The southeastern Wisconsin industrial real estate market continues to post impressive levels of absorption and lower vacancy rates.
“The industrial market is fine,” said Roger Siegel, the leader of the Milwaukee industrial group for Jones Lang LaSalle. “You haven’t seen the amount of deal velocity (frequency) that you did from 1980 to 2000. But it’s a pretty good market.”
“Generally the picture is pretty strong,” said James T. Barry III, president of Milwaukee-based Cassidy Turley Barry. “Deal velocity is not where we’d like to see it, but there is a slow and steady movement in the right direction.”
The region’s industrial real estate market absorbed 860,000 square feet of space during the first quarter, the 12th consecutive quarter of positive industrial space absorption for the region, according to Xceligent. The region’s industrial space vacancy rate dipped from 6.5 percent in the fourth quarter of 2012 to 6.4 percent in the first quarter of 2013.
The Milwaukee region remains one of the strongest industrial real estate markets in the nation. Its vacancy rate is well below the national 8.5 percent industrial space vacancy rate, according to Cassidy Turley’s first quarter report. The region ranked 15th highest, out of 68 markets tracked, for industrial space absorption in the quarter, according to Cassidy Turley.
Will the continued space absorption and declining vacancy rate finally lead to a boom in industrial real estate development in the region? Is more spec development going to occur, or will most of the new development be for build-to-suit projects?
“I think we’re probably in the very embryonic stages (of a spec industrial space development surge),” Barry said. “I think what we need to see happen is probably more (deal) velocity and notoriety of deals to justify a pro forma for a new (spec) building.”
The market’s vacancy rate has gotten to a point that quality available industrial space is becoming harder to find, so more build-to-suit developments should occur, Barry said. There is “not a complete shortage” of space in the region, but in some areas space is becoming harder to find, he said.
“Certainly with a 6.4 percent vacancy rate there are going to be shortages in certain geographic areas and in certain size categories,” Barry said. “I think there will be more build-to-suit (development).”
“There’s a real absence of quality product,” Siegel said. “It’s very hard to find buildings with cranes and power that is well distributed.”
The region’s industrial space vacancy rate peaked at 9.6 percent in late 2008 during the Great Recession and has been mostly declining ever since. The region’s first quarter 6.4 percent industrial space vacancy rate is the lowest since it was at 5.98 percent in the third quarter of 2006, according to Xceligent.
The Kenosha County and Waukesha County industrial markets had the most impressive first quarter. Kenosha County absorbed 348,860 square feet of space and Waukesha County absorbed 333,931 square feet of space.
In Kenosha County, S.C. Johnson leased 150,000 square feet of space and APL Logistics leased 134,170 square feet of space, both in Pleasant Prairie.
Notable leases in Waukesha County include Lindenmeyr Munroe, which leased 39,339 square feet of space in Pewaukee and Wisconsin Oven Corp.’s lease of 27,000 square feet of space in Waukesha.
First quarter industrial space absorption, by county (from Xceligent data):
- Kenosha, 348,860 square feet
- Waukesha, 333,931 square feet
- Washington, 143,068 square feet
- Racine, 32,000 square feet
- Ozaukee, 9,268 square feet
- Sheboygan, 0 square feet
- Walworth, -13,403 square feet
- Milwaukee, -31,966 square feet
Kenosha County has benefitted from its position in the I-94 corridor between Milwaukee and Chicago just north of the Illinois state line. Several Illinois firms seeking larger and less expensive space, and some concerned about the state of Illinois’ financial problems, have moved operations to Kenosha County in recent years. The county’s industrial space vacancy rate has plunged from 11.03 percent in the first quarter of 2012 to 7.85 percent in the first quarter of 2013.
Waukesha County’s vacancy rate has fallen from 5.06 percent in the first quarter of 2012 to 4.04 percent in the first quarter of 2013.
Despite lower absorption levels, Racine County’s vacancy rate remains low, at 3.06 percent in the first quarter.
First quarter industrial space vacancy rates, by county (from Xceligent data):
- Racine, 3.06 percent
- Waukesha, 4.04 percent
- Sheboygan, 4.47 percent
- Washington County, 4.58 percent
- Walworth, 5.19 percent
- Kenosha, 7.85 percent
- Ozaukee, 8.69 percent
- Milwaukee, 9.45 percent
Increased absorption and lower vacancy could result in price increases for the sale and lease of industrial space in the area. Industrial real estate prices in the area have held up well, even during the Great Recession, Siegel said.
“Quality industrial real estate has held its value, even on the northwest side (of Milwaukee),” he said.
Industrial real estate prices are already rising in some part of the region and for some specific product types, Barry said. During the past year industrial space lease rates in Waukesha, Washington and Ozaukee counties have increased, but lease rates in other counties in the region have dipped, according to the Xceligent report.
As prices rise and space becomes harder to find developers will have more opportunities to build new industrial space in the region. There are only a small number of developers currently building new industrial buildings in the area, which is one reason there has not been more development, Barry said. One of the most active is Milwaukee-based Zilber Property Group, which is working on plans for a 100,000 to 175,000-square-foot speculative industrial building in Pleasant Prairie and a 90,000-square-foot speculative industrial building in New Berlin.
Most national developers are concentrating their efforts on other markets right now, Barry said. But City of Industry, Calif.-based Majestic Realty Company plans to build a 1.18-million-square-foot warehouse/distribution center on an 87.5-acre site east of County Highway H and Bain Station Road in Pleasant Prairie. The company plans to do the project in two phases.
In addition, CenterPoint WisPark Land Company LLC, a joint venture of Milwaukee based Wispark LLC (the real estate development arm of Wisconsin Energy Corp.) and Oak Brook, Ill.-based CenterPoint Properties, plans to build a 471,403-square-foot industrial building in Pleasant Prairie in Pleasant Prairie. The building will be occupied by Taiwan-based Ta Chen International Inc., which will use it as its new Midwest distribution center.
In order for more industrial development to occur in the region, the national economy needs to improve, Siegel said.
“It’s very hard to get excited about an economy with a 7 percent unemployment rate,” he said.
Barry said the region’s industrial market will likely continue to post gains in absorption and a declining vacancy rate.
“I think it’s going to continue in a manner that is, for the time being, slow and steady,” he said.
