Region’s commercial real estate market in recovery mode

There are several signs that the southeastern Wisconsin commercial real estate market is gaining strength midway through 2013 and will continue to do so in the second half of the year.

Another new hotel opened recently in downtown Milwaukee and the construction of the Potawatomi Bingo Casino Hotel is rising over the Menomonee Valley.

The region’s long stagnant office market is finally showing signs of life. The market continues to absorb space and two new multi-tenant office buildings are getting closer to beginning construction downtown. They would be the first new multi-tenant office buildings built downtown in 10 years.

Demolition will begin by the end of the year of a 16-story office building on Northwestern Mutual Life Insurance Co.’s downtown headquarters campus, to make way for a new 33-story, 1.1 million-square-foot office building.

The industrial market could be the strongest commercial real estate sector for the region. The region has had a long streak of positive absorption and declining vacancy and several new industrial buildings are in various stages of development.

Marriott Hotel

The area’s retail market is full of activity. Mixed use developments with heavy retail components are planned or under construction in Wauwatosa, Brookfield, Oak Creek and Oconomowoc.

Hotels

One of the biggest commercial real estate developments in the region this year was completed recently when the new 205-room Marriott Hotel opened at 323 E. Wisconsin Ave. in downtown Milwaukee. The hotel has its own restaurant, called Millioke – Meat, Cheese, Beer; a Starbucks coffee shop and a Schwanke-Kasten Jewelers store. The hotel has about 8,900 square feet of event and meeting space, including a 5,500-square-foot ballroom.

The Marriott is the second new hotel to open downtown this year. The 90-room Brewhouse Inn & Suites opened recently in the former Pabst brewery complex.

Also, the Best Western hotel at 710 N. Old World Third St. downtown was converted to a 96-room Fairfield Inn & Suites this year.

Office building planned at former Pabst brewery.

The new hotels are adding new competition for existing downtown hotels, and even more hotels are planned for the area. Construction continues on the 381-room hotel at Potawatomi Bingo Casino, which will open next year. A 158-room Kimpton hotel is planned for the Third Ward and is expected to open in 2015.

Developer Rick Barrett is working on plans for a 180-room hotel in the 44-story Couture development that he plans to build southwest of Lincoln Memorial Drive and Michigan Street near the lakefront. The project will also have 179 apartments, several restaurants and could include new space for the Betty Brinn Children’s Museum and a performance hall for the Milwaukee Symphony Orchestra. Barrett is working on financing for the project and is working on an agreement to purchase the site, currently used as a bus garage and transfer facility, from Milwaukee County. But the project could face a legal challenge from parks advocacy group Preserve Our Parks, which claims the site is filled lakebed and that private development there should not be allowed because of the state’s public trust doctrine.

A few hotel projects are in the works in other parts of the region as well. An extended stay hotel is planned for the Innovation Campus in Wauwatosa. A 104-room Hampton Inn & Suites hotel is planned near State Fair Park in West Allis. Bear Development plans to build a 93-room Hampton Inn hotel along Highway 50 west of I-94 in Kenosha.

Office

By the end of the year, Northwestern Mutual Life Insurance Co. plans to begin demolition of a 16-story, 452,000-square-foot office building on its downtown Milwaukee corporate headquarters. The demolition work will be completed next year, when construction will begin for the 33-story, 1.1 million-square-foot office building that will take its place.

Two other downtown office developments could break ground by the end of the year.

Blue Ribbon Management LLC plans to build a five-story, 73,100-square-foot building with 42,000 square feet of office space and two floors of interior parking in the former Pabst brewery complex in downtown Milwaukee. Construction is expected to begin in early August. Financing is in place from Chinese investors through the federal EB-5 program.

Wauwatosa-based Irgens hopes to break ground by the end of the year on a 17-story, 357,000-square-foot office building that it plans to build at 833 E. Michigan St. in downtown Milwaukee. Downtown law firm Godfrey & Kahn has committed to be the anchor tenant of the building. Irgens to seeking additional tenants and financing to move the project forward.

Schlitz Park plans to renovate the 140,000-square-foot Executive and Stockhouse buildings at 235 W. Galena St. to attract new office tenants. A proposed extension of Galena Street into Schlitz Park complex could help attract more tenants there. UMB Fund Services Inc. plans to move its office from 803 W. Michigan St. on the west side of downtown Milwaukee to Schlitz Park.

As the economy improves demand is on the rise for office space in the metro Milwaukee area, which could help fill the proposed new buildings and other buildings in the marketplace.

“We’ve had some very good activity for showings,” said Ned Purtell of RFP Commercial. “I would think by the end of the year you will see significant activity in terms of leasing. The log jam has to break. You’re seeing more companies expanding than contracting. I think things are slowly starting to turn around.”

The metro Milwaukee area’s office market had positive net absorption of 58,000 square feet of space in 2012, according to Xceligent. The office market absorption in the region has increased this year. The market absorbed 85,722 square feet of space in the first quarter of the year and more positive absorption is expected to be reported for the second quarter, said Colliers International|Wisconsin partner Lyle Landowski.

“You’re starting to see some really positive signs in the office market,” he said.

The class A vacancy rate downtown is at 10.7 percent according to Xceligent, and for the top seven assets is closer to 7-8 percent, Landowski said.

The central business district’s class A market, “is as healthy as it’s going to get,” Landowski said.

“Without question downtown is more active than the suburbs at this point,” said Dan Jessup, executive vice president of Jones Lang LaSalle.

However, one of the strongest office “micro markets” in the region is the Milwaukee County Research Park in Wauwatosa, Landowski said. The occupancy rate and demand levels there are so high that rental rates are on the rise, he said.

Industrial

The industrial market could be the strongest sector for the region’s commercial real estate industry. The industrial space vacancy rate for the region dipped to 6.4 percent in the first quarter, which was the 12th consecutive quarter of positive absorption for the region’s industrial market.

“The market has been steadily improving through the first half of the year,” said James T. Barry III, president of Cassidy Turley Barry. “I think we will see slow and steady improvement continuing through the end of the year.”

The healthy vacancy and absorption rates could lead to more industrial development in the region. Zilber Property Group plans to build speculative industrial buildings in Pleasant Prairie and New Berlin. Pleasant Prairie is attracting several other projects including a 1.18 million-square-foot warehouse/distribution center planned by Majestic Realty Company east of County Highway H and Bain Station Road and CenterPoint Wispark Land Company LLC plans to build a 471,403-sqaure-foot industrial building for Ta Chen International Inc.

The I-94 corridor between Chicago and Milwaukee remains a hotbed for distribution center development. In Sturtevant, United Natural Foods Inc. is building a 450,000-square-foot distribution center. In Pleasant Prairie, Grand Rapids, Mich.-based Meijer Inc. will expand a 580,000-square-foot distribution center that it bought last year adding 253,677 square feet of space, bringing the facility’s total size to 833,677 square feet.

Some areas of the region, such as parts of Waukesha County, are experiencing industrial space shortages and could also attract more development, Barry said.

Additional development projects could be announced by the end of the year for build-to-suit deals and partially pre-leased projects with some speculative space, Barry said.

And tenants in the industrial real estate market are no longer able to demand major price concessions. Rates are starting to creep up, Barry said.

“The trend on discount rates is coming to an end,” he said.

Retail

Several major retail developments and mixed-use developments with significant retail components are in the works for southeastern Wisconsin.

The most significant retail project that is currently under construction in the region is the Mayfair Collection project, a mixed-use office, residential and retail project that is being developed by Chicago-based HSA Commercial Real Estate at Highway 45 and Burleigh Road in Wauwatosa. In the first phase of the project, HSA is creating 270,000 square feet of retail space. Tenants in the shopping center, which will open next year, are expected to include: Nordstrom Rack, Saks Off 5th Avenue, Dick’s Sporting Goods, Ulta Beauty, Old Navy, Carter’s, Torrid, Maurices and Men’s Wearhouse, according to various reports.

Nordstrom Rack and Saks Off 5th are discount versions of the Nordstrom and Saks Fifth Avenue department stores and will be the first locations for those brands in the Milwaukee area. A Nordstrom store will open at Mayfair Mall in 2015.

On the other end of the spectrum, discount retailers Walmart and Sam’s Club stores have been recently announced for the Pabst Farms development in Oconomowoc. The stores are slated for the Pabst Farms Town Centre, located northeast of I-94 and Highway 67. The Pabst Farms Town Centre was originally planned as an upscale regional mall, but the project has stalled since the Great Recession and Pabst Farms developer Peter Bell appears to be reacting to market realities and is moving forward with retailers that are willing to come to the project. However, several Oconomowoc residents are upset about the plans for the 151,000-square-foot Walmart supercenter store and the 135,000-square-foot Sam’s Club store and are urging the Common Council to reject the plans.

Meanwhile, Marcus Corp. and the Town of Brookfield still have not reached a final agreement for a tax incremental financing (TIF) package, of about $30 million, that Marcus says it needs to move forward with plans for The Corners, a 460,000-square-foot retail and residential development proposed at the former West Point Cinema and former Menard’s store sites at Bluemound Road, Barker Road and I-94, near Goerke’s Corners. Davenport, Iowa-based Von Maur Inc. plans to open a department store, which would be the anchor retail tenant for The Corners.

Construction is expected to begin by the end of the year on some components of the Drexel Town Square project, at the former Delphi plant site southwest of Howell Avenue and Drexel Road in Oak Creek. The project is an attempt to create a downtown for the city. A development team led by Wispark LLC is working on the project which, as proposed, will include a new City Hall and library, a 193,0000-square-foot Meijer store, several restaurants, a mixed-use Main Street area, a two-acre town square park and 500 to 600 upscale apartments.

The Meijer store at Drexel Town Square is one of several planned for the region by the retailer. Other Meijer locations are planned in Grafton, Sussex, Wauwatosa, Waukesha and Kenosha.

Retail space occupancy is high in the top retail corridors in the region, which could lead to more smaller retail development and redevelopment projects, said Ross Koepsel, a partner with Commercial Property Associates Inc. There is a shortage of good retail space in the North Shore, Mayfair Road, Southridge Mall, Bluemound Road and County Line Road/Appleton Avenue areas, he said.

“A lot of the grade A spaces that became available during the recession have filled back up,” Koepsel said. “I’ve got clients and retailers that are looking for locations and the biggest problem I’ve got is finding a place to put them in the more sought-after retail corridors.”

Many retailers that want to enter or expand in the area will wait until the right location is available, he said. That could lead to more development in the region’s top retail areas.

“I do think the economic recovery is picking up steam and things are going to continue to improve during the rest of the year,” Koepsel said.

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