Last updated on May 15th, 2019 at 05:03 pm
Associated Bank recently purchased the Milwaukee Center, one of downtown Milwaukee’s most prominent office towers, for $60.5 million.
The deal will have a significant ripple effect on the downtown office market.
Associated Bank and its 320 employees will shift from the 97,000 square feet they currently occupy in the 330 Kilbourn office complex (formerly Plaza East) beginning in 2021 and continuing in 2022, when its leases expire.
If the bank had not purchased the Milwaukee Center, its growth in Milwaukee could have prompted it to be an anchor tenant for a new downtown office tower. There are only a handful of companies in the city large enough to be an anchor tenant for a new office building.
Instead, the bank chose to buy the existing 28-story Milwaukee Center. Associated will occupy between one-quarter and one-third of the 373,000-square-foot tower. The Milwaukee Center is currently 81.7 percent leased.
The bank’s decision leaves the two-building, 14-story 330 Kilbourn complex in the lurch. In addition to losing Associated Bank, 330 Kilbourn’s other anchor tenant, the FBI, will leave this spring when it moves to the former Stark Investments headquarters in St. Francis. Combined, the two tenants lease 179,546 of 330 Kilbourn’s 475,313 square feet of rentable area.
Rick Matthews, spokesman for Tishman Speyer, the owner of 330 Kilbourn, said as a matter of policy the company would not comment on its existing tenants or their long-term plans for space. But Matthews stressed that the campus recently completed a massive renovation, which included a refreshed exterior façade, extensive landscaping work and refurbished tenant common areas.
Several local real estate brokers say they aren’t worried about the future of 330 Kilbourn. The class B office complex is solid, they say, with ample parking and a good owner in Tishman Speyer. Plus, even if Associated Bank begins moving tenants early, the bank has a lease for six more years, so the rent will be paid until 2022.
The downtown Milwaukee central business district’s class A office market (east of the Milwaukee River), which includes 11 buildings, had a vacancy rate of 11.1 percent and absorbed 230,540 square feet of office space during the first quarter of the year, according to Xceligent data.
That’s up from 9 percent in the fourth quarter. The increase in vacancy rate for the first quarter is attributed to the new supply added to the market with the completion of Irgens’ 833 East building, an 18-story tower near the lakefront that opened in March. As of early April, the building was 64 percent occupied, with 230,334 of 358,000 square feet leased.
Irgens first announced the 833 project in 2012, but began working on developing other downtown sites years earlier for Milwaukee law firm Godfrey & Kahn. Godfrey & Kahn now anchors 833 East, leasing 77,817 square feet of space on three floors.
It typically takes an anchor tenant before a new office building project can move forward. Irgens is planning a five-story, 168,000-square-foot office building at 100 N. Young St. in the Third Ward, if it can secure an anchor tenant. The building could be ready by late 2017, and the brokerage community has been receptive to its large floor plans and parking – unique amenities for Third Ward buildings.
Wangard Partners recently landed an anchor tenant for its office building project at the former Laacke & Joys site at 1433 N. Water St. downtown. Brookfield-based Bader Rutter & Associates signed a lease agreement to occupy 60,000 square feet of the 113,830-square-foot office portion of the project. The deal was the catalyst Wangard was waiting for to purchase the site for $3.7 million and start pre-construction work.
“The anchor tenant always drives these deals,” said Lyle Landowski, with Colliers International|Wisconsin. “Godfrey drove 833 and there are a number of sites ready for development, but at the end of the day, for a true office tower to be built, a tenant has to want an office tower built.”
Landowski believes within the next three to five years, another office tower will be built downtown. Until then, the majority of new development will happen peripheral to the central business district, such as in the Third Ward, like Irgens is proposing, he said.
“Another big factor will be waiting to see what Johnson Controls does with the Lakefront Gateway site,” Landowski said.
Glendale-based Johnson Controls Inc. is considering plans for a 50-story office building near the lakefront in downtown Milwaukee, according to sources. The company has agreed to split the costs of a $500,000 development feasibility study for the site with the city. If built, the building would be located southwest of the intersection of East Clybourn Street and North Lincoln Memorial Drive.
A Johnson Controls spokesman said recently that the company’s merger with Ireland-based Tyco International has no bearing on the development feasibility study for the site.
David Pudlosky, of JLL, agreed with Landowski that another new tower will likely be built downtown. He said there are a handful of sites ready for development, and developers are in a race to land the deals.
“Whether it’s Doug Weas, Joel Lee, Marcus Corp. or Irgens, they are all capable of doing it,” Pudlosky said. “It’s just a matter of who is going to win the business.”
The potential anchor tenant that is being sought after this time is Reinhart Boerner Van Deuren. The Milwaukee law firm has hired a Chicago-based real estate broker and a Chicago architectural firm to explore its office space options before its lease at 1000 North Water expires in 2019. The firm, which leases 114,000 square feet, is the largest tenant in the 283,000-square-foot building.
Local brokers have presented several options to Reinhart, including:
- Joel Lee’s property at the southeast corner of East Mason and North Jefferson streets.
- The Irgens project in the Third Ward. Irgens has an option to purchase the property.
- Weas Development Co.’s property at the southeast corner of North Broadway and East Michigan Street.
- The site Marcus Corp. purchased in November at 1301-1357 N. Edison St. near the northwest corner of Knapp and Water streets.
- A site owned by Hammes Co. at 210 E. Knapp St.
Marcus Corp. and Hammes Co. have each submitted proposals to purchase and develop a one-third of an acre parcel owned by Milwaukee County in the Park East corridor. The triangular site is in the middle of the properties each entity owns in the Park East. Neither company will say what their plans are for the property. Milwaukee County officials won’t say when the RFP will be awarded.
Pudlosky believes Reinhart is serious about wanting to move – but says if they are going to go, they’ll have to make a decision soon so a developer can secure financing to build a new office tower.
“I think it’s very real, I just don’t know how, logistically, they can pull it off,” Pudlosky said.
Reinhart is not tipping their hand.
“While our current lease does not expire for several years, we are exploring all options regarding our Milwaukee office,” said Jerome Janzer, Reinhart chief executive officer.
Regardless, Andrew Jensen, with the Boerke Co., said several tenants with 40,000 square feet of space or more will have leases expire in 2019 and 2020.
“They will be jockeying to renew or possibly want a new building,” Jensen said. “I think we will continue to see migration of businesses from the suburbs and good quality space is getting a little tight. A new tower could be needed.”
Jack Jacobson, at NAI MLG, said the story of the flight to quality is becoming a little old. But he, too, believes there is capacity in the market for another tower.
“There is the flight to quality, which is great, and everyone should be excited about that, but overall, there is no job growth, which is what we need to be thinking about as a city,” Jacobson said. “Manufacturing has been suffering, but white collar job growth is stagnant too. I would love for someone to tell me I’m wrong about this.”
The metro Milwaukee office market has a supply of 29 million square feet of space, the same amount of supply as it had in 1997, Jacobson. While new office buildings have been built since 1997, some unused office buildings have been converted to other uses, like the long-vacant 11-story former headquarters of Blue Cross and Blue Shield of Wisconsin, which is now the Buckler apartments.
The First Financial Centre, located at the northeast corner of Water Street and Wisconsin Avenue, is also under contract to be sold to a developer who is planning to convert the vacant office space in the building into a hotel. The 14-story, 154,200-square-foot office building, located at 700 N. Water St., currently is only 30 percent occupied.
Ned Purtell, with RFP, said there is certainly plenty of momentum for a new class A office tower downtown, but the reality of it happening is somewhat questionable.
“Associated Bank could have driven it but they bought (a building) instead,” Purtell said. “The last go around von Briesen & Roper, Quarles & Brady and Godfrey were all looking at the same time and only one pulled the trigger (to move to a new building). Reinhart is a likely driver, but it’s hard to say what they will do at the end of the day. It’s all guess work.”