Studies conducted for the City of Milwaukee by two Chicago-based consulting firms recently received attention for saying the city could justify a subsidy for a major development at North Fourth Street and Wisconsin Avenue, but suggested the city should not subsidize any of the other major developments currently proposed downtown.
Charlotte, N.C.-based Ghazi Co. wants to build 200 condos, a 150-room hotel and 100,000 square feet of entertainment-focused retail space at the Wisconsin Avenue and North Fourth Street site. The Ghazi proposal would be appropriate for city assistance because it would provide the most economic impact to the downtown and would provide a boost to the Midwest Airlines Center and the Grand Avenue Mall, the studies said.
However, the other major developments proposed downtown should not receive city assistance because those projects would not provide a major catalytic impact to the downtown and would add to the supply of hotel rooms, retail space and office space that would exceed the current downtown demand, the studies said.
The studies were conducted by Chicago-based S.B. Friedman & Co., which examined major proposed mixed- use developments in downtown Milwaukee, and Chicago-based HVS International, which examined the downtown hotel market and proposed downtown hotel developments.
The city requested the studies after several mixed-use projects, which included hotels, were proposed downtown. Some of the projects are seeking tax incremental financing (TIF) assistance. City officials have balked at providing assistance to some of the projects, saying they would cannibalize existing downtown businesses.
“(The studies) validates the TIF guidelines in terms of what type of projects the city should be investing public money in,” said Richard “Rocky” Marcoux, commissioner of the Department of City Development. Projects that receive TIF should be catalytic projects that spark additional development, or projects that face major impediments, just as brownfields with major contamination issues, Marcoux said.
“I believe that if we are to consider public assistance for projects in the office, retail and hotel sectors, they also must be demand-driven,” Mayor Tom Barrett said in a letter to the Common Council about the studies. “When demand is soft, new projects succeed only at the expense of existing projects. I believe we ought to heed the consultants’ advice on this point: don’t open the public pocketbook to pay for projects that simply move tenants from one downtown building to another. On the other hand, when developers are looking for help to relocate major tenants into the city, we ought to be open to that opportunity, because it advances our jobs agenda.”
In addition to choosing sides in which developments should, and which should not, receive city subsidies, the studies provided a detailed analysis of the downtown Milwaukee real estate market. Here’s what they revealed:
Condominiums
Residential condominiums are the strongest segment of the downtown Milwaukee real estate market, according to S.B. Friedman.
“Condos currently appear to be the sole real estate product type that can consistently develop in the downtown area (including associated parking) under market-rate conditions without city assistance,” the study said. “On a per-square foot basis, condominiums represent the most valuable real estate product type present in downtown Milwaukee.”
The buyers of the downtown condos are primarily empty-nesters and young professionals.
About 2,000 condos were built in downtown Milwaukee between 2001 and 2006, according to the report. The market absorbed about 360 new condo units per year between 2004-06, and 2007 is expected to meet or exceed that pace. That is a significant increase from 2001, when the downtown market absorbed fewer than 150 condos.
The downtown condo resale market has also grown from about 150 transactions in 2002 to about 500 sales in 2006.
The unsold inventory of new condo units in projects that have completed construction is about 220 units, which is a supply of about seven months.
There are about 15 condominium projects under construction, or expected to start construction soon, in the downtown area, totaling about 1,080 units.
In addition, there are another 18 downtown condo developments in the planning stages with a total of about 2,300 units.
“If all planned projects proceed in approximately their currently proposed from, they represent about six years of condo supply, assuming new unit absorption remains at approximately its current pace of about 360 units per year,” the report said. “This would likely cause a significant oversupply of units. However, it is likely that some of the proposals will encounter delays due to financing gaps, construction lender pre-sale requirements, or other factors.”
The increased supply of condos could slow the per-project absorption rate, which could delay some of the projects.
However, the continued improvement of downtown’s image could lead to even higher demand from downtown condo buyers, the report points out.
“Increased investment and population in the downtown neighborhood is likely to allow more amenities, particularly retail, to develop,” the report says. “This will further enhance the appeal of downtown condo living.”
The median price for downtown condos is $270,000, which means buyers must have a household income of about $100,000 a year or more to buy a new downtown condo, according to the study. The study said the number of young professionals and empty nesters in the Milwaukee area with a household income of more than $100,000 is expected to grow through 2011, meaning the pool of potential downtown condo buyers will also grow.
“Assuming the lifestyle trends that have caused these demographics to favor condo living in recent years continue, the downtown market will have strong demographic support in the coming years,” the report says. “Overall, it appears that the downtown condominium market is stable and growing.”
The city has avoided providing TIF assistance for condo projects, except for costly brownfield redevelopments.
“This policy appears justified in that numerous (condo) projects are proceeding without city gap financing,” the study says.
Retail
Large retail developments need large amounts of parking spaces, but the downtown Milwaukee retail real estate market is not strong enough to support the cost for building parking structures, the study said.
“Current prevailing retail rents, reportedly in the $25 per square foot range in the downtown area, do not appear sufficient to cover the construction cost of retail space, plus substantial amounts of dedicated structured parking,” the report says. Solutions recommended by the report could include scaling down retail components of mixed-use developments, subsidizing retail development with other uses (especially condos) to generate revenue for parking structures or having large retail stores share parking facilities.
Two proposed downtown Milwaukee developments would have major retail components: Ghazi Co.’s project and Chicago-based RSC & Associates, which has proposed a development in the Park East corridor at North Jefferson Street and East Ogden Avenue with 126 apartments, a 148-room Hyatt Place hotel and 80,000 square feet of retail space.
For the RSC project, “discussions are reportedly underway with a small entertainment anchor with a bowling/nightlife concept,” the study said. RSC also has less detailed plans for big-box store development, which could include a fitness center, on the block to the west.
The Ghazi project could provide a major boost to the Midwest Airlines Center and the Shops of Grand Avenue, the study said.
However, the impact of the RSC retail development would be, “at most modest in scale, and predicated on recapturing expenditures currently being made by city residents and downtown employees in suburban locations. It does not appear likely to function as a driver of new downtown visitor or shopper traffic.”
Department of City Development officials have balked at RSC’s request for $9.5 million in TIF assistance, saying the city should not subsidize developments that would compete with existing hotels and retailers.
“(RSC) can build a quality development without our assistance,” Marcoux said. “(They) just want to build a bigger development with our assistance.”
The study says only the Ghazi project should be considered for a subsidy.
“As a rule the city should avoid providing financial assistance to address financing gaps created by retail and/or its associated parking unless the retail is of a type and scale that would be likely to cause substantial area revitalization, draw additional visitors to downtown Milwaukee, and/or greatly complement/reinforce other key downtown assets,” the study says. “As proposed, it appears that Ghazi fits this profile.”
Office
The downtown office market remains weak.
According to information provided by Milwaukee-based RFP Commercial Inc. to S.B. Friedman & Co., the downtown class A and class B office space vacancy rate is about 18 percent, and is at its highest point in 10 years. The downtown office space vacancy rate was below 10 percent in 2001, and has climbed steadily since then.
“There has been little natural growth in overall downtown office demand from existing tenants in recent years and little is anticipated due to a general lack of major firms in a high-growth mode,” the study says.
However, the completion of the Marquette Interchange project next year could give downtown a boost.
Major downtown office developments will likely need a city subsidy, because the weak office market does not support the costs to build office space and needed parking structures, the report says. Downtown office space rents range up to $16 per square foot, plus parking costs.
“Several proposed downtown area office projects, most notably the Manpower Inc. headquarters, have recently requested city assistance to cover the cost of building a parking structure,” the study said. “Unless net rents escalate substantially from their current levels, it is likely that this trend will continue.”
The city should be careful when considering whether to provide TIF assistance for an office project, the study says. City support is justified if the project attracts a new employer to the city (such as Manpower) or retains a key employer whose space needs cannot be met with the existing downtown office inventory, the study says.
The city should consider studying the current configuration and quality of vacant office space to see if there are large enough blocks of existing space for downtown to attract a large, new office tenant, the study says.
Apartments
The downtown apartment market has a high occupancy rate of about 97 percent, according to the study. However, the downtown apartment market is extremely price sensitive, limiting the ability of building owners to increase rents and making new apartment development difficult, especially if the developments need to include parking structures. The study examined nine downtown apartment complexes with an average rent of $1,540 and an average unit size of 1,122 square feet.
“Overall, it appears that the downtown rental apartment market is healthy and likely to improve in the future,” the study says. “Rents should escalate in the coming years as demographic conditions continue to improve. This may improve the financial feasibility of market-rate apartment development in the downtown area.”
Hotels
HVS International examined 11 mixed-use development projects in the downtown area that include hotels.
“Most of the proposed hotel developments are unlikely to have significant new impacts that will benefit the local economy,” the HVS report said.
The one project that would have a major beneficial impact on the local economy, and would that would make sense for a city subsidy, is the Ghazi Co. proposal, the study stated.
“The site located at 4th Street and Wisconsin Avenue has great strategic importance for the city,” the study said. The Ghazi project’s entertainment-oriented retail development would benefit the Midwest Airlines Center and the Shops of Grand Avenue.
“I support the use of public funds at an appropriate level to ensure a high-quality project there,” Barrett’s letter to the council said.
The Wisconsin Center District is examining plans to expand the Midwest Airlines Center, although a funding source has yet to be determined. If the convention center is expanded, a new convention hotel with 300 or more rooms would be needed, the HVS study said. The Fourth Street and Wisconsin Avenue site would be a great location, otherwise city officials should look for another site, the study said.
Other sites would be suitable for a convention hotel, Marcoux said, such as the county-owned parking lot at the southwest corner of Sixth and State streets.
The greater Milwaukee metro area has 90 hotels and motels with a total of 12,346 rooms. The HVS study focused on seven downtown hotels: the Hilton, Pfister, Hyatt, InterContinental, Hotel Metro, Courtyard by Marriott and Residence Inn by Marriott. Those hotels have a total of 2,105 rooms. Last year, they had an occupancy rate of 68.5 percent, down from 69.4 percent in 2005.
According to HVS, a 70 percent occupancy rate represents the threshold at which a new hotel could enter the market and have little impact on the occupancy rate of the existing hotels. HVS says the downtown Milwaukee hotel market is not likely to hit 70 percent until 2010 or 2011.
Park East corridor
It is going to take several years for the Park East corridor to be built out entirely, and the amount of available land may exceed demand, the S.B. Friedman study says.
Although the Park East corridor looks largely vacant, there is actually a significant amount of development occurring in the area, the study points out. Five projects are under construction in and around the Park East with a total of $400 million in development value. They are: the Manpower Inc. headquarters project; the Flatiron condominium project; the mixed-use development by Fort Myers, Fla.-based Development Opportunity Corp. at the southeast corner of Water Street and Juneau Avenue that will include a Staybridge Suites hotel; the redevelopment by Zilber Ltd. founder Joseph Zilber of the Pabst brewery; and the redevelopment of the former Pfister and Vogel tannery property by Mandel Group into the North End, a mix of apartments, condominiums and a some retail space.
It will likely take seven to 18 years for total build-out of the Park East corridor, the study says.
The city should be patient and not subsidize developments in the Park East corridor that lack sufficient demand and would hurt existing downtown businesses, the study says. In addition, the city should avoid subsidizing projects that would compete with the office and retail segments of the Pabst brewery redevelopment, which could jeopardize the city’s $29 million TIF investment in that project.
Residential condominiums, which is the strongest segment of the downtown real estate market, may be a better use for Park East developments than office, hotel and retail projects, which need subsidies. Or the projects, instead of seeking TIF assistance, could add condos to provide more revenue to support the office, hotel and retail portions of the developments.
“If there is not compelling strategic reason to subsidize a project other than to catalyze development activity in the Park East, it may be more desirable to allow market demand to drive the pace of build out,” the study says. “It is also important to note that this inventory of development-ready land adjacent to downtown Milwaukee represents a substantial economic development resource-one that would be difficult and costly to replicate. A measured pace of development on the Park East area land would allow the city to reserve some acreage for large-scale economic development initiatives in the future, such as expansions of downtown activity generators or additional major employers.”
If the city provides gap financing for Park East development projects, S.B. Friedman said, it runs the risk of indirectly subsidizing the land prices of Park East land, therefore artificially inflating land values there and increasing the likelihood of future projects facing financing gaps. The city would also run the risk of creating a precedent for TIF assistance that other developers would expect. Assistance for the Park East project also could result in land speculation, the study says.
“We’re not going to absorb (the Park East) in one year or two years,” Marcoux said. “It’s going to be a long-term project.”
Commercial Real Estate Transactions
LEASES
Boerke Company
Landstar Ranger Inc. leased 3,700 square feet of industrial space at 7760 S. 6th St., Oak Creek, from GWZ LLC.
CB Richard Ellis
Robert W. Baird & Co. Inc. leased 263,700 square feet of office space at 777 E. Wisconsin Ave., Milwaukee, from U.S. Bank National Association.
NL Industries Inc. leased 3,313 square feet of office space at 411 E. Wisconsin Ave., Milwaukee, from Triple Net Properties Realty, Inc.
Elutions Inc. leased 7,683 square feet of office space at N14 W23833 Stone Ridge Drive, Waukesha, from Klement Sausage Company, Inc.
Fashion Bug #3742 LLC leased 7,000 square feet of retail space at Midtown Center 56th St., Milwaukee, from Inland Western Milwaukee Midtown 11 LLC.
Noodles & Company leased 3,092 square feet of retail space at 4859 S. 76th St., Milwaukee, from Pranke Holding 4859 S. 76th Street LLC.
LeBell, Dobrokski & Morgan LLP leased 3,373 square feet of office space at 309 North Water St., Milwaukee, from Water Street Lofts LLC.
Apolonia Jackson d.b.a. Dollar Store leased 3,000 square feet of retail space at 7627 W. Fond Du Lac Avenue, Milwaukee, from Seventy-Sixth Street LLC.
Robert W. Baird & Co. Inc. leased 3,540 square feet of office space at N17 W24222 Riverwood Drive, Pewaukee, from Transwestern Great Lakes, L.P.
Froedert & Community Health Inc. leased 45,470 square feet of office space at 400 Woodland Prime, Menomonee Falls, from Weas/Boulder Venture LLC.
Dollar Tree Stores Inc. leased 9,172 square feet of retail space at N84 W14575 Appleton Ave., Menomonee Falls, from S&H Company.
Northwoods Lending LLC leased 9,240 square feet of office space at 309 N. Water St., from Water Street Lofts.
Empty Inc. d.b.a. Cartridge World leased 1,690 square feet of retail space at 17440 W. Bluemound Road Brookfield, from BB&K Brownstones Inc.
Sally Beauty Company Inc. leased 1,368 square feet of retail space at the southwest corner of Howell Avenue and Centennial Drive, Oak Creek, from GP-OCD Partners LLC.
Cornerstone Creations LLC d.b.a. Lotions & Potions leased 1,695 square feet of retail space at N78 W14575 Appleton Ave., Menomonee Falls, from North Pointe Centre LLP.
Colliers Barry
Schroeder Moving Systems leased 47,000 square feet of industrial space at 16465 W. Lincoln Ave., New Berlin, from CenterPoint Properties.
Cretex Specialty Products leased 11,808 square feet of industrial space at N16 W23390 Stoneridge Dr., Suite C, Pewauke, from Stoneridge of Pewaukee LLC.
Mehmert Store Services leased 10,000 square feet of industrial and office space at W22 N5734 Miller Way, Sussex, from RLP Rentals.
Dickman Company
Nexity Bank leased 2,590 square feet of office space at 200 Woodland Prime, Menomonee Falls, from Strong Financial Corp.
Dr. Ronald Z. Arnold leased 2,425 square feet of office space at 5600 W. Brown Deer Road, Brown Deer, from Leisure Investments Inc.
Inland Companies
Hong Thai leased 2,890 square feet of space at The Berkshire, 6401 W. Greenfield Ave., West Allis.
Technical Air Corp. renewed their lease of 2,131 square feet of office space, Spectrum Business Center Inc. renewed their lease of 4,598 square feet of office space and MortgageIT renewed their leased of 1,234 square feet of office space at Executive Center III, 125 N. Executive Dr., Brookfield.
DavMar leased 6,840 square feet of space at Glendale Business Center, 6575 N. Sidney in Glendale.
Mid-America Real Estate
Snap Fitness leased 2,859 square feet of space at 2801-11 S. California St., Milwaukee, from South KK Real Estate LLC.
Cartridge World leased 1,690 square feet of space in The Brownstones at 17430-17680 W. Bluemound Road, Brookfield, from BB&K Brownstones.
Harbor Freight leased 15,000 square feet of space at West Allis Towne Center, at 70th Street and Greenfield Avenue in West Allis, from Ramco-Gershenson Inc.
SALES
CB Richard Ellis
Warren Real Estate Venture Inc. purchased 0.74 acres at the northwest corner of St. Paul Avenue and Madison Street in Waukesha from Waukesha Realty Development Corp.
Ayesh Real Estate LLC purchased a multi-tenant retail center at 5902-40 N. 76th St., from 76th Street Plaza LLC.
Colliers Barry
STAG Capital Partners purchased the 260,000-square-foot Bentley World Packaging facility at 4077 N. First St., Milwaukee.
Lemberg Electric purchased the 38,400-square-foot industrial building at 4085 N. 128th St., Brookfield, from GW Investments LLP.
Dickman Company
Van Brothers VI LLC purchased 211,000 square feet of industrial space at 5300 N. 33rd St., Milwaukee, from Villard Street LLC.
Inland Companies
Wingate Creek Storage purchased 4.38 acres located at Washington Street (Hwy 33) and Trenton Road in West Bend. The sale price was $175,375.
Mid-America Real Estate
ISB Community Bank purchased one acre of land in the Village Square of Delafield at Highways 16 and 83 from Delafield Investment LLC.
NEW CONSTRUCTION
Gilbane Building Co., Providence, R.I., recently completed renovations to the second floor of the Hyatt Regency hotel in downtown Milwaukee. The renovations included improvements to the atrium, meeting rooms, corridors and public restrooms. The updates included replacing carpet, wall coverings, ceiling tiles, sprinkler heads, lighting, doors, wall caps, signage and artwork. Renovation of the public restrooms provide guests with new finishes such as granite countertops, floor/wall tile, lighting, mirrors, plumbing fixtures, toilet partitions and accessories, wall covering, ceilings and lighting. Gilbane is the original builder of the 18-story, 484-room hotel.
Gerald Nell Inc., Waukesha, was selected recently by Sunset Investment Co. to design and build 26,250 square feet of office and production space for H&R Bindery Co., 3625 N. 126th St., Brookfield.
MSI General Corp., Oconomowoc, was selected by Cain Industries to design and build a 21,500-square-foot addition to their facility at W194 N11826 McCormick Dr., Germantown. MSI General has also been hired to build a 4,200-square-foot warehouse and production space addition for Exacto Spring Corp. at 1201 Hickory St., Grafton. In addition, MSI General was chosen by U.S. Carwash to design and build a 1,152-square-foot addition to the self-service car wash facility at 1626 N. 12th St., Milwaukee. MSI General recently completed a 15,500-square-foot multi-tenant retail building, for Michael-Cory Development and Spectrum Development Group, on Renaissance Drive in Sturtevant.
Creative Constructors LLC, Menomonee Falls, recently completed construction of the 23,000-square-foot Harry V. Quadracci Printing Education and Technology Center on the Waukesha County Technical College campus in Pewaukee. The facility will be utilized by printers from across the U.S. for demonstrations, research and testing of new printing technology.
The Jansen Group Inc., Milwaukee, was recently awarded a contract to build a 11,703-square-foot addition to Paper Machinery Corp. in Milwaukee.
