Out-of-state investors now own 50 percent of the downtown Milwaukee skyline, and they are paying top dollar for office properties there, according to a JLL study.
Last month, a Chicago-area real estate investment firm paid $124.6 million for the 30-story 411 East Wisconsin Center building on East Wisconsin Avenue in one of the biggest deals in the city’s history. The building’s assessed value is $92.4 million.
The sales price was almost 70 percent higher than what Stamford, Connecticut-based Five Mile Capital Partners LLC paid for the office building in 2014, when the group bought it for $74.3 million and essentially flipped the property with a $17.3 million makeover to the building’s interior and attached parking structure.
Since early 2016, the downtown Milwaukee market has seen several other large office buildings change hands. In June 2016, the Chase Tower, a 22-story office building at 111 E. Wisconsin Ave. in downtown Milwaukee, sold for $30.5 million to a Southfield, Michigan-based real estate investment group. The building had an assessed value of $28.8 million at the time of the sale.
Also last year, the 34-story 100 East Wisconsin office tower downtown was sold to Santa Monica, California-based Hertz Investment Group for $78 million as part of a four-property portfolio deal. The building had an assessed value of $72.5 million at the time of the sale.
Chicago-based real estate investment firm Bentall Kennedy and Warba Bank, a Kuwaiti public shareholding company, paid $66.5 million for the ManpowerGroup corporate headquarters building at the Schlitz Park complex in downtown Milwaukee in June. The building has an assessed value of $59.3 million.
“I know we are doing something right when out-of-state investors are investing in our market,” said Marnie Noel, vice president of the Milwaukee office of JLL.
For many years, tenants drove the downtown Milwaukee office market, asking for rate reductions and high tenant improvement allowances due to the significant amount of office vacancy.
But now, for a variety of reasons, upward pressure is being placed on downtown office space rents, brokers say. Those reasons include: the construction of the new 17-story office building at 833 E. Michigan St.; improvements to the 20-story office building at 250 E. Wisconsin Ave.; the conversion of some lower-class office buildings to other uses; the lease-up of lower priced office spaces in former industrial buildings; and the high-priced sale of class A buildings to out-of-state buyers that are seeking a return on their investment.
According to the report from JLL, investors that purchased “premium office buildings” in downtown Milwaukee during the past 18 months have increased rents by an average of 9 percent, to an average of $27.08 per square foot.
Bill Bonifas, an executive vice president at CBRE’s Milwaukee office, said according to CBRE’s most recent reports, office vacancy downtown is up a bit, but landlords are optimistic because rents are starting to increase.
According to the latest data from Xceligent and the Commercial Association of Realtors, the area’s office market absorbed 100,371 square feet of space during the second quarter, down from 127,749 square feet a year ago, but the highest amount of absorption since the third quarter of 2016.
The area’s office space vacancy rate has dipped from 17.2 percent a year ago to 16.5 percent.
“If (a real estate investor comes) in from Chicago to (purchase) a building (in Milwaukee) that is 22 percent vacant, you clean it up and give corporate America what they want, which is what you could argue the previous owners of 411 did; then you don’t care if the rents are up or not,” Bonifas said. “But the fancier the building, the more people will pay. And most buyers now are looking at the fundamentals.”
Bonifas believes within the next 24 months, most downtown Milwaukee office space rents will increase 5 to 10 percent, with the higher quality buildings charging steeper rents.
And while the rent increases won’t be welcomed by tenants, the increases will help the new construction by putting older buildings and converted industrial space on a more even playing field with the higher rents of the newer spaces, Bonifas said.
“In the old days, you could renew or go to Schlitz Park or Summit Place (for lower rent opportunities),” Bonifas said. “For many larger users, those options are not available. Rents will increase and they will start to price off new construction like other markets do.”
Another trend that will continue is the demand for real estate by national and international investors who are attracted to major markets such as New York, Chicago and Los Angeles, but are being priced out of those tier one markets and are looking to the suburbs or secondary or tertiary cities, like Milwaukee, Bonifas said.
“Milwaukee is on the radar of national and international investors now more than ever,” Bonifas said. “In addition, the office market and economy are generally robust here.”