Commercial real estate development picks up

Commercial real estate development ground to a halt during the Great Recession as financing became extraordinarily difficult for developers to find and demand for new projects slumped.

As the U.S. economy gradually improves, commercial real estate professionals say financing for commercial real estate is loosening up.

Meanwhile, in southeastern Wisconsin, several new commercial real estate development projects have begun recently or are expected to break ground in the second half of 2011. In downtown Milwaukee three hotels and a new office tower are planned and all could break ground by the end of the year. Several retail projects are planned in the region including about a dozen new Walmart stores and a revitalization project for Southridge Mall. The biggest project, however, is being planned by Menomonee Falls-based Kohl’s Corp., which is looking for a site for a new corporate headquarters.

Retail

The retail sector is providing most of the commercial real estate development activity in southeastern Wisconsin.

“There’s a lot of real positive things happening in our region’s retail development,” said Dan Rosenfeld, principal at Mid-America Real Estate – Wisconsin LLC.

Bentonville, Ark.-based Wal-Mart Stores Inc. is leading the way with several new stores planned in the region. Wal-Mart is working on plans to open new stores in several communities including the city of Milwaukee, Menomonee Falls, Greendale, Wauwatosa, Kenosha, Waukesha, West Milwaukee and Caledonia. Some of the proposed stores are full size Walmart stores, others are smaller Neighborhood Market stores focused on just grocery and pharmacy items.

Other major discount retailers will build new stores in the region. Issaquah, Wash.-based Costco Wholesale Corp. is building a 148,000-square-foot store at Capitol Drive and Highway 164 in Pewaukee. Minneapolis-based Ryan Cos. is expected to break ground soon on a 136,000-square-foot Target store at the former Quebecor World printing plant site at 12821 W. Bluemound Road in Brookfield.

However, an even bigger retail development splash will be made at the high end.

Indianapolis-based Simon Property Group will begin a major remodeling of Southridge Mall in Greendale. The project will include the addition of a Macy’s department store, in the former Younker’s store space at the south end of the mall. Simon Property Group plans to attract other new stores to the mall, including an H&M store, which is already under construction inside the mall.

In the Town of Brookfield, Milwaukee-based Marcus Corp. is working on plans to build a 600,000-square-foot commercial real estate development southeast of Bluemound Road and Barker Road, called The Corners of Brookfield, with about 480,000 square feet of retail space that will be anchored by a Von Maur department store. Von Maur is a Davenport, Iowa-based chain of upscale department stores compared by some to Nordstrom.

In Wauwatosa, Chicago-based HSA Commercial Real Estate Inc. is planning a 250,000-square-foot retail development, called The Mayfair Collection, for a portion of the former Roundy’s Supermarkets Inc. distribution center northeast of Highway 45 and West Burleigh Street.

The retail developments are driven by national retail chains looking for opportunities to grow, said Peter Glaser, first vice president of CB Richard Ellis’ Milwaukee office.

“Some of these projects were in the planning stages before the recession hit,” he said. “Now that we’re coming out of it, it’s a good time to move these projects forward. Retailers are looking for opportunity. They need to grow.”

The Milwaukee area has a fairly low amount of vacant retail space, especially for big box stores, Rosenfeld said.

“Milwaukee, unlike other markets doesn’t have a lot of vacant boxes,” he said. “Because we don’t have a lot of available buildings, we’re going to see more ground-up development.”

Hotel

The other commercial real estate sector that will be active during the second half of 2011 with development activity in southeastern Wisconsin is the hotel market.

Three hotel developments are planned in downtown Milwaukee and another project that was half-built and halted two years ago could resume.

Jackson Street Management LLC (which includes Ed Carow and Mark Flaherty of Milwaukee-based hotel development firm Wave Development LLC) plans to build a 200-room full-service Marriott hotel southwest of Wisconsin Avenue and Milwaukee Street.

Rosemont, Ill.-based First Hospitality Group Inc. plans to convert the 124-year-old Loyalty Building at 611 N. Broadway into a 128-room Hilton Garden Inn hotel.

Oregon, Wis.-based Gorman & Company plans to transform the former Brew House building and Mill House building located northwest of West Juneau Avenue and North 10th Street in the former Pabst brewery complex into a 90-room boutique hotel.

The Staybridge Suites development at the southeast corner of Juneau Avenue and Water Street was half built and suspended in 2009 when it went into receivership. The property is still tied up in a legal dispute. A Milwaukee County judge is expected to determine how much money investors, lenders and contractors will get once the building is sold. Wave Development has made an offer to purchase the building, which was accepted, however another buyer could swoop in with a higher offer. The receiver must accept the highest offer.

More hotels are also planned near Mitchell International Airport, an area that has added several hotels in recent years as the airport has set passenger records. A Courtyard by Marriott hotel is under construction at 4620 S. 5th St. and Illinois-based developer Syner G plans to build a 107-room Four Points by Sheraton hotel southeast of Howell Avenue and College Avenue in Oak Creek.

Interest in hotel development has picked up because of improved occupancy rates and room rates in the national and Milwaukee-area hotel markets, said Greg Hanis, president of New Berlin-based hotel industry consulting firm Hospitality Marketers International Inc.

“In 2010, the last half to two-thirds of the year saw big growth in demand (for hotels nationally),” he said. “That’s continuing in 2011. I think you’re starting to see rates coming back, so revenues are looking good.”

Many investors waited out the Great Recession. Now that the economy has improved and the hotel industry is showing signs of recovery, investors are backing more hotel projects, Hanis said.

“A lot of people were sitting on the sidelines waiting for this time period,” he said.

Industrial

The industrial sector might be the healthiest of the southeastern Wisconsin commercial real estate market. The region’s industrial space vacancy rate has improved steadily from 9.3 percent in the first quarter of 2010 to 8.2 percent in the first quarter of 2011. Racine County’s industrial market is particularly healthy, with a 3.9 percent vacancy rate in the first quarter.

Speculative commercial real estate development has been virtually non-existent since the beginning of the Great Recession, but now a few developers are working on speculative industrial projects, including HSA, which is considering plans to build a 100,000-square-foot speculative industrial building at its successful Park 94 development in Mt. Pleasant.

Office

The southeastern Wisconsin office market remains weak with a first quarter vacancy rate of 21.4 percent, although that was an improvement from the 22.1 percent vacancy rate at the end of 2010.

Office space brokers say activity has picked up significantly this year as more tenants have considered new spaces, but actual deals have not increased that much. Brokers are hoping the increase in activity will result in more deals in the second half of 2011.

“I think in the second half you’ll see a lot more businesses moving forward with a sale or lease,” said Lyle Landowski, principal with Inland Companies.

However, many office tenants are relocating to smaller spaces because their companies shrank during the Great Recession, said Bill Bonifas executive vice president with CB Richard Ellis’ Milwaukee office.

“The majority of clients I’m working with are downsizing,” he said.

Despite the poor office market, three major office development projects are in the works.

Irgens Development Partners LLC and Van Buren Management Inc. plans to build a 22- to 26-story office building southeast of Mason Street and Jefferson Street in downtown Milwaukee. Godfrey & Kahn has signed a lease to move its offices to the building and Baker Tilly Virchow Krause LLP has signed a letter of intent to move to the building, called Washington Square. Irgens and Van Buren are working to attract additional tenants and secure financing for the project, which would likely include some assistance from the city to pay for the parking structure in the project. Construction could begin this year.

Meanwhile, Kohl’s Corp. is considering plans to build a new corporate headquarters, with about 1 million square feet of space, according to sources. The company, currently located in Menomonee Falls is considering numerous locations for the project, including downtown Milwaukee and Menomonee Falls.

Another downtown office project is planned by The Brewery Works Inc., which will do a $30 million renovation of its Schlitz Park office complex on the north side of the downtown area. The project will include remodeling 350,000 square feet of office and public spaces in the 1.2 million square foot complex. The remodeled space will provide room for additional tenants with up to 1,800 employees, said Schlitz Park co-owner and developer Gary Grunau.

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