Based on an examination of the latest real estate market data, the metro Milwaukee area is arguably one of the strongest industrial markets in the nation.
During the third quarter, the region’s industrial real estate market had positive net absorption of 1.7 million square feet of space and the vacancy rate fell to 6.7 percent, according to the latest Xceligent and Commercial Association of Realtors Wisconsin (CARW) market report.
The region’s industrial space vacancy rate is at its lowest level since the third quarter of 2006, according to Xceligent. The vacancy rate has fallen steadily since peaking at 9.6 percent in the fourth quarter of 2008, during the Great Recession.
The 1.7 million square feet of industrial space absorption is the best quarter for the region since the first quarter of 2011 and the third best quarter since the third quarter of 2003. It was also the 10th consecutive quarter of positive absorption for the region’s industrial real estate market.
“I think the fundamentals of this market are very strong,” said James T. Barry III, president of Cassidy Turley Barry in Milwaukee.
The region’s industrial market stacks up well compared to other metro areas. Only three regions had higher levels of industrial space absorption in the third quarter: Chicago (3.5 million square feet), Louisville (2.6 million) and Dallas (2.5 million), according to Cassidy Turley. But Milwaukee’s 6.7 percent vacancy rate is lower than those regions: Chicago (10.1 percent), Louisville (7.3 percent) and Dallas (8.2 percent).
Milwaukee’s industrial space vacancy rate is well below the national rate of 9.0 percent, according to Cassidy Turley.
“That’s a very positive story for Wisconsin,” Barry said. “It’s a very, very positive development that has not received enough recognition.”
With a total inventory of 266 million square feet of industrial space, the Milwaukee area is the 14th largest industrial real estate market of the 67 tracked by Cassidy Turley. Some regions have a large amount of warehouse and distribution space, but the Milwaukee area remains a major manufacturing center.
“We have a very strong industrial base,” Barry said.
The region’s manufacturers did a good job of weathering the storm of the Great Recession, Barry said. In past recessions huge manufacturers including Allis Chalmers and breweries vacated enormous blocks of space.
“That didn’t happen during this recession,” Barry said. “It wasn’t as dramatic as it had been in the past.”
Business for many of the area’s manufacturers has improved as the economy has slowly recovered from the recession. Few manufacturers are hiring but more are considering plans to expand their facilities or move to larger spaces, Barry said. Still, many remain reluctant to make major capital investments, he said.
“I think we need more energy in the macro economy so that people will pull the trigger,” Barry said.
Many manufacturers are hesitant to expand or move because of uncertainty about the upcoming presidential election and the pending fiscal cliff that could result in significant federal tax increases, some commercial real estate executives say.
“Nobody wants to expand right now,” said Robert Flood, a partner with Milwaukee-based RFP Commercial Inc. “Nobody knows what to do. It would help if our quote-unquote leaders in Washington would give use some direction and people understood what they are supposed to be doing. We all believe it’s going to get a lot more expensive.”
Although the Milwaukee area’s industrial market fundamentals are strong, the volume (also known as velocity) of deals has been low, Barry said, demonstrating the impact of economic uncertainty on the market place.
But after the election and once the fiscal cliff issue has been resolved, Barry expects numerous industrial space users to move forward with new leases and building purchases.
“We’re going to see companies looking seriously at trying to make capital investments in real estate,” he said.
Some companies are doing deals now because they have grown and can no longer wait to make facility improvements despite the economic uncertainty.
“There are a number of firms that need to do something,” Barry said.
“There are people that are forced to expand,” Flood said. “The pipeline has been stuffed so full and packed so tightly, something has to fall out.”
The recession and the uncertainty during the slow recovery has resulted in a lack of new industrial development in recent years in the Milwaukee area, Barry and Flood said. Spec development has been limited mostly to the Kenosha area, which has become a distribution hub. City of Industry, Calif.-based Majestic Realty Company plans to build a 1.18-million square foot warehouse and distribution center east of County Highway H and Bain Station Road in Pleasant Prairie. No tenants have been announced yet for the project.
One of the few speculative industrial developments currently under construction in the region is a 54,155-square-foot building being built at 16235 W. Beloit Road in New Berlin by Zilber Property Group.
“We haven’t built anything for a long time,” Flood said. “What expansion is going on is owner-occupied type.”
The lack of development in recent years is a major reason the Milwaukee area’s industrial space vacancy rate is so low, Barry said.
“We did not have a lot of overbuilt spec space that became distressed during the recession,” he said. “We haven’t seen, other than some notable exceptions, a lot of construction of new (industrial) buildings.”
If vacancy rates continue to fall and absorption continues to rise eventually more industrial development should occur in the area. However, banks are still reluctant to provide financing for speculative developments, Barry said.
“I don’t think we’re quite there yet,” he said. “We may see (spec development) in the south I-94 Racine-Kenosha corridor. I would be surprised to see any spec development in the next two to three quarters.”
“(Spec development) is not going to happen until we get some direction (from Washington),” Flood said. “I think the demand is there. Somebody has to unleash that demand.”
If the economic recovery picks up steam the area could get more spec development in late 2013, Barry said.
In the meantime, Barry predicts that the region’s industrial space vacancy rate will continue to fall.
“The vacancy rate is going to go down further,” he said. “We’re going to have a situation where companies won’t be able to find the size and type of space they want in the location that they want.” n
