CITY HIGHLIGHT, MAY 2009

MILWAUKEE CITY HIGHLIGHTS
Peter Glase, Steve Sewart and Matthew Fitzgerald

Milwaukee Retail Market

At close of the first quarter of the year, the Southeastern Wisconsin retail vacancy rate totaled 10.4 percent, up 1.4 percent from a year ago. The growth in the greater Milwaukee retail vacancy rate was primarily driven by the closings of several large-format retailers over the last 6 months.

Changes in the retail environment have caused a shift in the Southeastern Wisconsin retail real estate market. More retailers are looking to existing developments or vacant boxes to expand as the tide of new development wanes. There are several major retailers looking to retrofit existing stores rather than build new boxes.

Despite the negative news and stores closures, the Southeastern Wisconsin market is still experiencing some significant retail activity:

• Wal-Mart is expanding and/or remodeling several area stores to include more grocery items. These stores include Southgate, East Capitol Drive, Midtown, Brown Deer Road, Franklin and Delafield. The retail giant is also moving forward with plans for new stores in Muskego and Waukesha. A new Wal-Mart Supercenter and a Sam’s Club will open at Somers Market Center this summer in Somers, which is located in Kenosha County along Highway 31.

• Target has opened two new stores at Prairie Ridge in Pleasant Prairie and the Shoppes at Wyndham Village in Franklin. The retailer has a third new store scheduled to open later this year that will anchor the Shoppes at Fox River in Waukesha.

• Pick ‘n Save is relocating several of its Milwaukee-area stores into new formats. The grocer recently announced plans to relocate its existing store at 76th Street and Good Hope Road into a 102,000-square-foot former Home Depot shell. There are new Metro Market stores, which, like Pick ‘n Save, come from Roundy’s Supermarkets Inc., planned for the Brookfield and Mequon markets, and new grocery store will also open later this year at the Shoppes at Fox River in Waukesha.

• Kohl’s recently opened a new location in the Burlington market. The store is part of a new 140,000-square-foot development that is also anchored by a relocated Pick ‘n Save store.

• Woodman’s Market has opened its first Milwaukee-area store — its 240,000-square-foot warehouse concept — in Oak Creek, and has recently announced plans to build an additional store in Menomonee Falls in 2010.

• Redevelopment activity continues along Mayfair Road. A new Pick ‘n Save store is under construction on the former Renner Automotive site, while the 4-acre Ewald Automotive site was recently purchased for $5.7 million. Plans for the Ewald Automotive site call for a new a 35,000-square-foot Dave & Busters entertainment center.

Other active retailers in the market include Aldi, A.J. Wright, AT&T, Citi Trends, CVS/pharmacy, Dick’s Sporting Goods, Dollar Tree, Gamestop, Get It Now, Goodwill, Maurices, Petco, Petsmart, Rogans Shoes, TJ Maxx, ULTA and US Cellular. The auto parts category is also very active, with Advance Auto, Auto Zone, Napa Auto Parts and O’Reilly Auto Parts all looking to add or reposition stores in the market.

There is also significant activity from non-traditional retail users such as automotive services, entertainment centers, health clubs and massage/wellness centers. Active users in these categories include Dave & Busters, Firestone, Anytime Fitness, Snap Fitness and Gold’s Gym.

Active restaurants include A&W, Buffalo Wild Wings, Chili’s, Five Guys Burgers & Fries, Flat Top Grill, Jimmy Johns Gourmet Subs, Sonic, Subway, Taco Bell, Tazino’s Pizza and Salad Bistro, and Qdoba. Flat Top Grill recently opened its first Milwaukee area location at the One Mayfair Place development in Wauwatosa. Sonic recently opened its first Wisconsin location at the end of February along the Miller Parkway corridor in West Milwaukee.

Retailers and restaurants that have closed stores in the market over the last several months include Circuit City, Linens ‘n Things, The Home Depot, Kmart, Steve & Barry’s, Sportman’s Warehouse, Big Lots, Workwear Depot, Tumbleweed, and Outback Steakhouse. Expect retailers such as Aldi, Burlington Coat Factory, Gold’s Gym, Goodwill, Hobby Lobby, and Pick N Save to continue to take advantage of these market conditions in an effort to expand into areas where, until recently, very few opportunities existed.

This trend is occurring along Bluemound Road, which is Milwaukee’s most active retail corridor. There are several junior anchor vacancies, measuring 15,000 square feet and up, that have created opportunities for retailers to expand along this corridor. Aldi recently opened in the former Gander Mountain space and Dollar Tree recently signed a lease to occupy space in the same center. A new Rogans Shoes store was built on the former Childrens World daycare center site. There are several other retailers looking to reposition themselves along Bluemound Road in the spaces vacated by retailers such as Circuit City, Comp USA, Lay Z Boy, and Linens ‘n Things.

For the remainder of the year, expect some of the vacant, large-format retail space to be absorbed. New construction will continue to decline as speculative development has come to a halt and retailers continue to look to existing inventory for expansion opportunities. Both of these trends should cause vacancy rates to recover over the next year.

— Peter Glase is a first vice president in the Retail Properties Group in CB Richard Ellis’ Milwaukee office.

Milwaukee Industrial Market

The Southeastern Wisconsin industrial market experienced a decline in the amount of transactions in the fourth quarter of 2008 that has continued through the first quarter of the year. This is primarily a result of an unstable national economy and an unprecedented tightening of bank credit. Overall, the industrial market saw little negative absorption and, for the most part, remained stagnant from the third quarter of 2008 to the end of the first quarter. The biggest bright spot of the second half of 2008 was the General Mitchell International Airport submarket, which experienced significant absorption of some speculative development product that has remained largely vacant since being built in 2006.

Typical asking rental rates for new construction continue to remain at $4.25 to $4.75 per square foot for warehouse space and $8.50 to $9.75 per square foot for built-out office space. Currently, most leases are being signed around $4 per square foot for warehouse product and $8.50 per square foot for finished office space. Second-generation space could see more activity this year, due in large part to the more economic rates and greater flexibility for short-term deals found in that property type. Rates — $3.50 per square foot for warehouse space and $7.50 per square foot for built-out office space — in these older industrial buildings have remained unchanged for several years. The western Milwaukee submarket has continued to have the lowest vacancy rates of all Southeast Wisconsin markets, at 5.8 percent. Conversely, the North Central submarket has the highest vacancy rate, 21.1 percent, which can be attributed to an abundance of old product and the emergence of newer facilities in the Western submarket.

Due to a weakened economy nationally and general uncertainty locally, Inland Companies is anticipating that the Southeast Wisconsin industrial market will continue to be slow until picking up pace towards the end of the year. Even with the slow economy, there are still active deals in the market, primarily driven by tenants looking to take advantage of increased landlord concessions and aggressive lease rates. Short-term deals have been commonplace this year, driven by companies’ hesitance to pull the trigger on long-term expansion plans until the future becomes clearer. Generally, larger global firms have been pulling back development and putting deals on hold, while smaller local companies have remained active in the market.

New industrial construction starts will remain low because of the availability of existing spec space that is on the market from previous years, as well as continued uncertainty in the capital markets. Vacancy rates will most likely remain constant through the second and third quarters, but with a lack of new development, vacancy should start to decline by early 2010. The greater Milwaukee industrial market will be stable through this year, with most tenants opting to remain in their current locations while others are forced to downsize. The market may be hit with negative absorption in the first half of the year, but activity should pick up during the second half.

The industrial investment sales market has not been immune to the economic recession that began in late 2007 and carried through the fourth quarter of 2008. According to NAREIT, investment sales in the United States were down 60 percent in 2008 compared to a robust performance in 2007. That equates to approximately $7.1 billion less in investment property changing hands in 2008. Most forecasts for 2009 have painted an even gloomier picture with respect to transaction volume. As the large, opportunistic vulture funds begin to absorb the toxic assets of the banks, many local investors are attempting to get into the act by finding value plays. In mid-December 2008, Chicago-based Capital Realty acquired a 100 percent leased, 126,000-square-foot distribution center located in Franklin, Wisconsin, for $6.8 million, or $54 per square foot. Additionally, Milwaukee real estate investment professionals are currently tracking the sales of several large Chicago industrial portfolios that are rumored to be on the market in the 10-to-11 percent cap rate range. If these portfolios sell for attractive cap rates in the coming months, it will definitely have an impact on value for real estate owners in southeast Wisconsin.

— Steve Sewart is a vice president of industrial brokerage with Milwaukee-based Inland Companies Inc.

Milwaukee Multifamily Market

With renter demand forecast to ease and deliveries increasing, vacancy is expected to rise in the Milwaukee apartment market in 2009, resulting in moderately lower rents by year-end. Although minimal construction has kept apartment vacancy largely in check, early estimates show that vacancy ended the first quarter at 4.3 percent, 50 basis points higher than one year earlier and up 60 basis points since the end of 2008. Vacancy has been most volatile in the metro area’s limited number of Class A properties. During the past 12 months, vacancy in the top tier has increased 140 basis points to 4.6 percent. In the lower tiers, fundamentals continue to improve year-over-year, vacancy has dropped 10 basis points to 3.9 percent. Since peaking in the fourth quarter of 2004, vacancy in Class B/C properties has declined by nearly 300 basis points. For the year, vacancy is forecast to rise 90 basis points to 4.6 percent, based on construction activity and slowing renter demand.

Rising vacancy has caused asking rents to dip through the first quarter, year-over-year, 1 percent to $831 per month, while effective rents fell 0.8 percent to $797 per month. Owners began trimming rents in the fourth quarter of last year, and asking and effective rents have contracted by 1.9 percent and 2.2 percent, respectively, since that time. Class A asking rents have declined more than Class B/C properties, with the upper-tier properties showing a 1.6 percent drop to $1,055 per month during the past 12 months; Class B/C properties have slipped 0.6 percent to $749 per month. As owners have trimmed rents in light of the weak economy, the average revenue has decreased 1.4 percent during the last year. In the outlook for the year, rents are expected to inch down 2.1 percent to $823 per month while effective rents are forecast to drop 2.5 percent to $787 per month.

Softening fundamentals will not be consistent across the board, however, and the key determinant for property performance at the submarket level will be the impact of new construction. In areas where builders have been inactive in recent years, such as West Waukesha County and the Greenfield/Greendale/Franklin submarket, vacancy is forecast to rise more modestly, and rent declines should be less than 1 percent. In other parts of metro Milwaukee, particularly the City West and City East submarkets, where inventory expansion continues, vacancy increases will likely exceed 100 basis points, and rent contraction will be more significant in the coming quarters. Employment losses remain the primary threat on the demand side, as two of the metro area’s largest employment sectors — professional and business services and manufacturing — each are expected to shed more than 7,500 jobs by the end of the year.

Investment activity has slowed in recent quarters and will likely continue to be restrained in the coming months, as the expectations gap between buyers and sellers remains fairly wide. First quarter sales trends show that the pricing expectations gap has slowed transaction activity. Buyers have begun to seek deep discounts when pursuing properties, while owners have been unwilling to cut prices due to still-tight vacancy levels. As a result, sales velocity has declined roughly 16 percent year-over-year. During the past 12 months, the median price for all properties sold has declined 1.1 percent to $53,500 per unit. Valuations have held fairly steady in the last 3 months; the median price for assets that changed hands in that time was $53,700 per unit.

Cap rates have edged higher, averaging in the high-7 percent to mid-8 percent range over the past year, up 30 basis points from the previous period. There has been additional upward pressure on cap rates since 2009 began, as some deals have closed with first-year yields approaching 9 percent. In many cases, investors are anticipating deep discounts that have yet to materialize. Most properties are operating soundly, and buyers seeking distress-level pricing are unlikely to find many opportunities in the Milwaukee multifamily market. Going forward, investors may want to target properties in the lower tiers, which rarely compete with newer high-end units, keeping vacancy below the metro average. Distressed apartment properties in the Milwaukee metro are limited; as such, buyers that choose to wait on the sidelines in anticipation of deep discounting will run the risk of missing opportunities.

— Matthew Fitzgerald is the regional manager of the Milwaukee office of Marcus & Millichap Real Estate Investment Services.

THE PABST BREWERY COMES BACK TO LIFE The effort is underway to revitalize Milwaukee’s former flagship brewery. Coleman Wood Zilber Ltd. is the master developer of The Brewery, and is behind the effort to redevelop the former Pabst Blue Ribbon brewery in Milwaukee into a true mixed-use community. Milwaukee is a city steeped in a beer brewing tradition, and some of the largest breweries in the country have called the city home at one time or another. The city’s baseball team is even named the Brewers, and the stadium they play in is named after Miller, perhaps the city’s best-known beer company. While Miller may be the most famous of today’s Milwaukee breweries, the legendary Pabst Brewery is just as intertwined in the city’s history. Founded in 1844, Pabst’s downtown Milwaukee complex was at one time the largest brewery in America. Its closing in 1996 left a large hole in the downtown neighborhood, and a local developer has found a way to fill it. At 91, local developer Joseph Zilber remains active in the Milwaukee community through his development company Zilber Ltd. when many others would have long since retired. He is also an avid philanthropist and has given away tens of million of dollars to various organizations in just the past few years alone. In 2006, he began perhaps one of his biggest projects when acquired the former Pabst Brewery site and vowed to redevelop it into a vibrant mixed-use community. He has decided to follow a unique path to redevelopment, though. Zilber has decided to take on the role of master developer of the project and sell the buildings and land parcels separately to other companies for development. The Brewery will feature office, residential and retail space. “Early on, we decided we would be the master developer for the project, and that decision was made because of the magnitude of the project itself — we’re talking over 20 acres and over six square blocks,” says Mike Mervis, vice president of The Brewery Project LLC, an affiliate of Zilber Ltd. that is overseeing the project. Mervis adds that in addition to the project’s size, it also contains a number of historic buildings Zilber was intent on preserving. The combination of vacant land parcels, historic buildings, and non-historic redevelopment projects provides development opportunities to many different types of companies. “I think it’s a really unique approach, particularly when you have a combination of historic buildings and raw land sites,” says Dan McCarthy, also a vice president with The Brewery Project LLC. He adds that historic preservation is a niche market and developers with that type of specialized knowledge are always looking for new opportunities, which has kept interest high for The Brewery Project. The 237,000-square-foot Bottling Building, formerly used by Pabst to bottle beer, is the largest structure within The Brewery and being converted into office and education space, potentially for the University of Wisconsin-Milwaukee. This project-by-project approach to development is not a new thing. When this country’s biggest cities started growing around the time of the Industrial Revolution, they were created one building at a time an array of developers. This same approach will allow the Brewery Project to evolve into a true neighborhood, rather than a pre-planned community. “I think a very unique feature is that we will provide, instead of the Disneyland approach of one developer trying to make everything fit neatly together, a true organic development platform that real cities are built upon,” McCarthy says. One of the first buildings to be developed at the brewery is the former Keg House, which was redeveloped by local company Gorman & Co. into Blue Ribbon Lofts, a 95-unit loft apartment community. According to McCarthy and Mervis, the building is approximately one-third rented, but they are expecting full occupancy soon. Leasing is also coming along at the old Boiler House, which was redeveloped into a 59,180-square-foot office building by another local full-serve real estate firm, Inland Companies. The space is currently two-thirds occupied, and tenants such as Albion Architects and AMB Development have recently move into the building. It is no coincidence that local companies worked on both projects. Zilber has stressed the importance of bringing in local companies to redevelop the brewery, both as a way to invest local dollars within the city limits and so that these companies have more of a stake in revitalizing their neighborhood. Blue Ribbon Lofts contains artist spaces, too, as a way to help the local artist community. Zilber even is giving preference — as well as favorable lease terms —to locally based companies for the retail component of the project. “We have deep roots in the Milwaukee community, and we felt that in addition to our partnership with the city…that we had an obligation to do all we can to help, assist and encourage local retailers,” Mervis says. The Brewery, from Zilber Ltd., is equipped to host a variety of office users in an eclectic mix of renovated and/or new buildings. The future of The Brewery Project is only looking brighter. This June, the old Laboratory Building will be reborn as a new facility for Cardinal Stritch University. The Milwaukee campus of the University of Wisconsin (UWM) is also creating a School of Public Health at the brewery, thanks in large part to a $10 million donation from Joseph Zilber to make the school a reality. In addition, UWM is in talks to relocate three more schools from its eastside campus to the 237,000-square-foot Bottling Building, the largest structure at the brewery. “If [the UWM deal] all comes together, it would be a spectacular setting of a great historic building and four different colleges — one graduate and three undergraduate — as well as support services for students and faculty,” McCarthy says. Also under construction is an 880-space parking structure that is scheduled for completion this fall. Several local technology firms, including Astronautics Corporation of America, are looking to relocate to the brewery and would need substantial amounts of office space to house their operations. McCarthy mentions that hotel developers are greatly interested in the site, but the current financial market has delayed such a project. There are currently 13 buildings left for purchase, as well as additional vacant land parcels, which has raised excitement for the type of community the former brewery will ultimately become. The Brewery Project is also participating in the pilot program for LEED for Neighborhood Development and is seeking Platinum-level certification. The project has even published its sustainability guidelines, which McCarthy refers to as “almost a how-to guide for sustainable building practices.” This step further demonstrates one of Zilber’s goal with the Brewery Project: to inspire others to attempt redevelopment projects such as this in their cities. “I think, when all is said and done, we will show that good planning, a good working relationship with the city, and historical preservation can be successful if you take your time and go about it in a methodical way,” Mervis says. “And there are consumers, both large and small, who are most desirous of being in such a setting.” Mervis believes that there has to be a pioneer with a project like this; someone who proves that it can be done and provides a model for others to follow. “I think that would be potentially our most satisfying role — that we would be used as a demonstration to show other people what could be done,” he adds. Joseph Zilber has built quite a name for himself in the Milwaukee community as a developer and philanthropist. But in the twilight of his years, redevelopment of the Pabst Brewery, and its subsequent revitalization of downtown Milwaukee, is sure to cement his legacy.

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