A strong second quarter performance bolstered the already healthy southeastern Wisconsin industrial real estate market. And the industrial real estate market in Waukesha County is leading the region.
The Milwaukee area absorbed 1.2 million square feet of industrial space during the second quarter, the 13th consecutive quarter of positive absorption, according to the latest report from Xceligent and the Commercial Association of Realtors Wisconsin (CARW). The region’s industrial space vacancy rate is down to 6.6 percent, compared to 7.6 percent a year ago, the report said.
Waukesha County’s industrial real estate market has performed the best of the eight county southeastern Wisconsin area this year, according to the report. The county has the lowest vacancy rate, the highest amount of industrial space absorption and the highest asking direct lease rate in the region, according to the report.
Second quarter industrial space vacancy rates, by county (from Xceligent data):
- Waukesha, 4.2 percent
- Sheboygan, 4.8 percent
- Racine, 4.9 percent
- Washington, 5.1 percent
- Walworth, 5.1 percent
- Kenosha, 6.0 percent
- Ozaukee, 8.7 percent
- Milwaukee, 9.4 percent
Waukesha County’s vacancy rate has plunged from 6.04 percent in the second quarter of 2012 to 4.2 percent in the second quarter of 2013.
A lack of new development in Waukesha County has contributed to the vacancy rate decline as the economy has improved and businesses are growing again, said Jeff Hoffman, vice president of Pewaukee-based Judson & Associates.
“There’s more of a limited supply (in Waukesha County),” he said. “So when business came back you’re just drawing down from a lower supply base.”
The only other counties in the region that have had significant declines in industrial space vacancy during the last year are Kenosha County, down from 10.84 percent to 6.0 percent, and Ozaukee County, down from 12.74 percent to 8.7 percent.
Waukesha and Kenosha counties have had the highest level of industrial space absorption for the first half of the year.
First half of 2013 industrial space absorption, by county (from Xceligent data):
- Waukesha, 812,277 square feet
- Kenosha, 697,171 square feet
- Milwaukee, 548,473 square feet
- Washington, 71,586 square feet
- Ozaukee, 66,554 square feet
- Walworth, 3,597 square feet
- Sheboygan, -44,522 square feet
- Racine, -216,398 square feet
The industrial deals in the region this year that resulted in the biggest increase in occupancy include:
- Morton Grove, Ill.-based Integrated Merchandising Systems’ lease of the remaining 314,249 square feet of space at 10100 58th Place, Kenosha. The company now occupies the entire 626,724-square-foot industrial building.
- Sussex-based Quad/Graphics Inc. moved forward with plans to start up a Midwest commingling center in a 225,000-square-foot building in New Berlin. The building is located at 5600 S. Moorland Road, just south of I-43, in New Berlin.
The industrial real estate markets in Waukesha County and Kenosha County have thrived, in part, because they have a large amount of well-located, modern industrial space, said Adam Matson, an industrial broker with NAI MLG Commercial. Milwaukee County is saddled with a large amount of older industrial space that is obsolete and is located further away from the freeway than industrial properties in Waukesha County, he said.
“Milwaukee has a lot of affordable product, but a lot of it is obsolete and is not well located,” Matson said. “Waukesha County (industrial) buildings tend to be closer to I-94 and I-43.”
Kenosha County also remains attractive to Illinois companies that want to move to Wisconsin to take advantage of lower costs north of the state line. And, more Milwaukee-area businesses are considering locations in the Kenosha County and Racine County I-94 corridor to be better located for distribution purposes, Matson said.
Waukesha County also leads the region in industrial space asking direct lease rate and is the only county in the region that has seen a significant increase in asking direct lease rate during the last year, according to the Xceligent report.
Second quarter industrial space asking direct lease per square foot, by county (from Xceligent data):
- Waukesha, $5.79
- Kenosha, $5.47
- Washington, $5.12
- Ozaukee, $5.05
- Walworth, $4.72
- Milwaukee, $4.16
- Sheboygan, $4.05
- Racine, $3.96
However, asking lease rates are not the same as actual lease rates. Actual industrial space lease rates in Waukesha County are still in the $4.25 to $4.50 per square foot range, Matson and Hoffman said. Some incentives, such as a month of free rent, are still being offered in Waukesha County deals.
“The incentives have been getting reduced, but there are still some incentives out there,” Matson said.
But some tenants have been surprised to find that the market is shifting in favor of landlords, Hoffman said.
“The bottom of the market was three years ago. One or two years ago, building owners would fall all over themselves to try to accommodate any offer from a tenant,” he said. “Now on some aggressive offers (by tenants), we’re seeing building owners not even respond.”
The high level of absorption and low vacancy rate in Waukesha County demonstrate that supply is dwindling there.
“We’re running out of product,” Matson said.
“We are to the point where a business looking to expand is going to have a limited supply to choose from,” Hoffman said.
But actual lease rates must rise closer to $5 to convince more developers to plan new industrial buildings, particularly speculative buildings, Matson said.
“We’re not there yet,” he said.
Another problem for developers is that many tenants are still concerned about the future of the economy and are unwilling to commit to longer-term leases necessary to support new developments, Hoffman said.
Industrial space developments that do occur will be limited mostly to build-to-suit deals and expansion as conditions are still not right for spec development, but some growing tenants may need to build to gain additional space. A lot of tenants that have held off making decisions in recent years on needed space expansion are getting to the point that they finally need to act, Hoffman said. Several large users are searching the market for space and with a limited supply could decide to build, sparking a construction surge in 2014, assuming the economic recovery continues, he said.
“The market has gotten better each and every quarter, but we’re still not to a point where there’s a ton of (deal) velocity,” Hoffman said. “The economy is growing slowly and steadily. It’s a three yards and a cloud of dust economy.”
