CITY HIGHLIGHT, MAY 2008

MILWAUKEE CITY HIGHLIGHTS
Sean Osborne, Susan Fellows, Julie Peterson, Sue Sardina, Samuel Dickman Sr. and Bill Bonifas

Milwaukee Retail Market

Milwaukee has historically been a conservative development market. As such, the market tends to be stable, without large fluctuations in rents and vacancy. In the past year, there has been a reduction in the amount of new development; an increase in absorption of smaller shopping center space; a slight increase in vacancy; a rise in large format sublease space; and substantial increases in construction costs. However, Milwaukee has not felt this negative impact to the same extent as other markets.

For the first quarter of the year, the general retail vacancy rate climbed to 6.6 percent, which is up from 5.9 percent since the second quarter of 2007, according to CoStar. Additionally, CoStar reports the average rental rate is $12.92 per square foot; quoted rent is up slightly to $13.41 per square foot.

One of the most significant changes in the retail sector is the decline in development of shopping centers of less than 20,000 square feet. This change has occurred due to decreased demand from retailers, as well as the consolidation of retailers within categories and the enormous increase in construction prices. These changes have combined with high land costs to push rental rates above $20 per square foot — and in some cases over $30 per square foot — for new construction under 20,000 square feet.

Much of the new development has been generated by big boxes such as Wal-Mart, Lowe’s Home Improvement Warehouse, Target, Pick ‘n Save and The Home Depot. Other retailers new to, or considering entering, the Milwaukee market include Kincaid’s, Five Guys Burgers and Fries, Brunswick Zone, CVS/pharmacy, McCormick & Schmick’s Seafood Restaurants, Dave & Busters, Wing Zone, Omaha Steaks, Jamba Juice, Claim Jumper, Stir Crazy, Joey’s Seafood and Grill, American Apparel and Citi Trends.

Kenosha has become one of the hottest sub-markets in southeastern Wisconsin. Bradford Real Estate has commenced construction of Somers Market Center, a 110-acre development anchored by Wal-Mart Supercenter and Sam’s Club that is located on the north side of Kenosha. On the west side of town, Gershman Brown & Associates has begun construction of a 350,000-square-foot Target & JC Penney-anchored center. Other retailers include Dick’s Sporting Goods, PetSmart, Circuit City, Maurices, Ulta, Lane Bryant, Starbucks Coffee, FedEx Kinkos and Verizon. It will be interesting to see what impact these two developments have on the 550,000-square-foot Southport Plaza, which Target is vacating when it moves to Gershman Brown’s new center, as well as the adjoining 300,000-square-foot Indian Trail Plaza, where Lowe’s has completed construction.

Other items of interest include Dunkin’ Donuts decision to open 50 stores in the coming years in Wisconsin, on the heels of Starbucks Coffee’s announcement of a slowdown of its national expansion efforts. Additionally, Target is toying with the idea of opening a new store across the street from Kohl’s corporate headquarters in Menomonee Falls.

Milwaukee’s real estate market is solid with good fundamentals. Rental rates are reasonable, growth is based on realistic expectations, and properties are rarely overbuilt (and occasionally under built). Milwaukee has historically been a conservative development market; conservative, but certainly not boring. Even in an uncertain economic climate, the city is experiencing sustained and intelligent growth.

— Sean Osborne is senior vice president in the brokerage division of Milwaukee-based Inland Companies.

Milwaukee Multifamily Market

The mainstream media has taken the “real estate market is in bad shape” story and plastered it from coast to coast. It is possible to get discouraged by all the negative coverage, but we have to remember that we are in the Midwest — better yet, we are in Wisconsin — so the news is much brighter than the stories reflect. Yes, foreclosures are at an all-time high and may keep growing; however, this doesn’t surprise people in the real estate industry. When real estate is being bought and sold with no money down and little regard to credit, something has to give. It is the role of real estate professionals to anticipate such happenings, and to help their business and clients benefit from the changing market conditions.

Ogden & Company’s property management division has worked with clients that own multifamily rental housing units and positioned the properties over the past several years to allow the owners to reap the benefits of the rental boom brought on by the struggles in the residential mortgage market. Prudent management has allowed apartment owners to maximize occupancy by keeping rental rates reasonable and extremely competitive, which kept the properties full. With good occupancy rates, owners didn’t have to support cash shortfalls often created by high vacancy, or sacrifice the income stream with huge up-front rent concessions.

Last year, many apartment owners tested the waters and were able to enact reasonable rent increases where appropriate. This year, owners were able to increase most rents across the board, with monthly rents increasing anywhere from $20 to $75 per unit, as well as implement increases on lease renewals. This was partly a result of the new loan environment, in which credit requirements have tightened; not everyone can qualify for financing or produce the cash necessary for a down payment on a home.

There were many owners that were not prepared to weather the storm of high vacancies and reduced rents, which resulted in loan defaults. In some cases, Ogden & Company stepped in during the pre-foreclosure and foreclosure processes as a receiver. Through the company’s management services, Ogden & Company has been able to stabilize the property and sustain the bank’s collateral. Through the company’s commercial and investment division, Ogden & Company has also identified purchasers for these properties, eliminating the need for an auction. The quick turnaround has allowed lenders to recoup a higher percentage of their investment than the returns that would have been gained via auction.

Stepping over to the Milwaukee condominium market, the over saturation is apparent; there are just too many available units. Condo developers had a great run, but sales have now slowed to a crawl. The situation is again compounded by the tighter lending requirements, which have significantly hindered many potential buyers. Renting out these new units has also become an option.

Even though the buying process has become more stringent, the market is still very good for potential condo buyers. As summer approaches and interest rates continue to dip, there will be great opportunities on the horizon for buyers. 

Milwaukee is also looking to outside investors as a potential economic stimulus, but has not yet experienced the same level of activity as some other Midwest cities. We anticipate greater interest from new investors, resulting in increased multi-unit condo sales and purchases. If investors see potential in Milwaukee, such acquisitions may save a few troubled developments. In addition, the Midwest‘s reputation for steady real estate appreciation provides a definite advantage for any investor. Some advice for potential investors during this unique time in the real estate industry: Buy if you can, maximize your rents and save for the future.

— Susan Fellows, director of real estate management; Julie Peterson, director of property management division; and Sue Sardina, commercial sales associate, for Milwaukee-based Ogden & Company contributed to this article.

Milwaukee Industrial Market

New industrial developments in the Milwaukee market have been slow coming online over the last 6 months. The downturn in the economy has had an impact on our industrial market, as it has in the rest of the country. The speculative industrial buildings that have been brought to the market, including two significant projects from CenterPoint Properties and First Industrial Real Estate Trust, have experienced sluggish leasing activity. These developments are in the General Mitchell Field Airport submarket, where a good deal of vacant inventory is also located. On the build-to-suit front, First Industrial recently announced that it is going to construct an approximately 500,000-square-foot distribution center for Quad Graphics, a Milwaukee-based international printing company.

The areas currently receiving the most attention from developers are:

Menomonee Valley

This City of Milwaukee-developed project is situated just west of downtown. The city has imposed restrictions on the type of businesses that can operate within the new industrial park, which was formerly a rail yard. The goal is to encourage job growth, thus the city will not allow distribution facilities to be developed in the Menomonee Valley project. Even with those restrictions, demand has remained fairly strong, with four new structures built in the past year.

General Mitchell Field Airport Submarket

This submarket, which extends south and east of the airport and includes the suburb of Oak Creek, has experienced a good deal (for Milwaukee) of speculative construction recently, with the two primary developments coming from CenterPoint and First Industrial. However, leasing activity has been fairly slow. These properties are in close proximity and offer easy access to Interstate 94, which is the main route between Milwaukee and Chicago. Partly due to its prime location, it is anticipated that as the economy improves, demand for industrial space, including manufacturing and distribution, will increase in this area.

Pabst Farms
Oconomowoc, Wisconsin

The 1,500-acre Pabst Farm mixed-use development includes a 200-acre industrial component. The expansive mixed-use endeavor is located along the I-94 corridor between Milwaukee and Madison, and is the farthest submarket west of Milwaukee experiencing substantial development. Within the industrial component, 100 acres has been improved with a 1 million-square-foot Roundy’s Supermarket Distribution Center. The remaining 100 acres will be developed by the project owner; a 30,000-square-foot spec building is slated for construction this spring. Also in this area, Target Corporation operates a 1.2 million-square-foot distribution center.

Interstate 43 / South Corridor

The I-43/South corridor extends from Milwaukee southwest to Beloit and Janesville, Wisconsin. The level of industrial activity in this submarket is substantially less then what is currently underway in the other submarkets. However, with plentiful, less expensive land, this area is expected to garner a lot of attention as the marketplace recovers. 

Investment Market

One of the most active segments for the industrial market is the investment scene. The appetite for net-leased industrial properties is extremely strong. The basis for this is that Milwaukee is considered to be a market where buyers can obtain higher rates of return than what is possible in more competitive areas such as Chicago. Net-leased industrial product is trading at cap rates ranging from just under 8 percent to approximately 10 percent.

Area to Watch

The submarket to watch is the I-94 corridor, which extends due south of the city. As the megalopolis between Chicago and Milwaukee slowly becomes reality, this area will receive more and more attention. Already, the area just north of the Illinois border in Kenosha is considered a submarket of Chicago, with a great number of big box warehouses, and manufacturing and distribution facilities located there. As that market moves north and the I-94’s scheduled reconstruction is launched, there should be a good deal of infill industrial activity between the two cities.

— Samuel Dickman Sr. is president of The Dickman Company/CORFAC International, a full-service, Milwaukee-based commercial real estate brokerage firm.

Milwaukee Office Market

100 East Wisconsin, a high-quality office tower located in downtown Milwaukee, is approximately 95 percent occupied.

Reflecting a slow but stable market, there are no entirely speculative buildings being constructed in southeastern Wisconsin. However, there are several projects underway in the greater Milwaukee area that have pre-leased tenants committed to occupy 40 percent or more of the building, with the developer confident that the remainder will lease. This is the case with Mayfair Woods, a Class A, 132,000 square foot, five story building, which is being developed by Irgens Development Partners in the Milwaukee County Research Park.

We expect a number of projects to be completed on a build-to-suit basis for specific users in suburban Milwaukee. These projects reflect a competitive advantage for the suburban market, where smaller buildings can be “right sized” for the user. Such smaller, customized projects are essentially impossible downtown due to Milwaukee’s higher land costs. While several excellent sites are available in downtown Milwaukee, and several tenants have strongly considered relocation, all ended up renewing their downtown leases.

In the suburban market, there are still a number of land sites available in existing submarkets, which should encourage an organic expansion in established suburban areas. There is as much as a 10- year supply of infill sites available to developers.

For many years, the market kept growing west along Interstate 94 toward Madison, Wisconsin. We believe this trend will continue, but as far as the suburban Milwaukee market is considered, we seem to have realized the outer limit along I-94 and Highway 164 in Pewaukee, Wisconsin. The vast majority of suburban development will take place closer to the city, in the aforementioned infill sites such as Brookfield Lakes, Bishop’s Woods, the Research Park, Burleigh Triangle and Park Place.

Irgens Development Partners is developing Mayfair Woods, a five-story, 132,000-square-foot office building in the 175-acre Milwaukee County Research Park in Wauwatosa, Wisconsin.

With respect to downtown, since the last construction wave in 2000, there has been a great deal of activity that will be supportive of future office development. Approximately 2,500 new condominium units have been added, and numerous restaurants and new public/private projects, such as the improved Riverwalk and the Santiago Calatrava-designed Art Museum on Milwaukee’s spectacular lakefront have opened. Several office headquarters formerly located in the suburban submarkets have relocated downtown, including Roundy’s Foods, Infinity Health and Manpower International. While several excellent sites are available and a number of tenants are in play, there is no office development currently taking place in the downtown area. The most active developers are focusing their energy on the suburban market. However, we think the downtown market is ready to take off due to the aforementioned improvements and the trend of suburban users considering downtown.

The current overall occupancy rate (combining Class A and B properties) is 82 percent, which is down from 84 percent a year ago. However, the Class A occupancy is in the upper-80 percent range, and above 90 percent in the best Class A buildings. The properties regarded as the best Class A buildings — US Bank Center, 100 East Wisconsin and Milwaukee Center — have occupancy rates nearing 95 percent.

— Bill Bonifas is executive vice president in CB Richard Ellis’ Milwaukee office.

CATALYST HOPES TO LIVE UP TO ITS NAME IN DOWNTOWN MILWAUKEE The Ghazi Company, a Charlotte, N.C.-based developer, is developing Catalyst, a $200 million mixed-use project located along Wisconsin Avenue in downtown Milwaukee. The Ghazi Company, a Charlotte, North Carolina-based developer, has a bold vision for downtown Milwaukee. According to Afshin Ghazi, president and founder of the 15-year-old company, there is great potential for the in-town market to grow into a thriving entertainment and retail destination. In an effort to accelerate growth downtown, The Ghazi Company is working to bring a potentially $200 million mixed-use development known as Catalyst to Milwaukee. The 2-acre  development site, a vacant parking lot acquired from the city, is located on a prime plot of land in the heart of downtown, with a full block of frontage along Wisconsin Avenue. The site is situated in a busy corridor; just across Wisconsin Avenue is Midwest Airlines Center, the city’s convention facility, and adjacent to Catalyst is the 730-room Hilton Milwaukee City Center hotel. The Shops of Grand Avenue, which is a huge draw featuring more than 100 retailers, is also adjacent to the Hilton. Catalyst will feature approximately 150,000 square feet of retail, as well as a 170-room hotel and a collection of residential units in a tower above the retail component. Catalyst will feature approximately 150,000 square feet of retail space, a collection of residential units and a hotel. The plans could accommodate up to a 30-story tower above the three-level retail component. Ghazi is in negotiations with hospitality providers to include a 12-story, 170-room hotel on site. The details of the residential component are still being considered, as the current economic environment has impacted the multifamily sector in Milwaukee. The $100 million first phase will focus on the retail and master plan development efforts. “We are still evaluating the residential side,” Afshin Ghazi says. “The Milwaukee residential market is stable, and is well established downtown, and we are exploring our options in regards to the residential development.” The site on which Catalyst is being built has been the subject of intense interest in recent years, as at least two other developers have attempted to build on it since 1999. Environmental concerns reportedly posed significant roadblocks to previous development attempts. Ghazi, however, has no concerns about the land or the location. The federal government has provided a $200,000 grant, and the developer is confident the site will be remediated and ready for development this year. Ghazi has had success with mixed-use development in the past. The developer is currently working on EpiCentre, a retail, residential and hospitality endeavor in Charlotte’s central business district. The Milwaukee project is modeled as a slightly scaled down take on EpiCentre, which is currently under construction. Ghazi has a wealth of experience integrating the mix of uses that will be featured at Catalyst and, after doing the necessary due diligence, he believes that Milwaukee is primed for such a project. “Milwaukee city planners found me [when scouting potential developers for the site],” he says. “I was surprised by what a wonderful downtown Milwaukee has; it is far along in terms of retail and residential product.” Catalyst’s location near the convention center, and its surrounding hotels and shopping centers, initially piqued the developer’s interest. This is the company’s first project in Milwaukee, and the developer himself needed to be certain of the market’s potential for growth and development before committing to the project. “We are interested in urban projects, but only in select markets,” Afshin Ghazi notes. “The city presented a wonderful opportunity to put an exclamation point on Wisconsin Avenue.” A major factor in Ghazi moving forward was its efforts to secure parking for the project’s future users. The developer recently closed a deal with Wispark LLC for a 900-space parking structure south of the development site. The deck is to be used for downtown office workers during the day, and will provide access to Catalyst’s visitors and hotel guests in the evening. The company currently is in the midst of negotiations with retailers and hotel flags, but is not releasing information on prospective tenants at this point. The retail mix is expected to include several restaurants and entertainment concepts, such as a high-end bowling alley or a movie theater. Sometimes it takes an outsider’s perspective to see the full potential in an established city that is seeking to redevelop parts of its urban core. Luckily, The Ghazi Company has a history of following its founder’s intuition into new markets and creating momentum through mixed-use development. Ghazi believes that Catalyst can live up to its name, and create a retail destination in the heart of downtown that will help link the convention center and surrounding retail and hotels to the rest of the city’s entertainment and retail corridors. Development is expected to begin later this year; as retailers come aboard and the plan for the residential component is finalized, it will be exciting to discover just what impact Catalyst will have on Milwaukee. — Kevin Jeselnik

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