Most of downtown Milwaukee’s real estate activity has been occurring in conjunction with efforts to revitalize the city. Additionally, real estate developments in the western suburbs are filling gaps between primary and secondary markets, which is helping to carry the Milwaukee metropolitan area out of its recent economic slowdown.

Major developments are starting to create steady activity, which will lead to future in-fill opportunities. These include downtown Milwaukee’s lifestyle center PabstCity, and also Pabst Farms, a 1,500-acre, mixed-use development located west of the city. The resulting job growth will ultimately provide Milwaukee and the metropolitan area with a positive economic forecast.

Retail

The supermarket business has been dominating the retail segment. For example, Milwaukee-based Roundy’s, the parent company of Pick ‘n Save (the largest grocer in the area), has aggressively been pursuing new food stores. Last year, Roundy’s acquired the Copps chain, and it recently acquired the Madison, Wisconsin, operation of Kohl’s Food Stores — converting them to Copps.

Fleming Companies previously operated throughout the state as Rainbow Foods, Festival Foods and Sentry, and the majority of these operations were run by franchisees. Fleming’s recent Chapter 11 bankruptcy filing — along with Kohl’s Food Stores’ decision to exit the market — has set off a real estate game of musical chairs among the strong players.

Sheboygan, Wisconsin-based Fresh Brands, which operates under the Piggly Wiggly and Dick’s Supermarket names, has been selectively acquiring operations. Piggly Wiggly, which has traditionally stayed in the suburban, mid-tier and small-town markets, and Roundy’s and Jewel-Osco, which have been rapidly expanding into the urban areas, are expected to acquire the best sites.

In markets with an oversupply of stores, such as in Pewaukee, Wisconsin, one of three centers may be left without a grocery anchor due to dominant competitors in the other centers. Because of a shortage of 25,000-square-foot to 50,000-square-foot box retail space, vacancies may need to be subdivided to fill quickly.

Home improvement stores are driving major new development in the area. For example, The Home Depot is developing a new store in Germantown, Wisconsin. In addition, Menards will build a new store at the former Northridge Mall site and at a proposed new site off of Highway 100 in Hales Corner, Wisconsin. The Northridge development will be co-anchored by a Pick ‘n Save grocery store. Lowe’s Home Improvement Warehouse is expected to enter the market this year. The company has hired a broker to assist with site selection.

There are several new retail sites to keep an eye on. For example, the Pabst Farms development, located on Interstate 94 in Oconomowoc, will feature more than 130 acres of retail space.

Additionally, Delafield, Wisconsin, has a new 170,000-square-foot center that is being developed by TOLD Development and the Weissgerber family. The project fills the last remaining site on the Interstate 94 and Highway 83 Interchange, and it will compete with Pabst Farms for specialty retailers. However, Delafield’s development has a timing advantage and the benefit of more than 700,000 square feet of adjacent retail businesses. On a long-term basis, however, Oconomowoc will probably be a stronger location because of its well-planned and centrally located site.

Closer to the city, Boulder Venture and the Canyon-Johnson Urban Fund are redeveloping the former Capitol Court enclosed mall, located at 60th Street and Capitol Drive. The 606,000-square-foot redevelopment — renamed Midtown Center — is currently anchored by Pick ‘n Save and Wal-Mart, and it has room for other big box retailers.

PabstCity, located at the former site of Pabst Brewing Company in downtown Milwaukee, is another project to watch. When completed, the complex will include approximately 350,000 square feet of entertainment-oriented retail space along with 200,000 square feet of office space, 300 loft apartments and a 50,000-square-foot youth basketball facility.

— Stewart Wangard is president of Milwaukee-based Wangard Partners.

Multifamily

Development in the Milwaukee multifamily market has slowed as vacancies in the overall market have risen from the 7 or 8 percent range to the 8 or 9 percent range. The market has felt the impact from historically low interest rates and the resulting increase in home ownership. Concessions, such as first month’s rent free or coverage of minimal moving expenses, are being offered to prospective tenants more than ever before in this market.

However, condominium development on Milwaukee’s riverfront is booming. For example, Renner Architects is developing the six-story Harbor Front project at 601 E. Erie St., which will feature approximately 160 one- and two-bedroom condominiums units. Also, 53 units — out of 64 units — have been pre-sold at the Water Front project, located on Water Street. Gaslight Lofts, a 138-unit project, and Jefferson Block Apartments, a 217-unit project, are both under development a few blocks south of Harbor Front. Finally, on Milwaukee’s northeast side, Legacy at Shorewood LLC is converting a former nursing home into condominium units.

Some multifamily development is also taking place in growing suburban areas such as Oconomowoc, Brookfield and Franklin, as well as in secondary markets such as Kenosha and Madison. Strong demand in the suburban markets and job growth in the secondary markets are driving these developments. Oconomowoc, with the Pabst Farms development just gearing up, will fuel more multifamily growth.

Investment activity in the Milwaukee area has remained stable, yet almost staid during the past several years. Investors are faced with several contradictory trends. For example, fundamentals such as asking rents and vacancy rates have shown weakness, yet sales prices have remained strong — especially for Class A properties.

As a result, these trends have increased demand and competition for real estate and have pushed cap rates lower. The lack of supply has also impacted sales as many investors refuse to pay higher prices, instead preferring to refinance their existing properties. Therefore, higher quality multifamily properties are expected to continue to trade in the 7.5 percent to 8.25 percent range in the near term. Lack of inventory should continue to constrain investment activity. The most significant development in the near future is expected to occur in the I-94 corridor heading west of Milwaukee.

— Robert LeClaire is senior vice president with Milwaukee-based Wangard Partners.

Industrial

Current trends in Milwaukee’s industrial segment show an increase in redevelopment projects. This includes urban in-fill projects, such as property located in the Menomonee Valley, Glendale, Third Ward and Walker’s Point areas. Another trend is the conversion of buildings to new uses including the Metro Milwaukee Sewage District (a pump station being converted to retail space), Lo Duca Bros. (an office building being converted to residential condominiums) and Pabst Brewery (an industrial complex being converted to a mixed-use project).

Milwaukee is typically below the national average for overall industrial vacancy. As a result, while the 7.6 percent to 8.1 percent vacancy rate for the metropolitan area appears low, it is actually quite high. (The metropolitan area encompasses four counties: Ozaukee, Washington, Milwaukee and Waukesha.) The asking rental rates have remained flat for 2 years, but free rent, generous tenant improvements and options to renew — or even purchase — are more common now.

There has been a decrease in land sales and speculative building construction. Due to the economy, new construction has slowed — thereby creating an abundance of primary and secondary sublease space on the market. While sublease space typically is leased “as is” or with minimal sublessor-funded improvements, the rates going in can be 30 percent less than the primary lease rate.

There has been a slowdown in new business park developments because of the drop in new construction. There is also a lack of available land suitable for large industrial developments, especially in Waukesha County.

Trends in new multi- and single-tenant developments include clear heights of 24 feet instead of 18 feet, metal halide lighting, painted roofs and walls, windows in warehouses and tilt-up construction. However, Milwaukee is still not seeing warehouse/distribution facilities with 30-foot clear heights like in Chicago.

Tax increment financing (TIF) has been the biggest contributor to new developments in Wisconsin for the past decade or so. In many instances, they have even been paid off well before projected.

Some of the most active developers in the area include Wispark, which will be developing some mixed-use projects within Pabst Farms; REITs such as CenterPoint Properties Trust, First Industrial Realty Trust, and Liberty Property Trust; and many local private firms. Areas to watch in the near future include Waukesha County, which lately has been the hottest market for new development, and the Menomonee Valley in Milwaukee, which is experiencing some redevelopment of existing buildings and the clean up and conversion of raw land.

— Marc Schmidt and Matthew Quest are vice presidents with Milwaukee-based Wangard Partners.

Office

The downtown Milwaukee office market has seen signs of revitalization in 2003. The suburban sprawl that drove tenants west in the past has slowed. While there have been some significant moves to the suburbs in the 1st quarter and 2nd quarter of 2003, tenants are also committed to the downtown market through lease extensions and renewals of existing tenants. Downtown Milwaukee now has more than 13 million square feet of office space, and it continues to grow. The downtown trend seems to be renovating existing Class B and Class C buildings, and developing new and versatile Class A buildings that include a mixed-use product.

For example, two new downtown office buildings — 875 E. Wisconsin Ave. and Cathedral Place, located at 555 E. Wells St. — have added approximately 400,000 square feet of Class A space to the downtown market. Roundy’s announced in April that it is moving its headquarters (500 employees) from its suburban Pewaukee location to the 875 E. Wisconsin Ave. building. Other major tenants include Ernst & Young, Artisan Partners and C.G. Schmidt Inc. (the buildings’ general contractor). In addition to office space, Cathedral Place, a $52 million downtown development, will consist of first-floor retail space and upper-level condominiums. The project is scheduled for completion by year’s end.

Also downtown, under the 1999 Interstate Construction Agreement proposed by former Mayor Tommy Thompson, former County Executive Tom Ament and Mayor John Norquist, the city is removing the Park East Freeway Spur and replacing it with a six-lane boulevard. Named the Park East Redevelopment Project, it will provide approximately 26 acres of prime downtown property. It is conservatively estimated that the redevelopment project will attract $250 million in new investment. Development in this freeway corridor will consist of a combination of office, retail and residential uses. It will also improve the connection between downtown and nearby residential neighborhoods, creating a more accessible downtown.

Although Class A vacancy rates remained high in the downtown east market at the end of 2002, tenants and developers alike are being drawn to the excitement of the downtown market. High quality residential condominium conversions and developments continue to appear along the Milwaukee River adding vitality to the entire city. The Southeastern Wisconsin Planning Committee is looking into upgrading the area’s freeway system including lane additions along the I-94 and Interstate 43 Marquette Interchange. With the proposed changes to the Marquette Interchange, downtown Milwaukee will become a much more user-friendly environment and will have the amenities that are necessary for a vibrant future.

— John Thomsen is office/retail associate with Milwaukee-based Wangard Partners.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.