Southeastern Wisconsin real estate professionals are generally optimistic that retail and residential development in the metropolitan area will remain strong in 2005, and that the industrial real estate market will improve this year.
However, the outlook for the area’s office market is mixed, with some viewing the glass as half-full and others contending it is half-empty.
Indeed, several questions are hanging over the commercial real estate market in the Milwaukee area as 2005 begins.
What will happen to PabstCity, the proposed redevelopment of the former Pabst Brewing Co. complex into a downtown Milwaukee regional entertainment center? Unveiled more than two years ago, the $395 project is on hold as the developers, Milwaukee-based Wispark LLC, Cleveland-based Ferchill Group and Atlanta-based TerreMark Partners LLC are trying to secure financing for the project. The developers originally said they wanted $75 million in tax incremental financing, but several city officials, including Mayor Tom Barrett, balked at that request. The developers also are facing a lawsuit by one of the project’s original partners, Jim Haertel, who alleges the other partners have not kept their promise to give him ownership of a portion of the complex.
For now, Wispark officials are remaining tight-lipped about the status of the PabstCity project.
"We don’t have anything to share with you right now," said Wispark spokesperson Margaret Stanfield.
Some real estate professionals believe the PabstCity proposal will eventually move forward.
"I think (PabstCity) is going to happen in some way, shape or form," said Daniel Cohen, director of tenant representation for Mid-America Real Estate.
Will development occur in the Park East freeway corridor, or will the land remain vacant?
City officials decided to tear the freeway down to free up a large tract of land on the north side of downtown for development. About 16 acres of the 64-acre corridor is owned by Milwaukee County, and the County Board recently passed rules that would require developers of the property to pay union-level wages to construction workers and would favor developers that agree to provide affordable housing, green space, worker training and other community benefits. County Executive Scott Walker vetoed the rules for the land sale, but his veto could still be overturned.
Some real estate professionals say the county rules will discourage developers from building on the land.
"If those restraints are in place, you’re going to see that land sit for a long time," said John Czarnecki, vice president of Brookfield-based Apex Commercial, Inc.
"I hope it doesn’t impede (development), but I know it will, because of basic economic principles," said James Barry III, president of James T. Barry Co. in Milwaukee. "The message the whole fiasco sends to developers and people in the free market is that Milwaukee County is not an entity with whom you want to do business."
Other real estate professionals say the county’s rules for developing the Park East land will slow down, but not stop development.
"I don’t think it’s going to doom it," said Scott Welsh, president of Milwaukee-based Inland Companies. "I just think it will be done at a pace Milwaukee is familiar with, which is slow. I don’t think it’s going to go at the pace it should."
"At some point, it will be a great area," said Ned Purtell, principal of RFP Commercial Inc. of Milwaukee. "The county is not going to be able to kill the market trend. (But) I think you’ll have a better development at the end of the day if you let the private sector take care of it."
When and where will the next office tower be built in downtown Milwaukee?
The downtown office market has a 16 percent vacancy rate, according to the 2005 Real Estate Market Review and Forecast by The Polacheck Co., a CB Richard Ellis Company. However, some real estate brokers and developers say the downtown market for Class A office space is strong, and they speculate another new office tower could be built there soon.
The success of the two newest downtown office buildings is fueling some of the speculation. The 227,000-square-foot 875 East building at 875 E. Wisconsin Ave. and the 205,000-square-foot Cathedral Place building at 555 E. Wells St., were completed in 2003, and both reached capacity or near capacity in 2004, faster than many expected. The success of the new buildings indicates that another new office building in downtown Milwaukee also would be filled up, some real estate professionals say.
However, real estate professionals also say that no downtown office project will break ground without first securing an anchor tenant.
At the same time, Quarles & Brady L.L.P. is considering a move from the 411 East Wisconsin Center into a new building. The law firm currently occupies about 160,000 square feet.
"Any time you get a tenant like Quarles & Brady (looking for space), it’s a unique opportunity for the downtown market," said Bruce Westling, president of NAI MLG Commercial of Brookfield. "You may see a building built around that tenant."
Irgens Development Partners LLC has proposed a high-rise office building for the northwest corner of Water and State streets, called Ovation Plaza, which could lure Quarles & Brady.
"As with any project, we need a find a couple of big tenants to get it to a point we are willing to break ground," said Kristine O’Meara, principal for Irgens Development Partners.
At least four other viable downtown office projects have been proposed, said Steven Palec, senior vice president of the office property group for Polacheck.
"There are a number of developers with sites that might be as good or even better (than Ovation Plaza)," Purtell said. "I think there’s a number of developers chasing (the Quarles & Brady) deal."
Other office users in the marketplace also are considering their options, Palec said.
"There are inquiries out there," he said. "Not a lot, but we’re not a ghost town either. There are toes in the water, but definitely not two feet."
The long-time trend of offices moving out of downtown to the suburbs has slowed, if not stopped, Purtell said.
"I think there are now (businesses) in the suburbs considering the downtown," he said. "I don’t think the floodgates have opened with people stampeding downtown, but people are considering the downtown."
What will happen to the suburban office market?
Even though the newest downtown office buildings filled up quickly in 2004, several real estate professionals say they are concerned about lingering office space vacancies in the suburbs.
As the economy continues to improve, O’Meara said she expects the metro area’s 16 percent office vacancy rate to fall to about eight or nine percent this year. If that occurs, more developers will announce office building projects, she said.
"This year, they will be planning (office projects), and next year, they will start building," O’Meara said.
According to the Polacheck report, office vacancy rates for suburban submarkets are 12 percent for Brookfield/Wauwatosa, 20 percent for West Allis, 17 percent for Brookfield, 15 percent for Waukesha, 16 percent for Menomonee Falls and the far northwest side and 12 percent for Ozaukee County and the north shore. The total suburban office vacancy rate is 15 percent, according to the report.
"The suburbs have been very quiet on office development for the last 12 months," Purtell said. "There is a fair amount of space to lease in the existing buildings. I think there will be some new buildings announced this year. The suburbs have always been the biggest and best growth area, and they will continue to be."
Some bright spots have emerged in the suburban office market.
Northwestern Mutual Life Insurance Co. built a $125 million, 500,000-square-foot office building on South 27th Street in Franklin, GE Healthcare is building an $89 million, 506,000-square-foot building in the Milwaukee County Research Park in Wauwatosa and Whitnall Summit Co. is spending about $45 million to convert the former Allis Chalmers facility in West Allis into an office complex with up to 650,000-square-feet.
"(Summit Place is) single handedly changing that submarket out there," Purtell said. "It’s a very interesting project and it has been very well received by the marketplace."
Will the region finally be able to attract more upscale retail chains?
Crate and Barrel will open a 33,000-square-foot store in 2005 at Mayfair Mall. It will be the first location in the state for the Chicago-based upscale home furnishings retailer. Many Milwaukee-area shoppers want to see even more new upscale stores opening in the area.
A $300 million project will transform Glendale’s Bayshore Mall into a town center concept and is expected to attract new, upscale retailers to the area.
"There’s no shortage of (retailers) that want to be there," Cohen said. "It’s going to be like nothing else we have seen (in the Milwaukee area). It’s going to be terrific."
Construction at Bayshore will continue in 2005 and be completed in 2006.
This year, the first retail component at the 1,500-acre Pabst Farms development at Interstate 94 and Highway 67 in Oconomowoc and the Town of Summit, is expected to be completed. A Pick ‘n Save and other stores are expected to open there this year.
Pabst Farms eventually will have 600,000 to 900,000 square feet of retail space and more than 4 million square feet of office and industrial space.
The Milwaukee area finally appears to be on the verge of attracting some national retailers that have not yet opened stores here, Barry said.
"There is a general consensus that Milwaukee is an under-retailed metro market," he said. "There is room for a lot of retail growth across the board."
Is the market for industrial real estate really on the rebound?
Several real estate professionals say sales and leases of industrial space have picked up in recent months, and they expect that to continue in 2005 as the economy continues to strengthen.
"We’re seeing an increase in activity and have been seeing it for the last six to eight months," Westling said.
For the entire metro Milwaukee area, the industrial vacancy rate is a little over 7 percent, Barry said. He expects the area’s industrial vacancy rate to dip down to about 6 percent this year.
"We’re going to see a pretty good pick-up of activity that we already started to see in the last quarter of last year," Barry said. "The largest amount of activity is still in the sale of small- to medium-sized buildings."
Sales and leases for larger industrial buildings are improving, Barry said. Leases for Class A industrial space have been lagging, but should also improve this year, he said.
The recession hit industrial firms hard in the United States during the last four years. Only the strongest industrial firms were able to withstand the recession, and those that did survive are growing significantly as the economy recovers, said Chad Vande Zande, principal of Grubb & Ellis/Boerke Co.
"A lot of the businesses that survived, before (the recession) they were competing against three guys. Now, it’s two guys," he said. "A lot of my clients have employee shortages, and they’re growing quickly. What we’re seeing from the end of 2004 and into 2005 is a demand for larger 50,000- to 100,000-square-foot users looking to lease buildings. That is something we haven’t seen in our market with any velocity for four years."
Vande Zande also expects leasing activity to pick up for industrial space, which he says should lower vacancies in the marketplace and drive up the value of industrial land, encouraging more development of spec industrial space.
Due to a shortage of sites in the metro area’s industrial parks, more developers will bring forward plans this year to build new industrial parks, Vande Zande said.
The shortage of industrial sites could lead to more infill development in the City of Milwaukee and other older suburbs such as West Milwaukee, Barry said. Outlying areas farther away from the population base are less desirable for industrial sites, he said.
Vande Zande said the hottest suburban areas for industrial development will be Oak Creek, Franklin, New Berlin, Oconomowoc, Menomonee Falls and Germantown.
What other areas will be hot sports for commercial real estate development in 2005?
The I-43 and Highway 60 interchange in Grafton may become a major new retail hub for the metro area. The interchange has already attracted Target, Home Depot, Colder’s and other stores. A Sam’s Club store and a Costco have been proposed for the interchange.
Marcus Corp. has announced plans to build new theater complexes in Sturtevant, East Troy and the Town of Brookfield. The company’s West Point and West Town theaters in Waukesha and the City of Brookfield will eventually be closed.
Wal-Mart has plans to build new Supercenter stores in Germantown, Hartford, Mukwonago and Sheboygan.
Other prime retail locations in 2005 will include Delafield, Pewaukee, the 27th Street corridor between Oak Creek and Franklin and County Line Road in Germantown.
Infobox:
Key projects
Pabst Farms – A $1 billion residential, retail, medical and office planned development at I-94 and Highway 67 in Oconomowoc and the Town of Summitt. Retail development is expected to begin this year, including a new Pick n’ Save store. Aurora Health Care plans to build an $85 million, 88-bed hospital there and a 1.1 million-square-foot, $65 million Roundy’s warehouse was recently completed.
PabstCity – A $395 million proposed redevelopment of the 22-acre former Pabst brewery in downtown Milwaukee into a regional entertainment complex with stores, a 16-screen movie theater, a House of Blues, residences and office space.
Bayshore Mall – A $300 million project to transform the mall into a town center, expanding the retail space from 560,000 square feet to 1.2 million square feet, and adding 180,000 square feet of office space and 200 apartments and condominiums.
GE Healthcare – An $89 million, 506,000-square-foot office building under construction in the Milwaukee County Research Park in Wauwatosa. The building will open in 2006.
Harley-Davidson Museum – A $60 million complex to be built in the Menomonee River Valley at 6th and Canal streets. The project, which will include a museum, a retail store, meeting rooms, banquet space, offices and a restaurant, is not expected to open to the public in 2008. The City of Milwaukee will move its Tracer Yards public works center at the stie to the former Tower Automotive site on the north side of the city by 2006.
Summit Place – A $45 million conversion of former Allis Chalmers complex in West Allis into a 650,000-square-foot office complex.
Pier Wisconsin – A $30 million freshwater exhibition center along Milwaukee’s lakefront will feature the Great Lakes Aquatarium and will be the new home for the Discovery World Museum and the Denis Sullivan schooner. The complex is expected to open later this year.
Milwaukee Public Market – A $10 million project at Water Street and St. Paul Avenue. The market will sell fresh produce year-round and will link downtown Milwaukee with the Historic Third Ward. The market is expected to open later this year.
January 21, 2005, Small Business Times, Milwaukee, WI
