As the U.S. economy recovered from the Great Recession, the commercial real estate industry rebounded and major investors flocked to do deals in primary markets located along the coasts and in Chicago.
“For the past few years, there has been a flight to the coasts,” said Chris Ressa, senior vice president of leasing for the Northeast and Midwest for Tarrytown, N.Y.-based retail real estate firm DLC Management Corp. Wall Street sees Chicago and the coastal markets as the safest places for commercial real estate investments, he said.
Foreign investors, real estate investment trusts and pension funds have made so many investments in the nation’s primary commercial real estate markets that prices have risen dramatically in those areas, causing some national real estate investors to look elsewhere for deals.
“It’s impossible to get return (for many deals in the primary markets),” Ressa said. “If you want yield, you have to look elsewhere.”
With prices for commercial real estate so high in the nation’s primary markets, many national real estate investors have turned to secondary and tertiary markets like Milwaukee. In 2009, only 13.8 percent of the commercial real estate transactions in the Milwaukee area that were $1 million or larger involved out-of-state buyers, according to Xceligent. This year 42.1 percent of the commercial real estate transactions that were $1 million or larger in the Milwaukee area involved out-of-state buyers, up from 32 percent last year, according to Xceligent.
Percent of CRE transactions over $1 million involving out-of-state buyers
The Milwaukee area is not the only one getting an influx of out-of-state investments. Other secondary markets, like Cincinnati, Cleveland, Kansas City and St. Louis, are also attracting more out-of-state buyers of commercial real estate (see chart on page 25).
“Due to price escalations in primary markets, capital looking for higher returns is investing in tertiary and secondary markets,” said Scott Stahr, co-founder and principal of Fulcrum Asset Advisors. “We have been targeting such markets for several years and have invested in Milwaukee and St. Louis multiple times. We’re looking forward to doing some more investing in Milwaukee.”
Stahr, Ressa and three other representatives of out-of-state firms that are making major real estate investments in southeastern Wisconsin will be part of a panel discussion at the 13th annual BizTimes Milwaukee Commercial Real Estate and Development Conference on Thursday, Nov. 19, at Potawatomi Hotel & Casino.
Stahr’s firm, Fulcrum Asset Advisors, as part of a joint venture, this year acquired the 20-story 250 Plaza office building in downtown Milwaukee for $9.75 million. The joint venture plans to make major improvements to the distressed office building.
“We are at the start of a major multi-million dollar capital improvement program, including a new main lobby, new entrance, restrooms and corridors, and major parking garage work,” Stahr said.
In 2011, Fulcrum acquired four office buildings in Brookfield, including the two largest in the high profile Crossroads Corporate Center, with a total of 338,424 square feet of space, for about $41 million.
“We have invested major capital in our suburban assets (near) Goerkes Corners, remodeling lobbies, common areas, parking lots and adding amenities,” Stahr said. “We did this despite being 95 percent leased, in order to anticipate competition and possible new development.”
DLC Management in 2014 purchased the 408,500-square-foot Midtown Center shopping center in Milwaukee for $47 million.
The deal fit DLC’s acquisition strategy for large retail properties with good fundamentals and potential for improvement, Ressa said. The firm likes the property’s location near the intersection of busy Capitol Drive and Fond du Lac Avenue. The central city neighborhood offers high population density, which DLC likes, but low income levels, by which the firm is not fazed.
“We’ve got a lot of experience in demographics like this nationwide,” Ressa said. “We own a lot of (shopping centers in low-income neighborhoods). It’s about finding the right group of users. There are services, health and wellness and retail tenants that like to do business in markets like this.”
Since DLC acquired the property, it has added two notable new tenants: a 25,000-square-foot Planet Fitness center and a 5,000-square-foot rue21 store.
More important than filling vacant space is attracting tenants that are a good fit for the community and the shopping center, Ressa said.
“We’re not just filling a space to fill a space,” he said. “That never works.
One of the most notable out-of-state investors in the Milwaukee area’s industrial real estate market is Dallas-based Westmount Realty Capital LLC, which earlier this year acquired a portfolio of 10 industrial buildings in the metro Milwaukee area for $61 million.
“So far, we have been very happy with that acquisition,” said Stephen Kanoff, executive vice president and partner at Dallas-based Westmount Realty Capital, and another one of the panelists at the BizTimes Milwaukee Commercial Real Estate and Development Conference. “We’d like to buy more in Milwaukee.”
Atlanta-based Atlantic Realty Partners is working on three apartment developments in the Milwaukee area. Construction work is underway on the first phase of the River House development, a four-building 443-unit luxury apartment development on the former Gallun Tannery site along the east side of the Milwaukee River, the west side of North Water Street, and north of Holton Street in Milwaukee.
Atlantic Realty Partners also plans to develop a 236-unit luxury apartment development at 11011 W. North Ave. in Wauwatosa, near Mayfair Mall, and a 195-unit luxury apartment development at West Bluemound Road and Bishops Way in Brookfield.
“We are going to keep ourselves busy in (the Milwaukee) market for the next several years,” said Richard Aaronson, president and co-founder of Atlantic Realty Partners, and another one of the panelists.
The fifth panelist for the conference is Matt Garrison, managing principal of Chicago-based R2 Companies, which recently purchased the 1.1 million-square-foot downtown Milwaukee post office complex for $13.1 million. R2 is planning a major transformation for the property (see cover story).