Editor’s note: This is part of a series of stories at BizTimes.com taking a deep dive into how industries and areas of life have changed in the five years since the COVID-19 pandemic hit the United States.
In the throes of the COVID-19 pandemic, it was tough to discern what changes in the local office real estate market would stick around versus fade away.
But nothing provides clarity like time — after all, hindsight is 20/20.
Nearly five years on from recommendations and mandates for "non-essential employees" to work from home, a consensus is starting to emerge about how profoundly the pandemic has affected the Milwaukee office real estate market and how healthy that market is today.
With multiple struggling office buildings in foreclosure or slated for conversion to apartments and other uses, but consistent headlines about office space investments and even plans for new office buildings in the works, office real estate experts agree the market is more asymmetrical than ever—and that won’t be changing anytime soon.
Companies look to downsize office footprint
Just as most people didn’t expect the impacts of the pandemic to be as widespread or permanent as they’ve proven to be, most office real estate brokers said they didn’t expect hybrid and remote work to redefine the office market the way it has.
“I thought at the very beginning of the pandemic the biggest negative effect of it would be on the retail sector, like everybody be afraid to go into stores and whatnot, and I wasn't that concerned about office,” said
Ned Purtell, principal at Milwaukee-based
Founders 3.
“I didn't know that the people's Wi-Fi at home would be robust enough, and the computers would be strong enough, and the software good enough that you could continue business at full pace from home,” said
Bill Bonifas, executive vice president at
CBRE in Milwaukee. “That was a revelation.”
In the first couple of years after the onset of COVID-19, many office tenants were “kicking the can down the road” and opting for short-term lease extensions or seeking short-term flexibilities in new leases as they figured out their remote/in-person balance.
Now, brokers said they’re seeing
more companies find that balance and commit to seven or 10-year leases for offices, rather than the two- and three-year deals they wanted back in 2020 and 2021, giving the market a bit more stability than in years past.
[caption id="attachment_607735" align="aligncenter" width="1024"]
Allspring moved into its new Historic Third Ward recently. The company reduced its space considerably in its new location.[/caption]
Milwaukee is on par with the national average of working three days per week from the office and two from home, reports show.
That hybrid schedule is pushing many tenants to downsize – or “right-size” – their office footprints as their existing leases expire.
For instance, Deloitte
moved its local office in 2024 from Cathedral Place to the U.S. Bank Center, shrinking its office footprint by 28%. Enerpac Tool Group is
making its move from the suburbs to downtown Milwaukee this spring, shrinking its office footprint by 31%.
Some have opted to eliminate a physical office altogether.
“Every tenant currently in the market for space over 50,000 square feet is looking to significantly downsize from their current square footage,” said a 2024 report from commercial real estate brokerage firm
Colliers.
By the numbers
Anecdotally, most office space brokers in town say they’ve been just as busy, if not busier, than the pre-2020 days. Some market reports say there have been more office tenants in the market in the last couple of years than at most points in the past decade.
That sentiment doesn’t consistently bear out in market data, however, many brokers acknowledge.
“We represent the Riverfront Plaza building (1110 Dr. Martin Luther King Drive, Milwaukee), and I think we have seen more substantial showings in the last year than we had previously. There are tenants out there looking to make long-term commitments,” said
Jim Barry, president of Milwaukee commercial real estate firm
The Barry Co. “I don't think it's reflected in the statistics, though, and I don't have confidence that it's going to be anytime soon. There has just been too much softening in the market overall.”
Metro Milwaukee entered the pandemic with a 13.3% office space vacancy rate, according to a report from the
Commercial Association of Realtors Wisconsin (CARW) from the first quarter of 2020. Office space vacancy has continued to rise since then and by the end of 2024, the local market's vacancy rate had
hit a new high of 19.8%.
Further, the market does not consistently post positive absorption. Absorption is the total amount of space (given in square feet) that has been leased, minus the amount of space that has been vacated during a specific amount of time. A market with positive net absorption shows that more space has been leased than vacated, and a negative net absorption shows the opposite.
Since 2020, the metro Milwaukee office real estate market has posted negative absorption of nearly 1.25 million square feet, according to CARW reports.
To be sure, there are companies that are maintaining the same amount of office space or even expanding, such as
Briohn Building Corp., which expanded its Brookfield office by 50% last year, but those companies don’t make up a lion’s share of the leasing activity.
Most office space brokers agree that as companies settle on a remote/in-person balance and potentially shrink their space to fit that need, the “right-sizing” trend will subside and vacancy and absorption could show more flattering numbers for the market.
Rising standards
Looking at the market building-by-building gives a more complex view, however, and one that points to another persistent – and maybe more permanent – trend: flight to quality.
Flight to quality refers to a shift in tenants’ preference for premium, well-located and amenity-rich properties, primarily as a tool to incentivize in-office working.
Some of metro Milwaukee’s newest and nicest office buildings include 833 East, BMO Tower, HUB640 and The Huron Building in downtown Milwaukee, most of which have seen a
flurry of leasing activity in recent years and have occupancy levels higher than the market-wide average.
“If a company is going to downsize even by a little bit, they have a little bit of room to upgrade their office space,” said
Katie Brueske, real estate advisor for Cushman & Wakefield | Boerke.
[caption id="attachment_579786" align="aligncenter" width="1024"]
The 25-story BMO Tower, 790 N. Water St., was completed in 2020 and has attracted tenants from other downtown office buildings including 100 East.
Credit: Valerie Hill[/caption]
The inverse of this is felt by building owners and property managers of older, class B buildings, who are faced with a choice to invest in their properties with new amenities, like downtown’s Chase Tower, whose
owners completed a multimillion-dollar project last year aimed at boosting the building’s occupancy, or converting the building to an alternative use.
The Clark Building downtown is set to lose its largest tenant this summer, and its owner, J. Jeffers & Co., is
planning to convert the building to apartments to put the building in a more sustainable financial position.
Others didn’t find an alternative path forward early enough.
100 East, which was once one of the premiere office buildings in downtown Milwaukee, fell into foreclosure after losing its anchor tenant to the newly constructed BMO Tower. It’s now
slated for conversion to apartments.
Late last year, a
foreclosure suit was filed against the Gas Light Building, which is 63% vacant. Two Brookfield office buildings have been
sold in foreclosure or in a deed in lieu of foreclosure in recent months, too.
“Most people aren’t absolutely panicked,” Bonifas said of landlords’ state of mind. “I was around in the '80s when there was just so much space, and people were giving away years of free rent and doing anything they could to mitigate exposure to sitting vacancies. Today, people are sharpening their pencils, but I don't see a panic out there.”
Brokers agree that flight to quality and the renovations or conversions that come as a result are likely to be a permanent change in the market.
New office space will test the market
As a result of the flight to quality trend, the amount of class A space in downtown Milwaukee is filling up, with 55,000 square feet at The Huron Building being the most contiguous space remaining.
For some tenants in the market for class A space, that’s not enough, prompting two development firms to float plans for new office buildings in the city: Chicago’s North Wells Capital is
interested in building an approximately 250,000-square-foot building in Deer District and Madison’s Neutral has included 190,000 square feet of office space in its plans for the
Marcus Performing Arts Center parking structure redevelopment.
Brokers agree that any new office building would need to pre-lease a majority of its space in order to get lender and investor confidence in the project.
“There are tenants out there that could drive a new building if they don't stay in their current buildings that are large enough to kick off a new development, but it becomes a difficult task once you consider construction costs, interest rates and just the overall environment for new construction,” Purtell said. "...But it still kind of gets at this tale of two cities we have in the office market. Tenants still need space, and they want nice space, which there isn't much of anymore."
"I started working in office real estate in January 2020, so the post-COVID office landscape is really all I know," Brueske said. "This is normal for me. I hear from some of the older brokers who were in the industry before talk about the differences and how they almost had to relearn the world of brokerage, but we're all still busy."
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