several new office buildings have either opened recently, are under construction or are planned in downtown Milwaukee.

But the market is active, as several tenants are looking at relocation options in an attempt to use attractive office space in quality locations to help them recruit employees, Johnson said.

“Those (office real estate) brokers seem to have a lot in the hopper,” she said.

In response, office space lease rates in the area are on the rise and landlords are offering fewer concessions, Johnson said.

The area’s retail real estate market is facing challenges as some brick-and-mortar retailers are struggling to remain competitive, but several new developments have added additional space to the market recently. CARW member sentiment for the area’s retail real estate market is mixed: 39 percent indicated it is “improving,” 44 percent said it is “flat” and 17 percent said it is “declining.” In 2016, 48 percent of CARW members said the local retail real estate market was improving. In 2015, 81 percent said it was improving.

According to Xceligent, the area’s retail real estate market has absorbed 1.18 million square feet of space this year, but only 32,848 in the third quarter. The vacancy rate is at 7.6 percent.

Johnson said the retail brokers she talks to are “very bullish” despite the growth in online shopping.

“Forty percent of holiday sales (this year) are going to be done online,” she said. “I can bring that up in a room of retail brokers and they don’t blink an eye.”

The retail industry is going through a massive transformation. Many retailers that are closing stores had too many locations, Johnson said. But some retailers are growing, including off-price stores like T.J. Maxx. New retail developments, like The Corners in Brookfield or The Mayfair Collection in Wauwatosa, are getting built with an emphasis on enhancing the shopping experience in order to compete with online retail.

“(The retail industry) truly is evolving,” Johnson said.

When asked which real estate sectors in the area were most in danger of being over-developed, 66 percent of CARW members said apartments, 13 percent said hotels, 10.4 percent said retail space, 5.2 percent said office space and none said industrial space.

When asked about specific economic development projects, 91 percent of CARW members said the Foxconn Technology Group project will be a success for the state and its economy, 59.7 percent said the Wisconsin Center in downtown Milwaukee should be expanded, 81.8 percent said the new arena will help attract more development to downtown Milwaukee, but only 31 percent said the downtown streetcar project will attract riders and spark development along the route.

Johnson will present the results of the CARW member survey at the BizTimes Commercial Real Estate and Development Conference on Nov. 17, sponsored by Bank Mutual and Husch Blackwell.

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Andrew is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, he is a lifelong resident of the state. He lives in Muskego with his wife, Seng, their son, Zach, and their dog, Hokey. He is an avid sports fan and is a member of the Muskego Athletic Association board of directors.

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