Wisconsin Avenue, the Main Street of downtown Milwaukee, is going through a major transition as several prominent office buildings have sold recently or could be changing hands soon.
The surge of office building sales activity on Wisconsin Avenue is a reflection of a hot investment market nationally for commercial real estate, which has priced some investors out of primary office markets and prompted them to look for deals in smaller markets like Milwaukee.
“The investment market in the last 18 months has heated up tremendously,” said Dan Jessup, executive vice president of JLL’s Milwaukee area office.
“There’s a plethora of capital in the market,” said Lyle Landowski, a partner with Colliers International|Wisconsin. “The investor market on a national scale is heating up for the secondary markets.”
Some office building owners in Milwaukee are trying to take advantage of the hot investor market, leading to several deals and sale opportunities on Wisconsin Avenue.
The most significant recent Wisconsin Avenue deal, announced earlier this year, was the $74.3 million sale of the 30-story 411 East Wisconsin Ave. building to Riverview Realty Partners, a Chicago-based affiliate of Stamford, Conn.-based Five Mile Capital Partners LLC, which bought the building from a tenants-in-common ownership group. Riverview Realty said it will make $17.5 million in improvements to upgrade the building’s elevator systems, HVAC system, lobby, roof and adjacent parking structures.
Key to the deal was Quarles & Brady LLP extending its lease of 186,000 square feet for 10 more years. The law firm occupies the top eight floors of the 654,165-square-foot building. Other major tenants in the building include von Briesen & Roper s.c., which leases about 70,000 square feet of space on three floors.
The renovation plans could help revitalize the 411 building, which at the time of the sale earlier this year had a vacancy rate of about 23.5 percent.
The 411 building sold for well below its assessed value of $87.7 million, according to city records.
The First Financial Centre at 700 N. Water St. is another Wisconsin Avenue building that sold recently. The 14-story, 153,201-square-foot building, located at the northeast corner of Water Street and Wisconsin Avenue, was sold to a Brookfield-based group led by real estate investor Bachan Singh for about $3.3 million, according to state records.
The building has an assessed value of $3.9 million, according to city records. It is mostly empty and is only 32.87 percent occupied, according to Loopnet.com.
The Milwaukee area office market has struggled for years, but has made some improvement recently. The region’s office space vacancy rate dipped to 19.09 percent in the third quarter, down from 20 percent at the end of 2013, and the downtown east class A office market has a vacancy rate of 9.6 percent, according to Xceligent.
Some real estate investors are interested in Milwaukee office properties because they see them as the last opportunity to get a bargain on commercial real estate in the area, said Patrick Gallagher, president and CEO of Milwaukee-based Siegel-Gallagher. Industrial real estate and apartments rebounded much quicker from the Great Recession and the area’s retail real estate market “has turned the corner,” while the area’s office market is “still anemic” and a place where investors can get a deal, he said.
“Buyers have dissipated the other asset classes,” Gallagher said.
Office building owners that want to sell are hoping to take advantage of the increased interest from investors. Two other major Wisconsin Avenue buildings are for sale and a third sale appears imminent.
The Chase Tower, a 22-story office tower at 111 E. Wisconsin Ave., is for sale, according to numerous commercial real estate sources. This is the third time the building’s owner, Toronto-based Brookfield Asset Management Inc., has tried to sell the Chase Tower since it bought the 472,507-square-foot building in 2006. The building was part of a portfolio of buildings Brookfield Asset Management bought from JPMorgan Chase. The firm paid $45.8 million to purchase the Chase Tower in 2006, but the building now has an assessed value of $21.89 million, according to city records.
JPMorgan Chase & Co. remains the anchor tenant in the building. Other tenants include Infinity Healthcare, WUWM Public Radio and the law firm of O’Neil, Cannon, Hollman, DeJong & Laing. The building also has three retail tenants: Capriotti’s Sandwich Shop, Dunkin’ Donuts and Café Dulce.
JPMorgan Chase currently leases about half of the building, or 235,000 square feet. The firm recently restructured its lease to reduce its footprint in the building down to about 175,000 square feet, in exchange for elimination of a clause in the lease that would have allowed it to terminate the lease in 2016, according to a source. JPMorgan Chase will reduce its footprint in the building by the end of 2015. Its lease expires in 2021.
The building is currently about 84 percent leased. The reduction of the JPMorgan Chase lease will reduce the occupancy rate to about 72 percent. But the elimination of the termination clause for the JPMorgan Chase lease could make it easier for Brookfield Asset Management to sell the building.
In addition, Brookfield Asset Management is making significant improvements to the parking structure, located on the block south of the building. The firm is in the middle of a two-year structural reinforcement project, according to a source.
The iconic Gas Light Building, a 20-story, 131,727-square-foot Art Deco inspired office building built in 1930 at 626 E. Wisconsin Ave., is also for sale. The building, known for its weather beacon “flame” lamp, is owned by a group of Wisconsin-based investors. It has an assessed value of almost $10.7 million, according to city records.
The building is 87 percent occupied and is anchored by the U.S. Forest Service, which occupies 91,767 square feet of space on nine floors.
Meanwhile, the 250 Plaza building, a 20-story office building at 250 E. Wisconsin Ave., is close to being sold. The building is under contract to a buyer that is doing final due diligence work.
Investors are increasingly seeking opportunities to purchase commercial real estate to diversify their portfolios, said Bill Bonifas, executive vice president of CBRE. An influx of foreign investment has priced some U.S. investors out of major U.S. real estate markets, which has led them to consider investments in secondary and tertiary markets like Milwaukee, he said.
“The capital markets are hot,” Bonifas said. “There are plenty of investors out there.”
Many of the office buildings that have been sold or are for sale in Milwaukee are priced attractively in the eyes of out-of-state investors, said Jack Jacobson, principal of Milwaukee-based NAI MLG Commercial.
“Investors have been having a hard time getting a good yield in other markets,” he said. “Milwaukee, and Wisconsin in general, is becoming more interesting (to those investors). The really great properties were all bought up in New York, Chicago and other large markets.”
Deep-pocketed institutional investors have priced other investors out of primary office markets, leading more investors to look for commercial real estate deals in markets like Milwaukee, Jessup said.
Secondary or tertiary office building markets like Milwaukee have assets available to investors at lower cost, and therefore less risk, but the trade-off is that assets in the smaller markets have less income growth potential than assets in primary markets, and therefore less opportunity for reward, Landowski said.
“The financial model is different,” he said.