Region’s strong industrial real estate market attracts national investments

The southeastern Wisconsin industrial real estate market continues to post impressive results. National investors are taking notice, and getting in on the action here.

As the U.S. economy has improved, deep pocketed foreign investors have helped to price some national investors out of primary real estate markets such as Chicago. As a result, national real estate investors are increasingly seeking assets in smaller markets, and the Milwaukee area’s strong industrial market looks attractive to many of them.

“The returns are getting so thin in larger, major markets,” said Bill Langhoff, vice president of Colliers International|Wisconsin. “(Investors) are chasing yield. They are starting to revisit secondary and tertiary markets.”

That’s good news for the owners of industrial real estate in southeastern Wisconsin, who are benefitting from falling vacancy rates and a prolonged period of positive absorption. Some owners of industrial real estate in the region are taking advantage of the opportunity to sell their properties at a premium price either to users that need the space or investors attracted to the fundamentals of the market.

“(Building owners) with a credit tenant that has a long term lease at this point in the cycle are cashing in their chips,” said Jeff Hoffman, partner with Milwaukee-based The Boerke Co.

During the first quarter of the year, the region’s industrial space vacancy rate fell to 4.86 percent, down from 6.45 percent a year ago and way down from its peak of 9.75 percent in 2008 during the Great Recession, according to Xceligent data.

The lack of available industrial space in the marketplace is noticeable, industry insiders say.

“We’re running out of buildings,” said Adam Matson, senior vice president of Milwaukee-based NAI MLG Commercial.

The first quarter of 2015 was the 19th in a row of positive industrial space absorption for the region. The region absorbed 2.8 million square feet in the first quarter of 2015, a number boosted by the 1.1 million-square-foot fulfillment center project in Kenosha. The region absorbed about 4.6 million square feet of industrial space in all of 2014.

Growing manufacturers and other industrial real estate users are absorbing what little space is still available in the market.

“It’s getting harder and harder for people to find spaces,” Hoffman said.

“I predict we’re going to have continued positive absorption through the end of the year,” said James T. Barry III, president of DTZ Barry.

DTZ Barry recently brokered the sale of the 395,000-square-foot former Harley-Davidson Inc. plant in Wauwatosa to Phoenix-based U-Haul International Inc. for $5.25 million. The deal is one of the largest industrial space sales in the region in recent years and will only reduce the area’s industrial space vacancy rate even further.

In addition to attractive real estate prices, national investors see the Milwaukee area as a lower risk market with fewer peaks and valleys, Langhoff said. The southeastern Wisconsin industrial space market is “a pretty safe bet,” he said.

There is ample evidence that national real estate investors are taking notice of the low vacancy and prolonged absorption of the region’s industrial real estate market and are choosing to invest here.

In April, an affiliate of St. Louis-based KP Development purchased the 246,000-square-foot Proteus Packaging building and the 300,000-square-foot Transpak Corp. building, both located on West World Packaging Circle in Franklin, from Wauwatosa-based VTLC Development LLC for $33 million.

In March, an affiliate of Rochester, N.Y.-based Broadstone Real Estate LLC purchased the 312,000-square-foot Power Products LLC headquarters facility, which includes a distribution center and regional warehouse, at N85 W12545 Westbrook Crossing in Menomonee Falls from an affiliate of Milwaukee-based Zilber Ltd. for $21.75 million. The building sold for well above its assessed value of $12.7 million, according to Waukesha County records.

In February, Oak Brook, Ill.-based CenterPoint Properties Trust sold a portfolio of 10 industrial buildings in the Milwaukee area to an affiliate of Dallas-based Westmount Realty Capital LLC for about $61 million. Some of the buildings in that deal were sold for well above their assessed values. A 465,050-square-foot industrial building in Mequon sold for $16.1 million, well above its assessed value of $11.8 million. A 113,568-square-foot industrial building in West Allis sold for $6.9 million, well above its $5.1 million assessed value. A 206,052-square-foot building in New Berlin sold for $6.6 million, well above its assessed value of $5 million. A 90,184-square-foot industrial building in New Berlin sold for $4.5 million, well above its assessed value of $2.6 million. A 67,000-square-foot industrial building in Menomonee Falls sold for $8.8 million, well above its assessed value of $5.5 million.

Hilmot Corp., a Pewaukee-based manufacturer and installer of conveyor systems, plans to purchase a 100,000-square-foot industrial building at 11925 W. Carmen Ave. in Milwaukee for $2.8 million, and will move its operations there. Hilmot will buy the building from Westmount Realty Capital, which acquired the building, as part of the February portfolio deal, from CenterPoint for $1.4 million.

The lack of available space and continued strong absorption is also putting some upward pressure on rental rates for industrial real estate in the region.

Hoffman estimates industrial space rents in the region have increased by about 10 percent over the past two years.
“I think we will see more rent growth in the next six to 12 months,” Langhoff said.

“I think there is going to be upward pressure on rents,” Barry said. “We have not seen very much of that at all because there was a lot of distressed product that had to be absorbed.”

Rising rents will encourage more developers to build. Spec industrial development has picked up significantly in the region as several developers, including some national players, are building or planning projects.

“People are building again,” Hoffman said. A total of 1.2 million square feet of new industrial space will be completed in southeastern Wisconsin by the end of the year, he said.

Langhoff estimates that there are 14 to 15 spec projects, with a total of about 2.2 million square feet of space, that are already under construction or could break ground this year in the region.

“I believe that space will be very well received by the marketplace,” he said.

Zilber Property Group has steadily added to its industrial portfolio in recent years and now plans to build a 173,165-square-foot spec industrial building in Kenosha, a 146,423-square-foot spec industrial building in Menomonee Falls, and a 113,665-square-foot spec industrial building in Pewaukee.

New York-based Ashley Capital is building a 376,000-square-foot spec industrial building in Sturtevant, the first of four buildings planned for the Enterprise Business Park that the firm is developing at Durand Avenue (Highway 11) and County Highway H.

Chicago-based HSA Commercial Real Estate plans to build a 180,000-square-foot spec industrial building in Waukesha.

Minneapolis-based Ryan Companies U.S. Inc. plans to build a 158,292-square-foot spec industrial building in Menomonee Falls.

A joint venture of CenterPoint and Milwaukee-based Wispark LLC is building a 412,000-square-foot spec industrial building in Pleasant Prairie. CenterPoint and Wispark are also building a 521,000-square-foot industrial building in Pleasant Prairie for Uline. That project began on speculation.

Malvern, Pa.-based Liberty Property Trust recently completed construction of a new 171,114-square-foot speculative industrial building in Oak Creek, but is still seeking tenants.

Rising construction prices are making new buildings too expensive for some industrial space users, Matson said. But Hoffman said businesses that are growing rapidly and badly need more space are able to afford to build new facilities. For example, rapidly-growing pet food manufacturer Stella & Chewy’s recently moved from Milwaukee to a new 164,007-square-foot building in Oak Creek. The company needed more space so badly it couldn’t afford not to move, Hoffman said.

Other user-driven industrial building developments in the region include a 92,340-square-foot headquarters facility for Oberlin Filter that will be built in Waukesha, replacing its current 56,000-square-foot facility. Meltic Corp. in Franklin recently moved to a new 90,000-square-foot building, replacing its previous 36,000-square-foot location.

Until more new supply is added, some real estate professionals predict that the region’s industrial space vacancy rate will creep even lower.

“(The region’s 4.86 percent industrial space vacancy rate) is kind of astonishing,” Barry said.

The lack of available space is slowing industrial real estate absorption in some areas. Waukesha County only had 111,520 square feet of absorption in the first quarter because of a lack of available space, Langhoff said. The county has a 3.34 percent industrial space vacancy rate.

With an industrial space vacancy rate of 7.56 percent, Milwaukee County is the only county in the region with an industrial space vacancy rate greater than 4 percent. The county absorbed nearly 600,000 square feet of space in the first quarter, a positive sign, Langhoff said.

“That, to me, was the bright spot of the entire market,” he said.

But Milwaukee County’s industrial space vacancy will remain higher, in part because it has a large amount of older industrial space that is functionally obsolete for modern industrial space users, industry professionals say.

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