Realtors prepare for rocky year

The subprime crisis and the collapse of the housing market were major factors leading to the financial industry crisis and credit crunch that have sent the U.S. and global economies into a recession.

Many observers expect the U.S. commercial real estate industry to have a horrible year in 2009 with empty storefronts and vacant office spaces.

“The massive job losses in the last few months of 2008 portend rising vacancy rates, negative absorption and softening rental rates across all types of commercial real estate with the exception of some niche product types,” said Bob Bach, senior vice president and chief economist of Santa Ana, Calif.-based Grubb & Ellis Company. “Standard office space, where demand is directly linked to office jobs (approximately 175 square feet per job) is particularly at risk, with some fairly hefty negative absorption numbers anticipated over the next few quarters.”

In addition, the credit crunch will make it difficult for new development to break ground. In southeastern Wisconsin, the recession and the credit crunch have delayed or prevented several projects from getting started. In the most recent high-profile casualty, Dallas-based Gatehouse Capital pulled the plug on the proposed Milwaukee Hotel Palomar and Residences development planned for the Park East corridor in downtown Milwaukee. The $150 million, 22-story development planned for the northwest corner of West Juneau Avenue and Old World Third Street was to include 63 luxury condominiums, a 175-room boutique hotel, a restaurant owned by Food Network star Michael Symon, a nighclub, a spa and fitness center, retail space and a parking structure.

Other delayed projects in southeastern Wisconsin include: The Ghazi Co.‘s high profile residential, hotel and entertainment development at North Fourth Street and Wisconsin Avenue in downtown Milwaukee; development of land owned by Milwaukee County in the Park East corridor; the regional mall at Pabst Farms in Oconomowoc; and the Quality Centers retail development along I-94 in Kenosha.

For residential real estate, new home development and sales in southeastern Wisconsin slowed considerably in 2008, and recovery will be gradual, not dramatic, said Mike Ruzicka of the Greater Milwaukee Association of Realtors.

“It’s going to be a tough year,” Ruzicka said.

However, even with the many storm clouds on the horizon for the residential and commercial real estate markets, local industry insiders are hoping for a ray of sunshine in 2009. Southeastern Wisconsin’s conservative business climate and its long tradition of avoiding major booms and busts could serve the region’s real estate market well in 2009.

“Milwaukee and Wisconsin does not typically participate in the huge upside of some areas of the country, and in contrast we are protected from the huge downturn in the market,” said Jim Barry III, president and chief executive officer of Colliers Barry. “Relatively speaking, I think southeast Wisconsin is going to weather the storm better than other areas of the country.”

“I think it will be an off year, but not one that is reflected by the overall economy,” said Bill Bonifas of CB Richard Ellis. “I don’t think it will be a bloodletting or anything.”

“We’re cautiously optimistic,” said Mike Judson, president of Judson & Associates. “It’s not the level of activity we usually see, but I think we’re going to be OK.”

There is some anecdotal evidence to suggest that there is indeed a silver lining to the region’s real estate market;

A recent report by New York-based Radar Logic says the Milwaukee area was the only one of the largest 25 metro areas in the national that had an increase in the sale prices of residential real estate. The Greater Milwaukee Association of Realtors said prices fell 4.6 percent in the metro area, which is still better than the rest of the country, which had a 13.2  percent decline.

Although the region’s office space vacancy rate rose from 16.6 percent in the second quarter to 17.4 percent in the third quarter, according to NAI MLG Commercial, the region’s class A office market is in better shape and its vacancy rate fell from 12.7 percent in the second quarter to 12.0 percent in the third quarter, according to Inland Companies.

The vacancy rate for retail space in the Milwaukee area fell from 11.5 percent in 2007 to 11.2 percent in 2008, according to Colliers International, bucking the national trend which saw retail vacancies skyrocket last year from 7.5 percent in 2007 to 9.3 percent in 2008.

The region’s third quarter industrial space vacancy rate of 7.8 percent was lower than the nation’s 8.7 percent industrial space vacancy rate according to Colliers International.

A recent U.S. Bureau of Labor report says the region’s 5.5 percent unemployment rate is the 10th lowest of the largest 50 metro areas in the nation. The national unemployment rate is 7.2 percent.

Despite the recession, some real estate developments are moving forward in southeastern Wisconsin.

Uline Inc. is building a new corporate headquarters in Pleasant Prairie and will move there from Waukegan, Ill.

Joseph Zilber’s redevelopment of the former Pabst brewery complex in downtown Milwaukee is making progress.

Mandel Group is building the North End project with residences and some retail space on the Milwaukee River downtown.

Two hotels are under construction in downtown Milwaukee and others are being built in the suburbs.

Several industrial buildings are under construction in Racine and Kenosha counties.

Wal-Mart plans to build new stores in Waukesha and Muskego.

Construction could begin this year on a new corporate headquarters for RedPrairie, which the company hopes to occupy in 2010, but the project still needs approval from Delafield city officials.

Construction is expected to begin on a 21-story senior apartment building expanding St. John’s on the Lake on Milwaukee’s east side.


Residential

The region’s residential real estate market is helped by the strength of the first-time homebuyers market, Ruzicka said. The large “baby boomer echo” generation, also known as “generation Y” is reaching home buying age, he said.

Southeastern Wisconsin experienced a real estate boom earlier in the decade, but not to the extent of some other markets, especially on the West Coast.

“We over-built in the middle part of the decade,” Ruzicka said. “That (over supply) is coming down now.”

Homebuyers had difficulty obtaining credit for mortgages after the subprime crisis hit in 2007, but the credit markets improved in 2008, Ruzicka said.

“Gradually the credit market is getting back to normal,” he said. “It’s not ridiculously easy to get credit the way it was. It’s getting back to the way it should be.”

For those who can get mortgages, interest rates are falling to record lows, which should help the real estate market. The low interest rates are already attracting a surge in refinancing.

However, credit is still tight for commercial real estate, Judson said.

“The banks are just not lending,” he said. “(Even though) they say they are.”


Office

The vacancy rate for office space in the region will likely increase a bit, but the local office market will benefit from a lack of office space development in the area in recent years and a lack of new office space currently under construction, Bonifas said. That contrasts sharply with the 1980s downtown office development boom, which resulted in a glut of office space that took years to absorb.

“I don’t see a panic situation downtown or in the suburbs,” Bonifas said.

A lot of businesses are waiting out the recession and are reluctant to move to a new office space, brokers said.

“I think the office market is going to be pretty flat in ‘09,” Barry said. “There’s not a lot that’s going to happen. People are going to stay where they are.”

“A lot of businesses that were going to do something new or different (for office space) punted to next year or two years later and renewed,” Bonifas said.

Office developments could occur this year, but only for projects with an anchor tenant, Bonifas said, such as the RedPrairie project. There are a few other potential anchor tenants that are considering moving to a new building, he said.


Industrial

The industrial space market in southeastern Wisconsin will also benefit from a lack of speculative development in recent years, Barry said. The exception is the area near General Mitchell International Airport, which attracted several speculative projects that took awhile to fill up, but made progress last year.

“(The industrial market is) looking fairly steady,” Barry said. “We probably have a vacancy rate in excess of 8 percent. I would expect that to stay in the 8- to 9-percent range for most of the year.”

But Judson said he is not as bullish on industrial space.

“Companies are starting to scale back,” he said. “There is a lot of downsizing. We’ve had some companies that have gone under.”


Retail

Retail space faces huge challenges on a national level. Job losses across the country have resulted in fewer consumers with money to spend. Several retailers are closing stores around the country and in southeastern Wisconsin, including Linens ‘n Things, Circuit City, Steve and Barry’s and KB Toys. Several mall owners are struggling and under severe financial stress, including Chicago-based General Growth Properties Inc., the owner of Mayfair Mall.

However small retail spaces, filled by local retailers or small national chain stores operated by local franchisees, are doing well, said Dan Rosenfeld, principal of Mid-America Real Estate.

“We happen to be bullish on local leasing activity in 2009,” he said. “We’re seeing great results with neighborhood grocery-anchored shopping centers that serve everyday needs.”

Ever during a recession, consumers need food and other essentials. But they are cutting back on shopping for non-essentials, which will put strain on medium box stores.

“A Best Buy does not fill a daily need, but food and drug stores do,” Rosenfeld said. “I think we’re going to see the grocery-anchored centers hold up pretty well.”

But medium box stores vacated by Circuit City, Linens ‘n Things and others will take awhile to fill up with new tenants, Rosenfeld said.

Big box development has slowed to a crawl, with Wal-Mart being the lone exception. The region already has all of the home improvement and Target stores that it can support, Rosenfeld said.

Despite the loss of several stores in recent months, Southridge Mall will survive and is a good candidate eventually for a major redevelopment similar to the improvements at Bayshore Town Center, Mayfair Mall or Brookfield Square, Rosenfeld said.

Few new developments will occur this year.

“Development activity has ground to a halt,” Rosenfeld said.

But retail projects that are already under construction or were recently built including the Shops at Fox River in Waukesha, Wyndham Village in Franklin and the Shops at Prairie Ridge in Pleasant Prairie are attracting tenants such as Noodles & Company, Sport Clips and Cousins Subs, Rosenfeld said.

The large regional mall planned at Pabst Farms has been delayed, but will eventually be built as planned, Rosenfeld predicts.

“It will happen, and it will happen according to plan,” he said. “It’s just a matter of the market correcting.” 

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