Time to build?

The industrial real estate market in the metro Milwaukee area has been in recovery mode for more than three years, posting 13 consecutive quarters of positive absorption and a vacancy rate that has fallen from about 9.75 percent in late 2008 to 6.6 percent in the second quarter of this year, according to Xceligent.

But development of new industrial buildings in the region has been limited during that time, with some exceptions including several distribution centers in Kenosha County, which has been bolstered by its proximity to the Chicago area. And more industrial users are coming to the county. New York-based KTR Capital Partners plans to build a 1-million-square-foot distribution center for Amazon.com in Kenosha, according to sources, and Liberyville, Ill.-based Hanna Cylinders recently leased a 105,637-square-foot building in Pleasant Prairie and plans to move its operations, and its 100 employees, there.

But for most of the region during the post Great Recession years, lenders have been extremely reluctant to finance speculative development so most of the new industrial buildings that have been built in recent years have been build-to-suit projects.

“What we have seen is a slow and steady decrease in the vacancy rate and a consistent absorption of space,” said James T. Barry III, president of Milwaukee-based commercial real estate brokerage Cassidy Turley Barry. “Simultaneously, there’s been very little new product built and what has been built is owner-occupied with very little speculative space.”

But as the economy continues to slowly improve more manufacturers in the region are growing again and considering plans to move to larger facilities, just as quality industrial space becomes increasing scare. That could finally encourage developers, and commercial real estate lenders, to build more new industrial buildings in the region.

Pewaukee appears to be a particularly hot spot. Interstate Partners LLC is working on plans for five new industrial buildings in the city of Pewaukee, including a 78,000-square-foot building that would be occupied by Pro Mach Inc., which last year acquired Milwaukee-based Federal Manufacturing Co. Interstate has submitted preliminary plans to the city for four industrial buildings that would have a total of 308,000 square feet of space. Each of its planned buildings will likely be built when at least some of the space is pre-leased, said Jeff Whipple, development associate for Interstate Partners. But the firm has considered doing some of the buildings totally on speculation, he said.

“That’s something we’ve debated here in the office, whether to go forward with a 100 percent spec building,” Whipple said. “Certainly the deal is easier to do with a tenant committed to at least a portion of the building.”

Also in the city of Pewaukee, 2000 Development Corp. plans to build a 120,000-square-foot, multi-tenant industrial building at the northeast corner of Commerce Circle and Watertown Road. The firm is working on a lease deal with a potential tenant that would occupy 45,000 square feet, said Brandon Bergman, president of 2000 Development Corp. He declined to name the potential tenant.

2000 Development Corp. currently has a four-building portfolio of industrial buildings, all located in Pewaukee, with a total of 430,000 square feet of space.

“We currently have no vacancy,” Bergman said. “The longest vacancy we have had in the last five years I think lasted a week.”

Pewaukee is located in the heart of Waukesha County, which has a 4.2 percent vacancy rate, the lowest in southeastern Wisconsin, according to Xceligent. Waukesha County also led the region with 812,277 square feet of industrial space absorption in the first half of the year.

“I think all of Waukesha County right now is pretty hot,” Barry said.

Some geographic areas of the region, particularly Pewaukee and Waukesha, have shortages of industrial space, particularly space in excess of 75,000 square feet, Barry said.

“There’s very little inventory there to meet the needs of certain size categories,” he said. “I think we are at a point, there are companies looking around for specific space requirements, but certain size categories are just not there.”

Mid-sized tenants are also struggling to find space, Bergman said.

“For tenants seeking 30,000 to 50,000 square feet of space, brokers say there is nothing out there,” he said.

The plans for the new industrial buildings in Pewaukee are, “extremely needed and I think it’s going to be very well received,” said Adam Matson, vice president of industrial brokerage for Milwaukee-based NAI MLG Commercial. “We’ve got a lot of (tenants) in the hopper and nobody wants to sign a lease because they can’t find the right space. I’ve lost three deals this year because I couldn’t find quality space for (tenants). They had to sign renewals.”

“As I’ve gone out and talked with industrial real estate brokers, they all say there is a need for high quality industrial space of 50,000 and up,” Whipple said. “That product is dwindling. In their opinion, a new building should do well in this area. If you’ve got a large user looking for quality (industrial space), it’s getting hard to come by in the Waukesha-Pewaukee submarket.”

In another sign of the strength of the industrial real estate market in Pewaukee, Denver-based real estate operating and investment company Alliance Commercial Partners recently purchased a 121,600-square-foot distribution center at W234 N2100 Ridgeview Parkway Ct., in Pewaukee, occupied by A.L. Schutzman Company, for $8 million, or about $65.79 per square foot. The building has an assessed value of $5.68 million, according to Waukesha County records.

Meanwhile, Milwaukee County has a 9.4 percent industrial space vacancy rate, but much of that space is in older buildings that are difficult to access from freeways, Matson said.

“Milwaukee has a lot of affordable product, but a lot of it is obsolete and is not well located,” he said.

Milwaukee County has absorbed 548,473 square feet of industrial space in the first half of the year.

Interstate Partners’ plans in Pewaukee will likely take years to be developed, said Jeff Hoffman, vice president of Pewaukee-based Judson & Associates.

“It’s probably a concept of what they would like to do over the next decade,” he said. “I’d be shocked if they plan to build all of that over the next 12, 18 or 24 months.”

Three of the buildings that Interstate Partners plans to build in Pewaukee would be located in its RidgeView Corporate Park. The company typically builds high-quality industrial buildings, Hoffman said.

“It’s not just four walls and a roof,” he said.

Interstate is well positioned to take advantage of rising demand for industrial space and lack of space in the increasingly popular Pewaukee area, Hoffman said.

“Interstate owns all of the good sites out there,” he said. “They’re in a good position. They’ve had these sites for years. They’ve had ideas of what to do with them.”

Pewaukee is an attractive area for industrial tenants because it has good access to freeways and is easy to get to from the entire metro area and to and from the Madison and Chicago areas, Matson said. The city of Pewaukee’s low taxes are also a major appeal, Bergman said.

Demand for industrial space exceeds supply in some parts of the region, but deal velocity is much slower in other areas where buildings will sit and take longer to fill up, Barry said. Besides much of Waukesha County, other areas that could be on the verge of attracting more industrial development include Ozaukee County and Washington County, he said.

“The biggest difficulty is finding available, developable land with utilities for that kind of development,” Barry said.

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