Local commercial real estate professionals say the troubled 100 East office building in downtown Milwaukee could be turned over to a new owner that will invest heavily to reposition the building to better compete for tenants.
News broke yesterday the 465,960-square-foot building, at 100 E. Wisconsin Ave., was in foreclosure. Its operation is now in the hands of a receiver.
But there were signs of trouble for the building even before lenders filed a foreclosure lawsuit this spring.
The building is around 55% occupied, according to industry data sources. That fell from 83% a few years ago due to the loss of tenants like Michael Best & Friedrich and PricewaterhouseCoopers to newer Class A office buildings downtown.
In addition, there is another nearly 25,000 square feet of space in the building that is occupied but available for sublease. Johnson Financial Group is vacating that space at the end of the year when it moves to Cathedral Place, noted Chris Allen, national director of analytics at REDIComps and Catylist.
Morningstar Credit Ratings LLC in 2018 placed a $51.9 million loan on the 100 East building on its watchlist because of the drop in occupancy.
When the building's construction was completed in 1988, it was considered downtown Milwaukee's premier Class A building, according to Gard Pecor, senior market analyst with CoStar Group Inc.
But that changed with newer office developments, including 833 East Michigan, the BMO Tower and Huron Building. BizTimes recently explored how those buildings have changed Milwaukee's Class A office space landscape.
Pecor said the 100 East building's floorplates are small compared to modern standards, coming in at under 20,000 square feet per floor. They are also oddly shaped, since the elevator banks lie at the center of the building.
These factors and more put 100 East and other older Class A office buildings at a disadvantage to the new ones, which boast larger, more efficient floorplates and modern amenities.
Even before the COVID-19 pandemic, industry professionals were preparing for a rise in Class A office space vacancies downtown as a result of newer product coming online, said Andrew Jensen, principal with Cushman & Wakefield | Boerke.
Jensen said things could in fact be worse.
"This (100 East) is the first true casualty downtown of financial stress," he said.
Another silver lining is the volume of space up for sublease is lower in Milwaukee than other markets. Subleases can indicate companies are downsizing or shedding excess space.
It looks like the Johnson Controls Inc. headquarters is also headed for rebirth. Kenosha-based Bear Development is under contract to buy the complex and redevelop it for a number of uses. Importantly to office brokers, this keeps 420,000 square feet of office space from being brought to market as JCI prepares to move operations to Glendale.
"The health of the market is pretty darn good, and this (100 East foreclosure) is really the only fallout," Jensen said.
Both Jensen and Pecor said 100 East could get significant reinvestment.
Their assumption is that the lenders will turn over the building to a new ownership group at a discount. The new owners could then pour money into improving the building and making it more attractive to tenants.
Pecor said 100 East could follow the model of Two-Fifty. Located at 250 E. Wisconsin Ave. downtown, the 20-story office building changed hands in 2015 and its new owners spent millions to improve it.
Pecor noted that buildings which undergo significant renovations — including Two-Fifty, The Avenue and The 42 — have been generally well received by office users.
Two-Fifty has landed a host of new tenants, including Kansas City-based HNTB's local office. The Factory Office Suites at The 42 are fully leased. The Avenue has only 13,000 square feet of vacant office space left in the short time it has been available.
"We continue to see tenants gravitate to not even necessarily new office space but some of the renovated (buildings)," Pecor said.