After several years of stubbornly high vacancy rates, scant absorption and little new construction, the metro Milwaukee area office market is finally showing signs of a turnaround.
“Up until 12 months ago the (Milwaukee area office) market didn’t have a pulse,” said Dan Jessup, executive vice president for Jones Lang LaSalle. “Now I think we have a pulse.”
The metro Milwaukee office market still has a high vacancy rate at 20.4 percent, but the market absorbed 314,769 square feet of space in 2013, by far the highest absorption level since the Great Recession, according to Xceligent data. The metro Milwaukee office market only absorbed 14,770 square feet of space in 2012, 91,094 square feet of space in 2011 and had negative absorption from 2008-’10.
“The good news is there is positive absorption,” said Andrew Jensen, a principal with The Boerke Company.
Colliers International|Wisconsin partner Lyle Landowski said his firm predicts the metro Milwaukee office market will absorb another 312,000 square feet of space in 2014. That amount of absorption should push the vacancy rate down to pre-recession levels, he said. The class A vacancy rate, currently at 13.8 percent, should end up lower than pre-recession levels by the end of the year, but the class B vacancy rate, currently at 26.2 percent, will remain above pre-recession levels, he said.
“People do seem to be more receptive to upgrading (their office space),” Jessup said. “That wasn’t the case 12 months ago. We’ve seen an increase in showings, proposals and RFPs. Leasing velocity has definitely increased over the past year.”
However, there is a lack of large tenants in the region currently in the market for office space, brokers say.
“The big tenant list is getting a little bit small,” Jensen said.
One of the few larger tenants that currently is in the market for office space in the region is Brookfield-based Bader Rutter & Associates. The PR, advertising and marketing firm is evaluating its future office space plans and considering relocation options. Bader Rutter is represented by Siegel-Gallagher principal Marianne Burish, who says the firm is seeking 60,000 to 70,000 square feet of office space and is considering sites in the downtown Milwaukee area and in the western suburbs.
New office buildings
After several years of little new office development in the region, several noteworthy projects are moving forward.
The most significant, of course, is the 32-story, 1.1 million-square-foot office tower that Northwestern Mutual Life Insurance Co. will build at its downtown Milwaukee corporate headquarters campus. The building will replace a 16-story, 452,000-square-foot office building. Demolition work began in December and will be complete later this year, when construction of the new building will begin. The $450 million project is expected to be complete in 2017. The new building will house 1,100 employees that had been housed in the building that is being torn down, and another 1,900 employees that the company plans to add by 2030.
The Northwestern Mutual project could provide momentum that boosts the rest of the downtown area.
“We cannot overstate the impact of Northwestern Mutual and their commitment to downtown,” Landowski said.
“(The Northwestern Mutual project) does a tremendous amount for the image of Milwaukee,” Jessup said.
One block south of the downtown Northwestern Mutual campus, Wauwatosa-based real estate development firm Irgens plans to build a 17-story, 358,000-square-foot office building at 833 E. Michigan St. Tenants in the building would include the Godfrey & Kahn s.c. law firm, Colliers International|Wisconsin and Irgens’ own offices. Colliers is representing Irgens in lease negotiations.
“This project will happen,” Landowski said. “They will break ground in spring.”
“Based on what I’ve heard in the last 60 days, that project is going to go,” Jessup said.
Meanwhile, on the west side of downtown, a new office building is under construction at the former Pabst Brewery complex. Blue Ribbon Management is building a five-story, 73,100-square-foot building there with 42,000 square feet of office space and two floors of interior parking. The project, called the Pabst Business Center, is expected to be complete by the end of this year. No tenants have been announced yet.
One of the few office developments planned in the suburbs is a 21,021-square-foot building planned by Heritage Brothers LLC, an affiliate of Milwaukee-based real estate development firm Weas Development. The single-story office building would be built northeast of Appleton Avenue and Good Hope Road, south of the Wells Fargo (formerly Strong Funds) office building in Menomonee Falls. The building will have two to three tenants, including Sattell, Johnson, Appel & Co. S.C., which will move to the building from the 53,000-square-foot 800 Woodland Prime office building at W127 N7564 Flint Dr. in Menomonee Falls, which Weas sold to Kohl’s Corp.
Northwestern Mutual is not the only insurance company planning a major expansion in southeastern Wisconsin. Sheboygan-based Acuity plans to build a 260,000-square-foot expansion of its corporate headquarters at 2800 S. Taylor Dr. The company’s headquarters currently has 400,000 square feet of space. The project is the first phase of a 20-year headquarters expansion plan for Acuity. In 20 years, the company plans to expand its headquarters to 2 million square feet of space.
In addition to lack of demand, another major reason for the lack of new multi-tenant office building development in the Milwaukee area in recent years is the significant number of old manufacturing facilities that were redeveloped into office buildings, including buildings in Milwaukee’s Historic Third Ward, Schlitz Park, The Tannery complex in Walker’s Point and Summit Place in West Allis.
According to CBRE executive vice president Bill Bonifas, 5 million square feet of old industrial buildings were converted to office space in the Milwaukee area during the last 25 years. Those building conversions absorbed a tremendous amount of office space demand and were done at a lower cost than building brand new office buildings, he said. In other markets that lack Milwaukee’s stock of old industrial buildings, that demand would likely have been filled by new office buildings instead.
At this point, most of the industrial buildings that were prime sites to be converted into office buildings have already been redeveloped, reducing the competition from redevelopment projects with new office building projects, Bonifas said.
“The buildings that made the most sense to be converted have been converted,” he said.
Another break for the existing office market is the conversion of some lower class office buildings into other uses, including the redevelopment of the downtown Loyalty Building at 611 N. Broadway into a Hilton Garden Inn hotel in 2012 and plans to convert the Germania Building at 135 W. Wells St. and an office building at 700 W. Michigan St. downtown into apartments.
The two residential conversions could help lower the high (30.89 percent) office space vacancy rate on the west side downtown.
“We see strength in much of the office market and signs of continuing improvement throughout 2014,” NAI MLG Commercial principal Jack Jacobson wrote in his firm’s fourth quarter 2013 office market report. “Office tenants are in the market now looking at options for 2014 and 2015. Tenants who have been laying low, analyzing their business models and planning for the future, are ready to take the next step and look at new office space. Unlike in previous years when tenant moves meant trading one space for another, we think that this wave will result in true net absorption.”
Two recent deals will create significant office space absorption in the region. Life sciences company Dohmen recently purchased a 42,141-square-foot office building in the Third Ward for $10 million and plans to move its corporate headquarters there from Menomonee Falls. In Brookfield, FedEx recently leased a 79,228-square-foot office building at 17950 W. Corporate Dr., which was formerly occupied by AT&T. FedEx will move the headquarters of its SmartPost subsidiary to the building from Brookfield.