Real Estate Outlook: It’s a tenant’s market

Many professionals in the commercial and residential real estate industries were happy to see 2009 come to an end.

It was a brutal year for real estate. Vacancy rates rose for commercial and multi-family residential buildings, and new development decreased dramatically as the credit crunch made it much harder for developers to obtain financing for new buildings. Fearful of the economy’s future, most tenants were reluctant to commit to new locations or long-term leases.

For residential real estate, sales were up in 2009, but property owners saw the value of their homes fall as the housing bubble collapse continued to deflate the market and rising unemployment led to foreclosures.
With the dismal 2009 behind them, many southeastern Wisconsin real estate professionals say there are signs that the market will improve this year, although most expect full recovery to still be a year away.
“I just don’t think (the market) could get any lower (than 2009),” said James T. Barry III, president and CEO of Colliers Barry.
However, not everyone is optimistic that real estate will improve this year.
Mike Judson, president of Pewaukee-based Judson & Associates, said commercial real estate will be a tenant’s market for another year.
“I don’t think we’ve hit (the bottom),” he said. “I think we will see more transactions, but not good ones for sellers and landlords. There will still be depressed values and lateral moves (by tenants). I don’t think there will be absorption.”
Meanwhile, construction companies are bracing for a tough year as their pipelines, which still had a backlog in 2009, will dry up in 2010. One sign of that slowdown: in the metro Milwaukee area the value of signed construction contracts, as reported by F.W. Dodge, was $78.8 million in October, down 51.8 percent from October 2008.


In the four-county metro Milwaukee area (Milwaukee, Waukesha, Ozaukee and Washington counties) the number of homes that were sold increased 6 percent in 2009.
But at the same time, the sale prices of homes that were sold fell throughout southeastern Wisconsin in 2009. Home sale prices were down 19 percent in Milwaukee County (from $169,737 in 2008 to $137,324 in 2009), 5.5 percent in Waukesha County (from $283,833 to $268,145), 9.6 percent in Washington County (from $218,492 to $197,624) and 9.4 percent in Ozaukee County ($315,871 to $286,088).
Residential Realtors are optimistic that sales will continue to surge during the first half of 2010 as buyers rush to take advantage of the federal homebuyers tax credit, low interest rates and the lower home prices.
“I’ve seen a lot more people come out (to consider buying a home) because they can afford more,” said Beth Jaworski of Shorewest Realtors. “They may have looked two to three years ago and been disappointed about what they could afford.”
The lower home price statistics are somewhat skewed by the rock-bottom sales of foreclosed homes and last year’s first-time homebuyer tax credit, which provided a huge sales boost to lower-priced homes that are affordable for first time homebuyers, realtors said. The new tax credit has provided a boost to the interest in people that want to move up to a more expensive home, especially in the $300,000 to $500,000 range.
Home sale prices have likely hit bottom and will probably only see a modest increase at the most this year, Realtors say.
Residential home sales may wane after the tax credit expires, especially if the unemployment rate stays high. But Realtors say they are focusing on what they expect will be an active home sale market for the first half of the year.
“I’m not going to worry now,” said Tammy Maddente, executive vice president of First Weber Group. “I’m going to ride that wave. We’re going to be busy.”
For multi-family housing, the condominium market is in a “hangover” from overbuilding, which has created a shadow rental market that is contributing to a decline in occupancy rates for apartments, said Mandel Group Inc. chief operating officer Bob Monnat. The lack of development will help the multi-family market recover, he said. The apartment market will be flat in 2010 and will begin to recover in 2011. The condo market recovery will be slower, prices will drop another 4 percent this year but there will be a “modest uptick” in sales, Monnat said.
Recent new apartment developments in the downtown area have been smaller projects, Monnat said. However, one large apartment development is expected to break ground downtown in February. The 30-story, Moderne development, with 203 apartments and 14 condominiums, will be built at the southwest corner of Juneau Avenue and Old World Third Street. The project will take about two years to complete.

Commercial overview

For commercial real estate, several industry professionals in southeastern Wisconsin say 2010 is looking up because many business leaders have shed the fear that paralyzed them in 2009. Many business owners were so concerned about the economy in 2009 they were unwilling to relocate, plan an expansion or sign a long-term lease renewal.
“I have never seen it before in my career. There was a period of complete fear that the entire economy was going to fail and everyone was going to go out of business,” said Barry. “Any plans to do anything involving a significant capital investment were put on hold.”
Now that the economic rebound appears to have begun, business owners are starting to explore relocations or long-term lease extensions.
“It seems like a lot of deals that were put on hold in 2009 are starting to percolate,” said Bill Bonifas of CB Richard Ellis.
The credit crunch has significantly reduced new commercial development in southeastern Wisconsin, and that could be good news for building owners as the economy recovers. With a lack of new commercial buildings to compete with, it will be easier to fill existing buildings, commercial Realtors say.
“We’re going to start to see much more absorption because we do not have any new development coming on,” said Dan Rosenfeld of Mid-America Real Estate, which specializes in retail real estate.


The metro Milwaukee area has a 19.66-percent office space vacancy rate, according to data presented at the annual NAIOP and Commercial Association of Realtors Wisconsin (CARW) Market Update event. However there is a big difference between the performance of Class A office space and lower class office space, brokers say.
In the downtown area the Class A office space, vacancy rate is at about 10.5 percent, but the Class B vacancy rate is at about 26.5 percent, according to Dan Wroblewski, vice president of Milwaukee-based Inland Companies.
Steve Palec, senior vice president of CB Richard Ellis, pegs the downtown Class A vacancy rate east of the Milwaukee River at an even lower rate, 8.5 percent.
The low Class A office space vacancy rate has led to some speculation that a new office tower for downtown could be announced by the end of the year. A handful of potential anchor tenants, including the Von Briesen & Roper law firm, are in the market for a new downtown office location and several developers are working on potential projects.
“There will be a new building downtown,” Palec said. “Somebody is going to win the race.”
However, the credit crunch is making it extremely difficult for office building developers to get financing to build a new building. Developers will probably need to have several tenants secured to get financing.
“I don’t know what bank would finance a lot of spec office space,” said Zilber Ltd. executive vice president John Kersey. “It’s not inconceivable. I’d be surprised.”
The office market will continue to favor tenants, brokers say. With a lack of new development, high-quality existing buildings are best-positioned to improve occupancy as the economy recovers and tenants come back to the market.
“The better buildings will get leasing,” Bonifas said. “I do anticipate market absorption, but also a lot of musical chairs flight to quality.”


The retail space vacancy rate in southeastern Wisconsin is at about 12 to 13 percent. Very little new retail development in occurring in the region, so Rosenfeld says positive absorption and lower vacancy rates should occur this year.
National retailers stopped adding new locations in 2009 so their pipelines for new locations are empty. Some retail chains will start to work on new locations in 2010, which will open in 2011 and 2012, Rosenfeld said. There are a few national retailers that have a presence in the region that are planning to add additional locations, Rosenfeld said.
One of those national retailers is Issaquah, Wash.-based Costco Wholesale Corp., which recently unveiled plans to build a 150,000-square-foot store on a vacant, 19-acre site in the Village of Pewaukee northwest of Highway 164 and Capitol Drive, and north of a Wal-Mart store at that intersection.
The Costco project is one of the few retail developments taking place in southeastern Wisconsin. Wal-mart is building supercenter stores in Waukesha and Muskego. Woodman’s Food Markets Inc. is building a store in Menomonee Falls. Opus North Corp. continues to develop the Shoppes at Fox River project, anchored by Target and Pick ‘n Save stores, in the 1200 block of Sunset Drive in Waukesha.
Shopping centers with grocery stores as anchor tenants continue to do well, Rosenfeld said, because they serve the basic needs that people need, even in a recession.
As national retailers begin to add more locations in 2010, Rosenfeld predicts Bayshore Town Center to be one of the top destinations in the region for new stores.


The Milwaukee area industrial real estate market has performed better than most metro areas in the U.S., but vacancies rates are rising in southeastern Wisconsin, even with little new development.
In its 2009 industrial market report, Milwaukee-based The Dickman Company Inc. said southeastern Wisconsin’s vacancy rate increased from 7.1 percent in the first quarter of 2009 to 8.2 percent in the fourth quarter. Milwaukee County has the highest vacancy rate of 10.9 percent. Waukesha County had a 5.9 percent vacancy rate, lower than all of the other counties in the region except Sheboygan County, with a 2.8 percent vacancy rate.
“Many tenants are taking advantage of the market by signing long leases at rental rates not available a few years ago,” the Dickman report said. “In the past several months we have seen a drop in values, which will believe will be the last significant drop as the market seems to have stabilized. As long as a large influx of quality existing product does not enter the market, values should hold at this level and slowly rise over the next 2 to 4 years. We do not anticipate any large increase in values until new construction commences.”
Curt Pitzen, of NAI MLG Commercial predicts that industrial space vacancy rates in the region will rise in the early part of the year, but will then decline in the second half of the year. The region’s industrial real estate market should have positive absorption this year, he said.

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