City awaits office development subsidy requests

Developers who are trying to build a new office building in downtown Milwaukee will probably need to obtain more than just a couple of anchor tenants. They also will need to obtain a subsidy from the city of Milwaukee in order to put together a financing package for a new downtown office building, commercial real estate industry observers say.

Some Milwaukee commercial real estate industry observers are wondering if city officials will be willing to provide a subsidy for a new office building.

Developers working on proposed downtown office building developments include Weas Development, Rainier Properties II LLC and a potential partnership of Irgens Development Partners LLC and Joel Lee of Van Buren Management Inc.

A developer that wants to build a new office building in downtown Milwaukee will need a city subsidy of $15 million to $25 million, said Bruce Westling, principal with Rainier Properties.

None of the developers working on a new downtown office building have submitted a proposal for their project to the city yet, said Department of City Development commissioner Richard “Rocky” Marcoux.

The Irgens/Lee project would be built southeast of Mason Street and Jackson Street, across the street from the Pfister Hotel. The Weas project would be built southeast of North Broadway and Michigan Street, just north of I-794 and the Third Ward. The Rainier Properties project would be built northwest of Water Street and McKinley Avenue along the Milwaukee River in the Park East corridor.

Potential anchor tenants for a new downtown office building include Von Briesen & Roper S.C., Godfrey & Kahn S.C. and Baker Tilly Virchow Krause LLP. According to commercial real estate sources, those tenants are primarily considering the Irgens/Lee project and the Weas project.

Marcus Theatres has committed to bring a movie theater complex to the Rainier project. The project could provide a boost to the Park East corridor, which has struggled to attract development.

The Weas project could provide much-needed parking spaces for the nearby Mitchell, Mackie and Loyalty buildings. The historic buildings lack parking, making it difficult to attract tenants, Marcoux said. “The area is significantly under-parked,” he said. The property is also highlighted in the city’s new downtown plan as a key development site to improve the connection between downtown and the Historic Third Ward.

The Irgens/Lee site would be more of an infill development, located in the heart of downtown just north of Wisconsin Avenue and near two hotels and several restaurants.

Despite the various strengths and weakness of each site and each project, Marcoux said city officials will not favor one development over another. City officials will wait to see what developer is able to attract tenants, put a project together and make a proposal to the city. Then city officials will evaluate that proposal and will consider any request for a subsidy, he said.

“The market is going to bring us the right project,” Marcoux said. “And then we will react to that project. Bring us your development project. We will look at it.”

Any city subsidy for a development project requires the approval of the Common Council. In the past, aldermen have preferred to subsidize projects that brought a company, and jobs, in from outside of the city.

“Normally, they want to see the job component,” said Ald. Robert Bauman, who represents the downtown area.

A perfect example of that is the $25 million in tax incremental financing (TIF) that the city provided in 2006 for the 280,000-square-foot Manpower Inc. corporate headquarters, which moved to the new building in downtown Milwaukee from Glendale.

However, aldermen have provided subsidies for projects that attracted tenants from other downtown buildings. For example, the city spent $25 million for the parking structure at Cathedral Place at 555 E. Wells St. The building’s anchor tenants are Whyte Hirschboeck Dudek S.C., which moved from the Chase Tower, and Deloitte LLP, which moved from the 411 E. Wisconsin Ave. building.

City officials are more inclined to favor a subsidy for a development that attracts tenants already located in the city if it provides an opportunity for those firms to expand and create jobs, Marcoux said.

However, development in downtown Milwaukee has slowed to a trickle ever since the Great Recession began and aldermen may be eager to support any building project right now to help create construction jobs and grow the tax base, Bauman said.

A demonstration of that desire is the Common Council’s approval last year of a $9.3 million city loan for The Moderne, a 30-story building with 203 apartments and 14 condominiums that will be built at the southwest corner of Juneau Avenue and Old World Third Street in the Park East corridor. The U.S. Department of Housing and Urban Development (HUD) recently approved a $42 million loan guarantee for The Moderne, and groundbreaking is expected next month.

The city loan for The Moderne project was unusual. For about a decade prior to the Great Recession, there was a housing boom in downtown Milwaukee. Several residential buildings were constructed in the downtown area, and almost all of them were built without any subsidies.

But the financial industry crisis hit, which was a major component of the Great Recession. Banks dramatically reduced lending for real estate projects. That contributed in a spike in unemployment in the construction industry and a major slowdown of real estate development.

Eager to boost the local economy, and hopeful that occupancy rates for the downtown apartment market would remain high, aldermen approved the loan for The Moderne.

That same sentiment could attract support from aldermen for an office building development, if one comes together.

Like the Manpower and Cathedral Place projects, office building developments in downtown Milwaukee usually need a city subsidy to cover the cost for structured parking, Bauman said. Otherwise the downtown developments are unable to compete with suburban office buildings and their lower parking costs, which is the result of lower costs to build a surface parking lot in the suburbs compared to the higher expense of building a parking structure downtown.

Opponents of mass transit systems overlook the subsidies that the city must provide for parking in downtown development projects, said Bauman, a major mass transit supporter.

“The car is the problem,” he said. “If you don’t have the car problem there would be no subsidies for any development in downtown Milwaukee.”

Bauman said he usually supports providing TIF for downtown projects. The TIF subsidy is paid for by the increase tax revenue that is generated by the development.

Bauman said TIF is perhaps the best tool the city has to encourage high-quality development in the downtown area.

“If we didn’t use TIF we would have a downtown with three to four story office buildings,” he said. “You would not get the scale of development that you want to see in a major urban area. If the public sector wants anything built it has to participate, so we are participating.”

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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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