HEARTLAND SNAPSHOT, MARCH 2005

Milwaukee Office Market                                          

The Milwaukee office market has managed to ride out the recent recession without suffering as much as some other larger metropolitan areas, according to Steve Pape, vice president of Milwaukee-based Inland Companies. “Vacancy rates have increased slightly in all submarkets, varying from 1 percent to 2 percent during the past 2 years, which is minimal when compared to other areas of the country,” he says. “One of the major reasons for this was the lack of overbuilding by area developers, and the developers that did venture into new projects only did so after securing an anchor tenant.”

Office development has been slow during the past 2 years; however, the majority of new development has taken place in the downtown submarket, which consists of 12.4 million square feet of office space. This submarket includes the areas east and west of the Milwaukee River, The Historic Third Ward and Walker’s Point. The current vacancy rate in this submarket is 16 percent. “The booming condominium market and new retail and entertainment options have all contributed to the excitement surrounding downtown,” Pape says.

The last year brought the completion of two new Class A office towers to Milwaukee’s downtown area: a 210,000-square-foot tower at 875 East developed by Irgen’s Development and a 220,000-square-foot tower at Cathedral Place developed by Joel Lee.  Artisan Partners, Roundy’s, Ernst & Young and Daymon Worldwide enabled 875 East to end the year with nearly 100 percent occupancy. In addition, tenants such as Whyte Hirschboeck and Deloitte & Touche moved into Cathedral Place to anchor this nearly 100 percent occupied building. “The immediate success of these two new office buildings sparked the announcement of Ovation Plaza by Irgen’s Development, a 324,000-square-foot mixed-use development located in downtown Milwaukee,” Pape says. “This project will require a large anchor tenant to break ground, and Ovation Plaza and other rumored new developments will be competing for a few large tenants with lease expirations in the next few years.”

Though not at the same level as downtown Milwaukee, the suburban submarket, which consists of 14.7 million square feet of office space in Brookfield, Pewaukee, Waukesha, Park Place/Northwest, West Allis and the Mayfair Road corridor, is experiencing growth as well. The expansion of the western suburbs continues with the announcement of two new office buildings: the proposed River Ridge Office Plaza and Stone Ridge IV, which is being developed by Irgen’s in Pewaukee. The 56,000-square-foot Stone Ridge IV building will be anchored by the Markel Corporation, which will be vacating a neighboring building in the coming year. Both properties are located along the I-94 corridor in Pewaukee near the intersection of Highway 164.

One of the largest lease transactions in the Milwaukee metropolitan area in recent years took place in 2004. GE Medical agreed to lease approximately 500,000 square feet in a new office building being built for them in the Milwaukee County Research Park near the freeway interchange of Highway 45 and I-94. This building will serve as headquarters for the company's information technologies, ultrasound and e-business divisions and is slated for completion later this year.

Another notable new development was Northwestern Mutual Life’s (NML) office campus on South 27th Street in Franklin. NML recently completed a 575,000-square-foot building, which is the first of a series of buildings planned for this site. Summit Place, a 650,000-square-foot office redevelopment in West Allis, landed a number of tenants coming from newer Class A buildings, including Alterra Healthcare (44,000 square feet) and IKON Office Solutions (14,000 square feet). “To date, nearly 200,000 square feet of office space has been leased in this development due to its high-end finishes at mid-level lease rates,” Pape says.

Irgens Development Partners has announced The Waters II at Park Place, a proposed building on one remaining site located between the Park Place Towers on the northwest side of Milwaukee in the Park Place submarket.  “In addition to the Milwaukee County Research Park, Park Place remains one of the few areas with tracts of land available for office development,” Pape says.

While no new developers have become active in Milwaukee, there has been an influx of new investors to the marketplace. Transwestern Commercial Services of Chicago entered the Milwaukee market when they acquired the 1 million-square-foot Milwaukee office portfolio of Great Lakes REIT.  Hamilton Partners, also of Chicago, acquired the 197,000-square-foot Two Park Plaza office tower on Milwaukee’s northwest side from Teacher’s Insurance of New York (TIAA). Most recently, an Idaho-based real estate investment company, DBSI Group, completed a transaction in Brookfield by acquiring 400 and 440 South Executive Drive, which total 160,000 square feet.

No single tenant is absorbing a majority of the vacant office space in Milwaukee. However, there are a few large local companies that have signed leases recently for a substantial amount of space. M&I Bank recently signed leases for 100,000 square feet at the Milwaukee Center downtown and 60,000 square feet at One Park Plaza on Milwaukee’s northwest side.

Class A rates remained stable in Milwaukee during the recent recession, with Class A rental rates in the downtown submarket ranging from $22 to $26 per square foot gross and suburban Class A rates ranging from $21 to $25 square foot gross. Developers of new buildings were able to get their quoted rates as many tenant upgraded from older Class B buildings. This in turn affected the Class B buildings by forcing landlords to reduce their rates and offer concessions in an effort to retain existing tenants and attract new tenants.

The current marketplace is seeing a trend of improved activity. Economic indicators are positive, and some employers have expressed that they will be hiring in 2005. “This bodes well for the expansion of current tenants or tenants exploring the market for options,” Pape says. “Rates should stabilize and incentives should begin to diminish as occupancy slowly improves. The downtown submarket will continue to be the most exciting area for new office developments in the next year with a number of developers proposing new office buildings. Additionally, the proposed Pabst City redevelopment and the land available in the former Park East Freeway corridor will also play an important role in the excitement surrounding downtown Milwaukee.”

©2005 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.