NAI MLG predicts revival in local office building development

The metro Milwaukee office market has struggled for years, but Milwaukee-based NAI MLG Commercial’s third quarter office market report is predicting a revival for the area’s class A office space market.

“The office market is getting tighter and momentum is shifting to landlords,” said NAI MLG Commercial Jack Jacobson, who wrote the report. “In every submarket that we track, the class A vacancy rate is less than the overall vacancy (rate) and in downtown Milwaukee, east of the river the market is virtually full.”

The region’s overall office space vacancy rate is 23.7 percent, but the class A vacancy rate is 7.6 percent, the NAI MLG report says. The downtown east class A market has an office space vacancy rate of 3.3 percent, according to the report.

“A tenant looking for 20,000 square feet of contiguous (class A office space downtown) may not have any choices in existing buildings,” Jacobson said. “The same is true in the Brookfield submarket. The class A vacancy (rate in Brookfield) is 10 percent, but large blocks of contiguous space are very difficult to come by.”

The NAI MLG report comes out at the same time that the third quarter office market report from Xceligent and CARW says the southeastern Wisconsin office market has a vacancy rate of 20.6 percent. The region’s class A vacancy rate is at 14.3 percent, down from 15.2 percent a year ago, and the class B vacancy rate is at 26.1 percent, according to that report. The region’s office market only absorbed 16,599 square feet of space in the third quarter. The central business district absorbed 50,593 square feet of office space and the suburbs had negative absorption of 33,994 square feet of space, according to the report. The central business district’s overall vacancy rate is at 20.3 percent, down from 21.4 percent a year ago.

Interestingly, the NAI MLG Commercial report does not consider the 411 E. Wisconsin Ave. building in downtown Milwaukee to be a class A building. The building is of class A quality, but because of its tenants in common (TIC) ownership, which consists of multiple investors, deals are extremely difficult to do so the building is not counted by NAI MLG as part of the class A market, Jacobson said.

“It’s a question a broker has to ask: why would I bring a tenant there to look at the building?” he said. “It shows great. But you can’t do a deal.”

Jacobson said he expects that a new multi-tenant, class A office building will get built downtown. Most likely it will be the 17-story, 358,000-square-foot building planned by Irgens at 833 E. Michigan St. The building would be anchored by the Godfrey & Kahn law firm.

“For severl years we have heard about the pressure to build a new downtown office tower,” Jacobson said. “No question the time has come to build one.”

There is also demand for a new class A office building in Brookfield, he said. Shovel ready sites are available in the Brookfield Lakes and Bishops Woods office parks. Irgens plans to build a mixed-use development on the Ruby Farms site in Brookfield, but it will take some time for it to be ready for a new office building.

As for the class B office markets, there has been “significant activity and improvments in their vacancy rates,” Jacobson said.

The Third Ward and Walker’s Point neighborhoods have attracted tenants relocating from downtown and tenants that want to be near the newly opened Global Water Center.
“This is a trend that will continue,” Jacobson said.

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