CITY HIGHLIGHT, MAY 2010

MILWAUKEE CITY HIGHLIGHTS
Russell Sagmoen, James Barry

Milwaukee Retail Market

During the first quarter of 2010 the Milwaukee retail market has seen an uptick in leasing activity compared with the same period in 2009. Last year witnessed vacancy rates of more than 11 percent and we anticipate vacancy rates to slowly decline in late 2010 and throughout 2011. Retail rental rates have also come down during this period. Average asking rental rates of $18 to $20 per square foot triple net have come down to an average of $15 to $17 per square foot triple net.

Retailers that continue to close stores include Blockbuster, The Home Depot and Lowe’s Home Improvement Warehouse just to name a few. While most of the Blockbuster and Hollywood Video stores are in decent position to be absorbed by smaller tenants, the larger box and mid-box retail space may take longer to backfill.

During the downswing over the past 18 months the category that has faired the best has been the grocery sector. With Woodman’s breaking ground on a 240,000-square-foot grocery store in Menomonee Falls, Wisconsin, Roundy’s countered by flanking the proposed Woodman’s with two new 100,000-square-foot Super Pick N’ Save locations in northwest Milwaukee and Menomonee Falls. Both Super Pick N’ Save stores are relocations and expansions of existing locations. At 76th Street and Good Hope Road in Milwaukee, Pick N’ Save moved from the northwest corner to backfill the former The Home Depot on the southwest corner. On Appleton Avenue in Menomonee Falls, Pick N’ Save moved next door to the former Sears Grand Store.

With the exception of a few single tenant projects we expect to see very little new retail development in 2010. Most of the development will focus on the relocation and repositioning of existing stores. One such example is Wal-Mart, which has begun construction on a new Supercenter in Waukesha on Highway 59 and Southwest Avenue only a few miles from an existing Wal-Mart store.

One submarket that has begun to reinvent itself and looks to continue that trend is the Sunset Drive corridor on the Southside of Waukesha. The Shoppes at Fox River, which includes Target and Pick N’ Save, has had success attracting small shop retail in this densely populated but under served retail market. Opus North kicked off the project at the former Super Valu distribution site just as the market started to slide, but the development was remarkably successful given the current retail climate. 

Overall the metropolitan Milwaukee retail market has good fundamentals and did not see the extreme over supply of space as in other markets. In 2010 we expect more discount retailers such as outlet stores, thrift shops, auto parts, dollar stores, etc. to continue to take advantage of opportunities in prime retail vacancies from some of the premium stores closing their doors. This trend of backfilling existing space will help reduce the vacancy rate in late 2010 and early 2011.

— Russell Sagmoen is an associate broker with the retail brokerage division of Milwaukee-based Inland Companies.

Milwaukee Office Market

Like other real estate markets, the metropolitan Milwaukee office market has experienced significant challenges during the Great Recession. Vacancy rates are up, lease rates have declined and, with some notable exceptions, major new developments have been stalled. Nevertheless, compared to many other U.S. markets, the metro Milwaukee office market appears to have weathered the economic downturn fairly well. There have been relatively few office projects that have gone into foreclosure or receivership and relatively few major office tenants who have abandoned their space. In part, this is because the metro Milwaukee office market saw very little speculative overbuilding during the boom times preceding the downturn. Most major office properties were relatively stabilized going into the recession and have been able to manage through the challenges presented by a very tough market. Consequently, the metro Milwaukee office market should be on the path to recovery during the remainder of 2010 and into 2011.

Since the fourth quarter of 2008, the overall metro-Milwaukee office vacancy rate has risen from about 17.7 percent to more than 19.5 percent; however, the vacancy rate for Class A space in the central business district (CBD) is less than 15 percent and appears to be declining, with very few large, contiguous blocks of Class A space available. The relative strength of the Class A CBD market has raised the possibility that one or more new office towers might be developed in downtown Milwaukee in the next year or so. Developers such as Irgens Development, Hammes Co., Joel Lee, Doug Weas, the Levine family and a partnership involving Bruce Westling and Gary Grunau have all floated plans for a possible downtown office tower. The key to any of these proposals will be securing an anchor tenant. Potential anchor tenants include the national accounting firm Baker Tilly, the Von Briesen law firm and Marcus Corporation. In all likelihood, there will be an announcement of at least one new downtown office project during 2010.

The suburban Milwaukee office market has also seen an increase in vacancy rates, but submarkets such as Ozaukee and Waukesha Counties remain relatively strong, with vacancy rates at or below 14 percent. Nevertheless, there is little to no new suburban office development at this point and very little planned. Fortuitously, projects that came on line towards the beginning of the recession — such as Irgens Development’s Mayfair Crossings building — have had decent leasing activity. There are few suburban office projects in the distressed category.

One bright spot in the office market has been the expansion of adult educational facilities both in the suburbs and downtown. Herzing University recently added a Brookfield location in a building owned by Towne Realty and developer Dan Druml is anchoring a major downtown redevelopment site with a 45,000-square-foot lease to Everest College.

Not surprisingly, leasing and sales activity for office product slowed down during 2008 and 2009. Nevertheless, there are preliminary signs of a resurgence in activity. Holter Financial Group recently announced that it will lease 25,000 square feet at 100 East Wisconsin Avenue, one of Milwaukee’s premier office buildings. And on the investment sale front, Endeavor Co. recently purchased the 86,000-square-foot Executive Center IV office building in Brookfield from VK Development LLC.

In summary, while the metropolitan Milwaukee office market has not been immune from the forces that took their toll on the national office market, Milwaukee’s slow-and-steady approach to office development and a diversified tenant base have positioned Milwaukee to endure the recession better than many other metro areas. Should we have a sustained economic recovery, the Milwaukee office market will see its vital signs strengthen and should see some interesting, but prudent, development in the next year or so.

— James Barry is president with Cassidy Turley Barry in Milwaukee.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.