CITY HIGHLIGHT, MAY 2006

MILWAUKEE CITY HIGHLIGHTS
Mark Rasansky, Peter Glaser, John Visser, John McCardle, Steve Pape and James T. Barry

Milwaukee Retail Market

As we end the first quarter of 2006, the Milwaukee retail market continues to experience a tremendous amount of activity. This activity is being driven by the aggressive expansion plans that many retailers have for this market. Based on The Polacheck Company’s latest survey of the Milwaukee market, overall vacancy rates remained stable in 2005, increasing slightly from 7 percent in 2004 to 7.9 percent in 2005.

Regional malls including Bayshore, Brookfield Square, Mayfair and Southridge have continued to remain vibrant through adding new retailers. In 2005, Brookfield Square added a two-story Barnes & Noble and Bravo! Cucina. Proposed future additions to the mall include The Fresh Market, Fleming Steakhouse and Abuelo’s. Crate & Barrel opened its first Wisconsin location at Mayfair in 2005. Southridge Mall transformed the former Younkers store into a new location for Linens ‘n Things, Cost Plus World Market, and Steve & Barry’s University Sportswear.

The most significant mall project of 2006 will be the transformation of Bayshore Mall into Bayshore Towne Center. This Steiner + Associates project is expected to open later this year. With both an interior mall and exterior main street component, the new 1.2 million-square-foot Bayshore will be Milwaukee’s first hybrid-lifestyle center.

We are seeing a trend on the part of retailers to expand beyond the traditional regional shopping areas through establishing locations in urban redevelopment projects and suburban fringe markets.

The Miller Parkway corridor of West Milwaukee is a prime example of the urban redevelopment trend. Long vacant industrial properties are being demolished to make way for retail development. A partnership between Boulder Venture and General Capital Group recently purchased the former GE Hotpoint facility, and is in the process of demolishing the site to make way for Menards, Pick’n Save and additional development. Across 43rd Street, Heartland Development has demolished the Froedtert Malt site with plans in place to build a 100,000-square-foot retail development. Target opened a new store in this area in 2005 on a former industrial site.

The urban redevelopment trend is also transforming the retail landscape in Wauwatosa, Wisconsin. A new two-story, 50,000-square-foot Best Buy is under construction directly across from Mayfair Mall, on a site formerly occupied by three office buildings. Continental Properties also recently  broke ground on the new Lowe’s Home Improvement Warehouse-anchored Burleigh Square Shopping Center on a site formerly occupied by Briggs & Stratton.

Active suburban Wisconsin submarkets include the Howell Avenue corridor in Oak Creek; South 27th Street in Oak Creek/Franklin; Interstate 43 and Highway 60 in Grafton; the Highway 50 corridor in Kenosha; Highway 67 in Oconomowoc; and the Moorland Road corridor in New Berlin. The Howell Avenue corridor has seen a significant increase in the amount of retail development. Target, OfficeMax and Ace Hardware recently opened new locations in this area, and the first Woodman’s Market in Milwaukee is proposed for a closed portion of the Delphi site.

One of the biggest shifts in the market continues to take place in the grocery store segment. In recent years, we have seen Kohl’s Food leave the market and Sentry close most of its stores. With these exits, Pick’n Save (Roundy’s) has been able to increase its market share and continues to be the driving force behind new grocery-anchored shopping center development.

Growth in the specialty grocery category continues. Local operators Lena’s, Outpost, and Sendik’s continue to take over former Kohl’s and Sentry locations to increase their market share and fill this void. The first Whole Foods Market in Milwaukee will open this fall at North and Prospect avenues on Milwaukee’s east side. In addition, The Fresh Market, Trader Joe’s, and Woodman’s have announced plans to enter the market. Wal-Mart has opened a Supercenter in Mukwonogo and another is under construction in Germantown.

Retailers that have either recently entered or are planning to enter the market include: Anna’s Linens, Babies “R” Us, Barefeet Shoes, Costco, Cost Plus World Market, Crate & Barrel, The Fresh Market, Kirkland’s, Lowe’s Home Improvement Warehouse, PetsMart, Trader Joe’s, ULTA, Value City Furniture and Woodman’s Market.

In the future, we should continue to see retailer demand for greater market coverage drive urban redevelopment and suburban development. The market will grow, as retailers continue to reposition older stores into new “prototype” locations, and demand for suburban retail sites will persist at interstate locations in outlying growth markets.

— Mark Rasansky is president and CEO, Peter Glaser is vice president, retail division, and John Visser is vice president of marketing of The Polacheck Company/A CB Richard Ellis Company in Milwaukee.

Milwaukee Multifamily Market

The multifamily housing market in Milwaukee, and in the southeastern Wisconsin market in general, continues to hum along. Of course, each specific market sector and location can vary greatly, but, for the most part, things are steady. Because of steady demand for condos and the lack of raw land for the development, the redevelopment and conversion of apartments to condos has actually helped both the rental and for-sale segments. The strong continued demand is helping the apartment market, as the conversion of apartment buildings takes units off the market and brings down vacancy levels.

The renewed appetite for living, working and playing in downtown began a decade or more ago in the Third Ward, a submarket just south of the downtown central business district (CBD), and it has continued to flourish as it has moved into the CBD. There are two specific examples in downtown Milwaukee that illustrate the benefit of the conversion trend. The first is a building that has undergone gradual changes from humble beginnings as a brewery building of industrial capacity to a residential property. The Blatz was converted into apartments approximately 15 years ago and is currently undergoing another conversion, this time from apartment to condominium units. The for-sale units will range in price from the mid-$100,000s to the mid-$300,000s, depending on size, configuration and amenities. The Blatz is within walking distance to much of the local nightlife, sporting events, restaurants, cultural locales and events, as well as the professional sector in the CBD. All of this adds up to a very desirable location and a potpourri of options for city living in the city of festivals.

Another similar, yet unique, property is the Landmark on the Lake (The Landmark), which was also built approximately 15 years ago. The Landmark is a 28-story high-rise developed on a bluff overlooking Lake Michigan. The residential tower was originally developed as a high-end apartment community that focused on a very affluent rental market. This property was recently purchased and is undergoing a conversion from rental units to owner-occupied condominiums. NVG Residential has taken on this task, and has been proceeding at a rather efficient and effective pace in converting and selling these units. The price range varies greatly, from the mid-$200,000s up to more than $1 million. The Landmark and its location offer much of the same benefits as The Blatz, coupled with the views of the lake and close proximity to the fashionable east side.

Both of these projects, as well as many others on varying scales, continue to draw from the field of available rental housing. The increased condo supply is keeping up with demand for home-ownership, while decreasing the supply of rental properties, lowering apartment vacancies and tightening up the market.

Current market forces are closing the window of opportunity for would-be buyers with each shift in the interest rate volley, as more residents fall into the category of would-be renters. This trend shall continue as interest rates climb from their record lows of the recent past.

Milwaukee’s suburbs are also flourishing. One shining example of mixed-use development/redevelopment is Bayshore Mall, a regional mall located in Glendale, a suburb directly north of Milwaukee. The enclosed mall is being refaced, rebuilt and expanded by Steiner + Associates into an open-air retail and entertainment center, with office and residential space. The residential component, which is being developed by the Mandel Group, will have both rental and condo/townhouse units integrated into the planned unit development.

Milwaukee continues to transform from that beer-and-brat town into a small enough, yet big enough, city with a cultural center. As Milwaukee grows, and continues to focus on attracting and maintaining residents and jobs, the residential renaissance shall likely continue, benefiting both the condo and apartment markets for the time being.

— John McCardle is a vice president with Brookfield, Wisconsin-based NAI MLG Commercial.

Milwaukee Office Market

One trend experienced in the Milwaukee office market during the last few years has been the move of tenants out of the older Class A and B office buildings into new developments. However, in 2005, that trend did not continue. Instead of moving to a new office tower, M&I Trust, the wealth management division of M&I Bank, relocated its offices from 1000 North Water Street to the Milwaukee Center, a 370,000-square-foot Class A office tower built in the late 1980s. M&I leased 100,000 square feet of space that had been vacant for the previous 3 years. It is important to note that this deal was a sizeable transaction but did not create any positive absorption in the submarket, just another 100,000 square foot vacancy. This shuffling of tenants from building to building, without any expansion and few new companies entering the Milwaukee market, is a trend that started in 2004 and continued in 2005.

Two other downtown office towers renewed their anchor tenants’ leases in 2005. Quarles & Brady renewed its 160,000-square-foot lease at 411 East Wisconsin Avenue and Godfrey & Kahn renewed its lease of 90,000 square feet at 770 North Water Street.

The decision by Blue Cross Blue Shield to move from its downtown location at 401 West Michigan Avenue to 140,000 square feet at Summit Place in West Allis, Wisconsin, was a big blow to the downtown area. When Blue Cross vacates the building later this year, an additional 225,000-square-foot vacancy will be created in the downtown area, which represents 1.8 percent of the total space in this submarket. Last year ended on a high note when Manpower announced its decision to move its corporate headquarters from the northern suburb of Glendale, Wisconsin, to a new 260,000-square-foot office building that will be built along the Milwaukee River on the north edge of downtown.

The rapid expansion of the Third Ward and Walker’s Point continued in 2005, with the completion of many new residential condominium projects and the announcement of even more. In addition to the residential condo market, the offering of office condos has begun to emerge in the Third Ward, with three existing buildings offering office condos in a range of $150 to $200 per square foot. On the office leasing end, 222 East Erie Street is the most recent Class A office redevelopment to be built in the Third Ward. The 95,000-square-foot former American Biscuit Building is undergoing a renovation and is slated for completion late this spring. Additionally, the extension of the Riverwalk and the success of the Milwaukee Public Market have contributed to the excitement surrounding the Third Ward.

Looking ahead, the two proposed downtown office developments, Ovation Plaza and Lake Point Tower, both still need a large anchor tenant in order for the projects to break ground. Available land in the former Park East freeway corridor and continued reconstruction of the Marquette interchange will play a significant role in the direction the downtown Milwaukee submarket goes this year. Vacancy rates will rise, mainly due to the Blue Cross deal, and rental rates will remain flat.

Although the Blue Cross Blue Shield relocation to Summit Place hurt the downtown submarket, it will have the opposite affect on the suburbs. Summit Place was successful in leasing up almost all of its 400,000 square feet of space by offering large blocks of space at very aggressive lease rates. These large blocks are now leased up, which bodes well for the few competing suburban office buildings that currently have big blocks of vacant space.

GE Medical’s 500,000-square-foot corporate headquarters facility is nearing completion and GE is scheduled to move in by mid-year. In addition, American Family Insurance announced that it would move to a new 75,000-square-foot office building that will be built at Highway 164 and Interstate 94 in Pewaukee, Wisconsin, at the end of the year. These two large transactions will create an additional 128,000 square feet of vacant space on Executive Drive and could have a major impact on the Brookfield, Wisconsin, submarket in early 2007. One deal that helped the Brookfield submarket in 2005 was State Farm Insurance’s decision to consolidate some of its operations into 35,000 square feet at 245 South Executive Drive.

Two notable lease transactions took place in the Park Place submarket during 2005. In addition to taking a large block of space in downtown Milwaukee, M&I Trust also moved into 65,000 square feet at One Park Plaza. Additionally, Froedert & Community Hospitals leased 53,000 square feet in the Woodland Prime office park.

The office investment sales market in the suburbs remained active in 2005 — two of the most notable deals closed at the end of 2005. Honey Creek Corporate Center, located on the west side of Milwaukee County, was sold to The Geneva Organization for $70 million and Crossroads Corporate Center, located at Highway 18 and Bluemound Road in Waukesha, Wisconsin, was sold to Liberty Property Trust for $105 million.

The lack of large blocks of available space in existing buildings and the fact that no new office developments are coming online in the next 6 months are both positive signs for the suburban market. Vacancy rates will decline and rental rates will stabilize, and we may see some small rental rate growth late this year.

— Steve Pape is a vice president and head of the office brokerage team at Milwaukee-based Inland Companies.

Milwaukee Industrial Market

Industrial development in southeastern Wisconsin has proceeded very cautiously during the past few years, as Milwaukee has been slower than other markets to recover from the economic downturn. Nevertheless, several speculative projects have been built or are being planned throughout the greater Milwaukee area.

Opus has a new development near the Milwaukee County/Racine County border and CenterPoint Properties Trust is considering a large speculative building near the airport. First Industrial Realty Trust is also planning to build a spec building and James Luterbach Construction Co. is building a speculative building in the New Berlin Industrial Park in New Berlin, Wisconsin. Development is picking up the pace throughout the area and it will be an active market in the near future with increased competition for tenants. However, even with all the new construction, the market should stay in equilibrium.

The area around General Mitchell International Airport has been very active for new development, as has the Interstate 94 South corridor between Chicago and Milwaukee. These markets provide excellent access for tenants to service both the Chicago and Milwaukee markets. There will also be development in the Menomonee River Valley just west of downtown Milwaukee once the necessary infrastructure is complete. The West Allis/West Milwaukee area has also seen a great deal of infill development.

The current industrial vacancy rate in southeastern Wisconsin is stable at approximately 7.1 percent. Rental rates for Class A industrial space start from approximately $4 per square foot for warehouse and $7.50 to $8.50 for office/flex space. Class B and C industrial space can be leased for as low as $2 to $3.50 per square foot.

The I-94 South corridor between Chicago and Milwaukee will grow increasingly stronger as these metropolitan areas continue to converge. Another market to watch for future growth is the Highway 41/45 corridor, which also continues to be extremely strong, and is pushing development north with new retail and business park developments planned.

— James T. Barry is president of Milwaukee-based Colliers Barry.

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