Downtown office market getting supply surge

Real Estate Spotlight

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The downtown Milwaukee office market has not experienced a building boom like the one it is currently undergoing in 30 years.

From 1985 to 1991, the city saw the 411 East Wisconsin Center, Milwaukee Center, 100 East Wisconsin and 1000 North Water towers open, drastically changing Milwaukee’s skyline and its potential for downtown office tenants.

A rendering of the Hammes office building that will be complete in 2018 in the Park East Corridor.

Today, two new office buildings are currently under construction in the central business district –  Hammes Co.’s 94,000-square-foot office building at the northeast corner of East Knapp and North Water streets in the Park East Corridor and Irgens’ 25-story BMO Tower at Market Square office tower project at 778 N. Water St.

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Once both are complete in 2018 and 2019, respectively, the projects will join Irgens’ 18-story 833 East building, which opened last year near the lakefront, and Wangard Partners’ redevelopment of the former Laacke & Joys building on North Water Street, which was completed earlier this year.

These new projects come at a time when the Milwaukee-area office market saw an uptick in total vacancy in the third quarter and for the first time in two years posted negative absorption (of 77,961 square feet), leaving some to wonder if the downtown market is being overbuilt.

Andrew Jensen, principal with The Boerke Co., said unless a large tenant comes into the market, vacancy will continue to rise, which could mean landlords will have to lower their rates to offset the lack of demand to fill the existing and new spaces.

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“Most landlords are trying to secure their tenants with leases coming up over the next two years, so they are not competing with the new space on the market,” Jensen said.

Jensen pointed to a late 1980s development boom period when several new office towers opened and it took years to fill them.

“That is the concern, although you never know what will happen in a market,” he said. “When 875 (E. Wisconsin Ave.) was built (in 2003), it was only 50 percent leased and everyone worried. Then Roundy’s came out of nowhere and moved 500 people from Pewaukee to downtown.”

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When Brookfield-based Hammes relocates its corporate headquarters to its new downtown building, it will occupy two floors of the five-story structure. The company has not yet announced any other future tenants.

BMO Harris rendering southeast view.

BMO Harris will lease 124,000 square feet of Irgens’ 379,400-square-foot BMO Tower at Market Square, occupying the building’s first and 11th through 16th floors. In addition, Michael Best & Friedrich LLP will lease 60,000 square feet in the building.

Irgens is currently trying to lease the remaining space in the building.

When Michael Best & Friedrich moves to the new building, it will leave an approximate 60,000-square-foot vacancy at 100 East.

Northwestern Mutual Life Insurance Co. opened its new downtown office tower in August, also opening up 55,000 square feet of space at the 411 building, where it had been leasing two floors since September 2015.

Wangard Partners secured Bader Rutter & Associates as its anchor tenant for the Laacke & Joys site redevelopment at 1433 N. Water St., leasing 60,000 square feet of the 113,830-square-foot office portion of the project to the marketing company. But so far, Wangard has not announced another office tenant for the building.

When Irgens’ 833 East building, an 18-story tower near the lakefront, opened in March 2016, it was 64 percent occupied. Today, it still has two-and-a-half floors vacant, which brokers estimate to be about 75,000 square feet.

Some brokers are optimistic the market will absorb the new office spaces downtown.

Lyle Landowski, a partner with Colliers International, which markets the 833 East building, said by the time Irgens completes the BMO tower, the 833 building will be fully leased.

“We have meticulously followed the central business district since 2006 and the vacancy rate for the Class A office market has never exceeded 10 percent for any extended period of time, even during the Great Recession,” Landowski said, adding that two-thirds of the clients he is seeing are either expanding or new to the market entirely.

Landowski said real estate used to be viewed as an expense by tenants, but now those employers see their office space as a tool to help attract and retain employees and are often relocating or renovating their space.

“There is a blip on the radar this year (with the third quarter market data),” Landowski said. “But we have been tracking it and we predict a robust fourth quarter. For the next 12 months, we’re predicting just under 500,000 square feet of absorption.”

Jenna Maguire with Founders3 expects the trend of companies relocating downtown to continue as companies hope to attract young talent.

“There are multiple large suburban office tenants active in the downtown marketplace right now, and most of them will land downtown in the next few quarters, backfilling many large downtown floorplates and making way for the new product to enter the marketplace,” Maguire said.

Despite the increase in vacancy and decrease in absorption, the rents have not yet depreciated and David Pudlosky, vice president of JLL’s Wisconsin office, said he does not believe they will. As there is more competition, there will be holes, but older buildings are being repositioned and that will help the backfill, Pudlosky said. JLL is also continuing to see tenants coming from the suburbs, he said.

Average asking rents in all classes increased 5.6 percent in the third quarter compared to the same time in 2016 and in Class A buildings, weighted average rents improved 3.6 percent year-over-year, according to Xceligent data.

“I think Milwaukee has evolved in terms of rent growth, regardless of what happens with vacancy,” Pudlosky said. “It is an interesting paradigm. We have all of this vacancy coming online, but I don’t think the landlords will start doing crazy deals to fill it.”

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