With capacity outpacing absorption and interest rates remaining low, southeastern Wisconsin’s commercial real estate scene will continue to be a buyer’s market in 2004.
The fundamental softness in demand for the region’s office, industrial and retail property markets stems from the fact that vacant space continues to exceed the demand for that space after a three-year economic recession.
In many respects, the commercial real estate development market is even more of a lagging economic factor than employment, according to Mark Eppli, Marquette University professor and Robert B. Bell Sr. chair in real estate.
Before companies lease or buy and develop real estate, they must see expanding revenues and be confident that the economy will continue to grow.
Companies won’t see those revenues expand until consumer spending increases. Consumer spending won’t increase until employment and wages rise. And employment and wages don’t rise until businesses see increased demand for their products and a premium is placed on qualified employees.
And so it goes.
"I think what you’re going to see is there are hopeful signs, but it’s going to take at least until mid-year for those signs to turn into new contracts and new space absorbed," Eppli said.
"Industrial’s going to take a while to get back on track. Business productivity is still hovering around 75%, and we’ve still got equipment sitting idle," Eppli said. "It will take a while, probably into the third quarter, before we get some real absorption."
"The likelihood of a recovery in the real estate market is linked to the stabilization and growth of the national economy," reported Grubb & Ellis
Boerke Co. in its 2004 Commercial Real Estate Forecast for the Great Lakes States. "As the nation grows, so too will Milwaukee."
The Reis Reports Inc., a New York-based company that monitors commercial real estate trends in 80 metropolitan markets throughout the nation, is not exactly bullish on Milwaukee.
"The Milwaukee economy is hanging by a thread," the company reported, citing continued job layoffs in the manufacturing sector.
"Regional economic indicators provide little reason for optimism. Local manufacturers will continue to lay off workers in this highly unionized, high-cost market in favor of cheaper labor overseas," Reis reported. "This metro will need a national recovery to pull it out of its current economic doldrums, and longer-term it has to diversify."
However, local business executives are far more optimistic about southeastern Wisconsin’s economy. In the most recent Metropolitan Milwaukee Association of Commerce outlook survey, about 75% of employers foresee increases in revenue and profits in 2004, and nearly half plan to expand their workforce.
No doubt, the southeastern Wisconsin commercial real estate market has its hot spots:
— Progress continues to be made in development plans for the $1 billion Pabst Farms project in Oconomowoc and the $300 million Pabst City project in Milwaukee. Both are grand projects that will take years to complete.
— Downtown Milwaukee and the Historic Third Ward are bustling with new upscale condominium developments. Those projects, which include two large condominium towers, will bring a growing need of retail to meet the residential demand.
— Harley-Davidson Inc. is adding to the momentum of redevelopment in Milwaukee’s Menomonee River Valley by deciding to build its museum, office and retail complex near South Sixth and Canal streets.
— New industrial development is booming along Interstate 94 from Oak Creek down to the Illinois border.
— Menomonee Falls is targeted for $150 million in new development at its Heritage Reserve complex in Menomonee Falls. Plans call for a hotel or conference center, a medical service building, upscale retail, a bank, a senior housing complex, several more office buildings and upscale apartments and condominiums.
— The health care industry continues to expand throughout the region with several medical buildings being constructed.
In general terms, the southeastern Wisconsin market seems to be gobbling up new commercial real estate space, but the reuse of existing space continues to be a real challenge, Eppli said.
"Both industrial and office, we’re going to have a problem with reusing our existing buildings," Eppli said. "We’re leasing up our new buildings."
Beyond 2004, Eppli is concerned that the nation’s trade deficit and federal budget deficit are soaring. If that continues, it won’t be long before interest rates and inflation will become factors that could stymie economic growth and the accompanying commercial real estate development, Eppli said.
"The big risk is the double-barrel risk of the trade and federal deficits. We’ve really got to get this back in order again. We can’t continue to do this," Eppli said. "In the long run, if we stay at this path, it’s so clearly and wildly unsustainable. That’s a looming challenge. Politics aside, Republican or Democrat, whatever …. I’m not trying to pull a political card here. But we can’t continue to do this."
Feb. 6, 2004 Small Business Times, Milwaukee