CITY HIGHLIGHT, MAY 2007

MILWAUKEE CITY HIGHLIGHTS
Russell Sagmoen, Greg Moyer, Samuel Dickman Sr. and Samuel Dickman Jr.

Milwaukee Retail Market

Steiner + Associates’ redevelopment of the Bayshore Mall into the 1.2 million-square-foot Bayshore Town Center in Glendale, Wisconsin, is the most significant project to come online in the Milwaukee retail community recently. Other developers are following Steiner’s lead and creating mixed-use centers in the area as well.

Milwaukee has seen a push towards mixed-use shopping centers, most notably Steiner + Associates’ redevelopment of the former Baytown Mall into the 1.2 million-square-foot Bayshore Town Center in Glendale, Wisconsin, just north of the city. This trend can also be seen in most of the developments planned for downtown Milwaukee, as well as in smaller developments in the suburbs as municipalities push developers to adhere to higher building standards.

A direct result of this movement towards aesthetics and higher-quality construction is a rise in rental rates. In addition to rising construction costs, the area has seen an influx of capital, as out-of-state and institutional investors seek higher cap rates. The increased acquisitions have shifted some developer’s strategies to boost rental concessions in trade for increased rental rates.

One of the current hot spots is the commercial corridor along Highway 60 and Interstate 43 in Grafton. Currently, the intersection has a Target, The Home Depot and a Colder’s Furniture store. Continental Properties Co. is developing in this area, including a 151,000-square-foot Costco that will be part of a 388,000-square-foot development when complete. The addition of quality big box retail to this area will continue to draw consumers further north from Milwaukee’s affluent north shore area.

The majority of the region’s retail development has followed the recent residential boom and expanded into the outer-ring suburbs. Exploding retail markets include the Pabst Farms mixed-use project and the Grafton, Wisconsin, area. Developers are also adding retail developments in Milwaukee’s downtown, which has seen an explosion of young professionals and baby boomers moving into the area. Milwaukee is successfully shedding its “rust belt” label as a primarily industrial town with the redevelopment of former industrial sites into other uses. Miller Park Way in West Milwaukee has reinvented itself with the addition of a Target, a Menards, and a Pick N’ Save.

New retailers entering the market include the grocer Trader Joe’s, Cabela’s, Costco, Petco, White House|Black Market and L.A. Fitness, which recently completed a deal for a 42,000-square-foot gym. There has also been an influx of restaurants, including Fleming’s Steakhouse, Mitchell’s Seafood, Abuelo’s Mexican, BD’s Mongolian Grill, California Pizza Kitchen, Cameron’s Steakhouse, Devon’s Seafood Grill, Capital Grill, Ruby Tuesday, Red Robin, Bar Louie, Joey’s Seafood & Grill and Panchero’s Mexican Grill. In Pewaukee, Wisconsin, there is a 15,200-square-foot Paul Mitchell Beauty School, another new addition to the market, underway.

There have been some significant retail leases signed in the area recently, including Office Depot negotiating a 20,930-square-foot deal; The Salvation Army signing a 38,086-square-foot lease; Petworld Inc. securing 18,205 square feet; PetsMart taking 20,072 square feet; and True Value signing a 12,000-square-foot deal.

Area retail vacancy rates across the market depend on the product type and submarket. Overall, the Milwaukee/Madison markets showed an average vacancy rate of approximately 5.7 percent at the end of 2006 (Source: CoStar 2006 year-end report).

Rental rates vary widely, as well. For small-shop space and second-generation neighborhood centers, rental rates range from $8 to $14 per square foot triple-net and new construction product located on a prime corridor can run from $20 to more than $30 per square foot triple-net.

One emerging submarket to watch is Franklin, Wisconsin, to the south and west of downtown Milwaukee. The expansion of Ryan Road will be complete this year, and the Highway 100 retail corridor is starting to expand into Franklin, with the Menards at the former Hales Corners Speedway site. Also, Mark Carstensen Development Corp. is planning a 30-acre, grocery-anchored shopping center on the corner of Highway 100 and Drexel Avenue. Franklin has had tremendous industrial and residential growth during the past few years, and now is primed for retail growth.

— Russell Sagmoen works for Milwaukee-based Inland Companies in the firm’s retail division.

Milwaukee Office Market

Office market fundamentals in Milwaukee are expected to show improvement despite projections for slower economic expansion in 2007. While overall job growth is forecast to decelerate, office-using employment is expected to generate demand for approximately 500,000 square feet of additional space. In recent years, additions to office inventory have not kept up with tenant demand, helping to push the metrowide vacancy rate lower. While construction will pick up for the remainder of this year, inventory is still expected to increase by less than 2 percent, muting the impact of the slower economic environment. Class A properties, where vacancy is forecast to end the year 80 basis points lower at 11.5 percent, should benefit most from limited inventory growth. With such healthy demand, many Class A properties may post rent gains exceeding 5 percent this year. In the Class B sector, rents in the central business district (CBD) are also expected to rise, as the submarket has little available Class A space and a thin development pipeline.

Overall, the metro is expected to receive 600,000 square feet of new inventory, up from 121,000 square feet last year. Downtown Milwaukee is the most active submarket, with three projects either underway or in the planning pipeline. The two developments currently under way will contribute 308,000 square feet to inventory in 2007, while the project in the pipeline is expected to bring an additional 44,000 square feet. Despite downtown Milwaukee’s expected growth in 2007, new office development will remain concentrated in the market’s suburban areas. The Wauwatosa/West Allis/West Milwaukee submarket could become the most active area, as 150,000 square feet of space is in the planning pipeline. The most prolific developer in the metro, RiverBend LLC, is expected to introduce the Manpower Inc. corporate office development to the city in the third quarter. Irgens Development Partners should overtake RiverBend LLC as leading developer in the future by delivering two projects that will add 190,000 square feet to the metro.

As a result of the new inventory, vacancy is expected to remain flat at 14.2 percent at the end of the year. However, asking rents are forecast to gain 2.3 percent to $18.97 per square foot in 2007, while effective rents are expected to increase 3.7 percent to $15.57 per square foot.

Office property investors are expected to remain active in 2007, as cap rates sit in the low 8 percent range. Western Waukesha County, which consists primarily of newer Class A properties, will remain popular with investors. Despite ongoing construction in the submarket, vacancy is expected to decline 100 basis points as tenants continue to seek space close to executive housing. More aggressive buyers will likely favor the CBD, where the renovation of the Marquette Exchange makes properties in surrounding areas attractive for investment over the longer term. With renovations to the roadway expected to be completed in 2008, transportation access for suburban commuters will improve, boosting the appeal of CBD properties to prospective tenants and driving future revenue growth. Buyers seeking smaller properties will continue to target the Third Ward, which has become a popular location for small professional firms. Supply, however, is extremely limited; investors can expect to pay top dollar for properties in this area, even for older assets that are in poor condition or require renovations.

Although Milwaukee’s economy has historically relied on the industrial sector, the office-using sector is expected to fuel the economy in 2007. And even though construction levels are forecast to pick up by year’s end, the overall vacancy rate is expected to tighten and operating fundamentals should improve. Milwaukee remains a good place to acquire well-located Class A properties at relative bargains. Opportunistic local and out-of-state investors should keep Milwaukee on their radar screens this year and into 2008.

— Greg A. Moyer is a senior vice president and managing director of Marcus & Millichap. He is the regional manager of the Milwaukee office.

Milwaukee Industrial Market

One factor that will impact the Milwaukee industrial market this year is that rates for new construction will be rising due to increased land prices and construction costs. Expect this issue to be a barrier to entry for some developers.

One of the current trends on the development front involves the construction of speculative big box buildings south of downtown. Big box facilities are most popular by the General Mitchell International Airport; that submarket is always strong and still has available land. Right now, small spec development does not make economic sense. With the increase in construction cost and lack of demand for small space, there is no possibility of a strong enough return to entice developers.

Commercial development outside of the city is expanding the market in new directions. There is an increasingly strong draw west of the city, where the mixed-use Pabst Farms development is underway. The developers are creating their own downtown area, which will act as a catalyst for further development in the in Oconomowoc submarket.

Some of the most significant industrial projects currently underway include CenterPoint Properties and First Industrial Realty Trust’s spec buildings just east of the airport. Pabst Farms will include an industrial research project, as well as General Growth’s new retail center and a new Aurora Hospital. There is also continued industrial development in the Menomonee Valley submarket.

The hottest submarket though, continues to be the area around the airport, because of its proximity to various transportation options and to the Chicago market. That submarket is benefiting from the wealth of available land and a population shift in from Menomonee Valley to the area.

Current vacancy rates measure approximately 8 to 10 percent, depending on the submarket. Rental rates for high-quality warehouse space ranges from $4.25 to $4.75 per square foot triple-net.

In the future, watch the Pabst Farms development and the submarkets surrounding it — that development has changed the landscape of the western side of the market. There is tremendous development potential, for both commercial and residential sectors, tied into the current growth there.

— Samuel Dickman Sr. is president and Samuel Dickman Jr is executive vice president of The Dickman Company/CORFAC International.

Milwaukee Multifamily Market

The outlook for the Milwaukee apartment market is undeniably bright, despite forecasts for slower employment growth. Single-family home prices remain out of reach for a large percentage of the local population, boosting demand by expanding the market’s pool of renters beyond the traditional demographic of young adults and lower to middle-income households. At the same time, development activity during the past several years has not been sufficient to keep supply aligned with growing demand, resulting in significant vacancy improvements in the past year.

With vacancy currently at an equilibrium level below 5 percent, operators are expected to be more aggressive with concession reductions as metrowide effective rent growth approaches 4 percent. Within affluent submarkets — such as western Waukesha County, where vacancy is the lowest in the metro area and home costs are among the highest — rent growth may exceed 5 percent by year end. Class A properties, which benefit the most from the wide gap between monthly rent and single-family mortgage payments, are expected to outperform their counterparts within the lower-tier segments.

Overall, the apartment inventory is expected to match last year’s total with 300 units scheduled for completion in 2007. There are 250 units currently under way in Milwaukee, all of which are scheduled for delivery by the end of the year. The largest project scheduled for completion in 2007 is the 91-unit City Green Apartments, located in the City West submarket.

Single-family home prices in the Milwaukee area are expected to remain unaffordable relative to incomes for the foreseeable future. The median single-family home price dipped to $216,000 in the final quarter of 2006, down 1.5 percent from one year ago. Current median household income in metro Milwaukee is only 65 percent of the level required to purchase a median-priced home. With new home construction forecast to slow, existing housing stock will remain stable, supporting modest price appreciation, which will continue to widen the gap between rents and mortgage payments.

As a result, overall apartment vacancy in Milwaukee is expected to remain relatively stable throughout the year, ending 2007 at 5 percent, a slight 10 basis point uptick from year-end 2006. Also, as limited additions to apartment inventory support stable vacancy this year, rent growth is expected to accelerate. Asking rents are forecast to rise 3.2 percent to $833 per month in 2007, while effective rents should grow 3.6 percent to $797 per month.

With current market fundamental trends supporting net operating income growth in coming years, demand for apartment investment properties is expected to increase in 2007. While revenue growth should drive price appreciation without compressing cap rates significantly in the near term, operators may not be the only investors targeting local properties. With housing costs elevated when compared to rents, incomes and reasonable apartment sales prices per unit, condo-conversion buyers also are expected to maintain a presence within the market. Accordingly, cap rates may continue to compress in high-demand areas such as Waukesha County and downtown Milwaukee, where converters seeking locations with expensive housing will compete with operators looking to secure assets positioned for strong revenue growth.

Investors will continue to look for opportunities in the west Wauskesha County submarket, which has outperformed the metro for the past 12 months. Another year of strong rent growth is expected through the end of the year, as nearby home prices remain high, and ongoing development of the Pabst Farms master-planned community continues to fuel population and business growth in the area. Also, aggressive investors are expected to target City West assets for potential value-add investments.

Tight occupancy conditions are expected to continue to drive rent growth, while increasing competition among buyers will keep cap rates reasonably stable through the year. With such investment conditions and the high cost of single-family homes, Milwaukee-area apartment values are expected to appreciate at a modest pace during the year.

— Greg A. Moyer is a senior vice president and managing director of Marcus & Millichap. He also serves as the regional manager of the Milwaukee office.


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