CITY HIGHLIGHT, MAY 2004

MILWAUKEE’s REAL ESTATE MARKET STANDS STRONG
Greg Moyer, Steven Pape, Neal Driscoll, Mike Fardy, Steve Sewart, Tom Shepherd and Peter Langhoff

Milwaukee has held steady despite the recent reccession. For example, in the multifamily market, there is plenty of capital vying for the favorable returns typical to Milwaukee. The office market is also staying the course with only a small rise in vacancy rates. On the industrial side, the city is seeing a shift from heavy industrial to traditional office/service space. Milwaukee’s retail market is also alive and well with the redevelopment of four former enlcosed malls and several new developments underway. PabstCity, is one of the largest projects currently under development in the area. The 1.2 million-square-foot mixed-use project is expected to draw several million visitors annually. (See sidebar on page 22.)

Multifamily

Investment activity in the Milwaukee apartment sector should accelerate this year, albeit modestly, as buyers and sellers rise above the general malaise that overcame the market in 2003. However, Milwaukee’s export-oriented manufacturing continues to weigh down the pace of economic recovery. Modest job growth of 0.7 percent is expected in 2004, following the 1.4 percent decline recorded in 2003.

Investment activity in the multifamily market slowed last year because of the uncertainty regarding the economy’s direction and the effects that further softening would have on market fundamentals. Despite this decreased investment activity, prices held firm at $41,220 per unit. Milwaukee’s investment market continues to be filled with local and out-of-state private capital vying to take advantage of the more favorable returns typically achieved in Milwaukee when compared to most first-tier cities. Cap rates for Class A properties range from 8.75 percent to 9.25 percent, while Class B and Class C cap rates run 9.5 percent and up. This year, investors will actively pursue Class B and Class C properties within portions of the city, but they will also target suburban communities that are expected to outperform the metropolitan area as a whole, including the Greenfield, Greendale, Franklin and Waukesha County submarkets.

Outside of this year’s modest economic outlook, the issue remaining in Milwaukee is the level of tenant demand that exists for local multifamily housing. While construction of apartments remains relatively low, investors should not ignore the heavy dose of condominium construction in the market, particularly in downtown Milwaukee. When demand slows for condominium purchases, a number of for-sale units could become direct competition for the rental market. In Cudahy, a proposed condominium project recently reverted to rental units when the depth of demand proved to be less than expected. Therefore, while only 500 rental units are expected next year in the metropolitan area, there are more than 3,200 condominium units in various phases of the construction pipeline that could pose a direct threat. As a result, investors should focus on the lower tiers of the market, particularly in the suburbs. The majority of capital investment downtown will continue to come in the form of development or conversion projects, as builders feed off of the hype created by the rejuvenation in the area.

Apartment operators can expect average vacancy rates to remain stable this year at 10 percent. Limited job growth during the year will not generate significant apartment demand, and the ever-growing supply of condominiums will prove to be a hindrance. Improvement is expected in the Greenfield/Greendale/Franklin and West Waukesha County submarkets, and concessions will likely tighten in these areas. The overall average asking rent is expected to rise 1 percent this year, to $700 per month. Effective rent growth should increase by 3 percent.

— Greg Moyer is a managing director at Marcus & Millichap Real Estate Investment Brokerage Company. He oversees the firm’s investment brokerage operations in Chicago, Indianapolis and Milwaukee.

Office

The Milwaukee office market has managed to ride out the recent recession without suffering as much as larger metropolitan areas. Vacancy rates increased from 3 percent to 5 percent in the city’s submarkets during the past 2 years, which is minimal when compared to other areas of the country.

There has been a lack of new developments by area developers. Those who did venture into new projects only did so if they had an anchor tenant secured for 50 percent or more of the space. Two developments were completed in the downtown market last year. Van Buren Management developed the 200,000-square-foot Cathedral Place, which is anchored by the law firm of Whyte Hirschboeck Dudek (60,000 square feet); and Irgens Development Partners completed 875 East Wisconsin Avenue, which is anchored by the investment firm Artisan Partners (50,000 square feet). Currently, both buildings are nearly 100 percent occupied with the addition of major tenants such as Deloitte & Touche (70,000 square feet) at Cathedral Place, and Ernst & Young (27,000 square feet) and Roundy’s Inc. (120,000 square feet) at 875 East Wisconsin Avenue. These recent projects show the demand for new office space in the downtown market, but they have created large vacancies in the older office towers.

Additionally, the recent demolition of the Park East Freeway spur and the proposed development of PabstCity are two other downtown projects to note. PabstCity is a retail, entertainment, housing and office complex planned for the former Pabst brewery. Both of these developments could be major draws for area developers, tenants and national players.

There is no doubt that the downtown submarket has been the most exciting area of development in the past year, but the suburban markets continued to be attractive to developers as well. Liberty Property Trust completed a 90,000-square-foot building that is anchored by eFunds (85,000 square feet), and Irgens Development Partners is currently completing a 30,000-square-foot build-to-suit building for the architectural firm of Plunkett Raysich. Both of these projects are located in the Northwest portion of Milwaukee County in the Park Place submarket. This area is one of only two areas left near the center of the metropolitan area where large tracts of land are available for development. The other area is the Milwaukee County Research Park near the Zoo Interchange, where GE Medical plans to build a 420,000-square-foot building to house its information technology division.

Brookfield’s growth has consumed most available land for build-to-suit office space. However, Big Bend Development is developing new Class A office buildings in Bishops Woods that will total approximately 300,000 square feet. Also, VK Developments recently acquired the 29-acre former WTMJ Radio site along Bluemound Road in Brookfield.

Other options for development include redeveloping urban infill areas or building on land further to the west along the Interstate 94 corridor. For example, Wispark Corporation has taken advantage of this area with the development of Pabst Farms, a 1,600-acre mixed-use project in Oconomowoc.

— Steven Pape is vice president for Milwaukee-based Inland Companies.

Industrial

The Milwaukee metropolitan industrial market is slowly seeing a transformation into institutional quality industrial space, similar to other major Midwest markets such as Chicago, Minneapolis and Indianapolis. Milwaukee is historically 75 percent owner-occupied, and the shift from heavy industrial to traditional distribution and office/service space is evident throughout the market. Developers who are building distribution space (either speculative or build-to-suit) within the metropolitan area are focusing on floor plates of 50,000 square feet to 150,000 square feet with a typical clear height of 24 feet. For office/service space (a.k.a. flex or office/showroom space), developers are targeting 30,000-square-foot to 70,000-square-foot buildings with clear heights of 18 feet.

A majority of the successful industrial developments that have taken place since September 11, 2001, have been infill locations such as the Stadium Business Center developments in West Milwaukee, near Miller Park. Brownfield redevelopment opportunities near Miller Park, and the 120-acre Menomonee Valley industrial park, are revitalizing outdated industrial zones. Major infrastructure plans between Miller Park and downtown in the next 12 months to 18 months will create many synergies between the new industrial developments and Milwaukee’s central business district (CBD). Significant developments are underway and are, in some cases, progressing to second and third phases through the work of developers such as Real Estate Recycling.

Additionally, development in the western suburbs is highlighted best by Wispark Corporation’s 1,600-acre mixed-use development, Pabst Farms. Roundy’s has proposed a 900,000-square-foot distribution facility as a major catalyst for development within the park. Expansion to the west continues to narrow the gap between Milwaukee and Madison, Wisconsin, along the Interstate 94 corridor.

Once the economy shows tangible indicators of a recovery, suburban industrial parks such as Franklin Business Park, New Berlin Business Parks and Waukesha County’s industrial parks should rekindle the activity levels of the late 1990s and early 2000s. A significant amount of relatively new, high-quality space within these adolescent industrial parks will provide space opportunities for emerging companies and for those that are retooling and growing.

Multiple industrial land parcels south of the airport market in Oak Creek are creating speculative and build-to-suit opportunities for a number of developers that have control of land, including Opus, MIE, Capstone, Quadrangle and Briohn Development. Opus has control of 90 acres and has proposed an initial development of 140,000 square feet to kick off its project on the northwest corner of Howell Avenue and Oakwood Road. MIE and Capstone are in different stages of speculative office/showroom and distribution development. Briohn Development is active in the city of Cudahy, east of the airport.

It is no surprise that, given the significant manufacturing base within Milwaukee, the industrial market has been significantly impacted by high vacancy rates. For example, Milwaukee County currently has an industrial vacancy rate of 9.1 percent; Waukesha County has a vacancy rate of 7.8 percent; and Washington County has a vacancy rate of 7.6 percent.

Based on activity so far this year, many industrial opportunities should be available in the next 6 to 8 months that will benefit end-users and building owners. One factor is certain: Current development in the suburban markets, and most importantly within the infill locations close to Milwaukee’s CBD, shows that the health of Milwaukee’s industrial market is returning.

— Neal Driscoll, Mike Fardy, Steve Sewart and Tom Shepherd are industrial brokers for Milwaukee-based Inland Companies.

Retail

Milwaukee’s retail real estate market is alive and well. While this secondary midwestern market might not experience the stratospheric highs of larger metropolitan markets, it also does not suffer the excessive vacancies, over-building and rental rate fluctuations that larger cities commonly face. Milwaukee’s star is clearly on the rise. Most notable is the redevelopment of four former enclosed malls in the metropolitan area. Equally significant are several new retail developments in the planning stages. Finally, Milwaukee is squarely on the radar screen of local, regional and national investors who have discovered that retail properties in the area are reasonably priced compared to larger metropolitan areas.

Milwaukee-based Boulder Venture started the trend in the area of redeveloping tired, obsolete malls by demolishing the former Capitol Court Mall and building Mid Towne Center. Mid Towne Center is home to a 55,000-square-foot Pick ‘n Save Food Store, a 156,000-square-foot Wal-Mart and 65,000 square feet of small shop space. Lowe’s Home Improvement Warehouse purchased 11 acres from Boulder Venture in March and will start construction on a 145,000-square-foot store late this summer that will be the retailer’s first location in Wisconsin.

Grand Avenue Mall, a 250,000-square-foot mall located in downtown Milwaukee, was originally completed in 1982 by The Rouse Company. During the course of the 1990s, Grand Avenue lost major national retailers including Marshall Field’s, The Limited and Banana Republic. The mall was cleared of its remaining tenants, renamed The Shoppes of Grand Avenue by developer Faison and recently reopened featuring Borders Books & Music, Linens ‘n’ Things, T.J. Maxx and Applebee’s.

Bayshore Mall is minutes from downtown Milwaukee with some of the best demographics in the metropolitan area. Bayshore was first opened in 1953 and has been remodeled since then. Owner Corrigan Properties has partnered with Steiner + Associates to renovate the mall. The proposed renovation and expansion will increase the center’s size to 950,000 square feet of retail, office and residential space compared to the current 534,000 square feet of space. Bayshore will be redeveloped as the first lifestyle center in southeastern Wisconsin.

Tucker Development, based in Highland Park, Illinois, is developing Granville Station, which is on the 103-acre site formerly occupied by the 1.2 million-square-foot Northridge Mall. This project will include three phases. Completion of Phase I is projected for spring 2005 and will include a 180,000-square-foot Menard’s, a 61,000-square-foot Pick ‘n Save and small shop space. Phase II will include roughly 100,000 square feet of midsize boxes and small shop space. Phase III will be non-retail and is expected to have a mix of office and medical tenants.

In addition to converting former malls into new shopping centers, the area is experiencing new, ground-up development. Menomonee Falls, Wisconsin-based Continental Properties Company has received Plan Commission approval from the city of Brookfield for construction of the 140,000-square-foot Fountain Square on Bluemound Road across from Brookfield Square Mall. Construction is scheduled to begin this summer, and tenants include Ashley Furniture, Bed Bath & Beyond, Jared’s Jewelers, Gold Creations and Goodyear. Two additional tenants of approximately 35,000 square feet each will also be announced this spring.

Continental Properties is also in the planning stages for the redevelopment of the former Briggs & Stratton plant, a small engine production facility at 124th and Burleigh streets in Wauwatosa. The 23-acre site is in the heart of the metropolitan area with Interstate access and visibility. Continental Properties expects the development to reach 200,000 square feet, but the tenant mix is not yet known. This project promises to be one of the major new retail developments in the Milwaukee area in the coming years.

On the retailer side, Kmart, Sentry Foods, Rainbow Foods, Drug Emporium, Stein Mart, Kids “R” Us and Kohl’s Food Stores each closed stores in the Milwaukee area during the past year. This resulted in an overall increase in the metropolitan area’s vacancy rate from 8.8 percent in 2003 to 9.9 percent today. It also created a shift in the local food store market toward the independent operator opening additional stores. Local grocer, Sendik’s, for example, has expanded into former food store locations in Mequon and Wauwatosa. The other positive consequence of the store closings is that Wal-Mart, Target, Pick ‘n Save, Menard’s, Lowe’s Home Improvement Warehouse, The Home Depot, Kohl’s, Linens ‘n’ Things, Bed Bath & Beyond, Ashley Furniture, Michaels, Pier 1 Imports, Petco, Aldi, Trader Joe’s and Office Depot are all either opening new stores or considering an entry into the market.

Finally, while Milwaukee’s obsolete properties are being replaced with new retail centers, private and institutional investors have set their sights on either entering or expanding their presence in the area. New Plan Excel Realty Trust, Inland Real Estate Heritage Realty Trust and Developers Diversified Realty have each established a presence in Milwaukee and are eager to grow in the area. Relative to larger metropolitan areas, Milwaukee’s retail investment climate is particularly attractive because cap rates are, on average, 0.5 percent to 0.75 percent higher, resulting in lower purchase prices and higher yields to investors. This disparity has caught the attention of the national investment market and is likely to tighten as developers and investors from Chicago, Minneapolis, Detroit and other areas recognize the area’s potential and compete for the available assets.

— Peter Langhoff is vice president of investment properties with Milwaukee-based Siegel-Gallagher.

A TOAST TO PABSTCITY PabstCity, a 1.2 million-square-foot mixed-use project, is being developed on the former site of the Pabst Brewery in Milwaukee. The project is scheduled for completion in 2006. Milwaukee is building on more than 100 years of history with the development of PabstCity, a 1.2 million-square-foot mixed-use project, located on the former site of the Pabst Brewery. According to Craig Kaser, president of Atlanta-based TerreMark Partners (the company providing leasing, marketing and development consultation for the project), this is a one-of-a-kind development due to its historic aspect. “It is edgy, non-institutionalized and has the intention to build a thriving street culture much like some of the great urban models like Post Office Square in Boston or the Pearl District in Portland,” he says. The approximately $300 million project is a joint venture of Milwaukee-based Wispark LLC (the corporate subsidiary of Wisconsin Energy Corporation), and Cleveland-based The Ferchill Group. TerreMark Partners worked with the ownership, architects, and research and marketing partners to create the master plan for the development. “Our initial research led to the discovery of a market with a very high per capita expenditure on food and beverage, along with significantly underserved retail, restaurants and major entertainment,” Kaser says. “The outflow to Chicago for these needs presented a unique opportunity.” PabstCity, which is slated for groundbreaking in the fourth quarter of this year, will consist of 26 separate buildings (22 of which are original buildings from the Pabst Brewery). “Most of the Pabst Brewery buildings date from the late 1800s, and they are being restored to preserve their pending status on the National Historical Registry,” Kaser notes. Retail and entertainment options will occupy approximately 450,000 square feet of the project, and office space will total about 200,000 square feet. In addition, the master plan calls for 450 residential lofts. All of these components are scheduled for construction and restoration late this year with a grand opening slated for 2006. TerreMark Partners is targeting retailers and restaurants that are currently unavailable in the area. So far, letters of intent are in process for 225,000 square feet of space, including major entertainment destinations, Kaser says. For example, a 14-screen theater is under negotiation for 65,000 square feet, and The House of Blues is under negotiation for 30,000 square feet. The company also expects PabstCity to feature an Art Walk area that will enhance the local artist community. According to Kaser, the office lofts will be boutique in style, and they will cater to young, up-and-coming businesses, as well as to established companies that are seeking a hip and convenient location. “We will position it to be the most desirable location in the downtown area,” he says. “We also will feature Milwaukee’s first wireless community that will allow access throughout the several public spaces within PabstCity.” Given the currently underserved market, the strong line-up of entertainment options and the historical architecture and ambiance of PabstCity, Kaser expects the project to draw several million visitors annually. “The market presents a strong daytime employee base, residents, college students and visitors,” he says. — Misty Reagin

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