CITY HIGHLIGHT, MAY 2011

MILWAUKEE CITY HIGHLIGHTS
Steffi Krolikowski, Samuel Dickman, Samuel Dickman Jr., Brian Parrish, Adam Connor

Milwaukee Office Market

The beginning of 2011 has felt energizing and promising for the Milwaukee office market. Although business is not improving as swiftly as most would like, we have seen leasing steadily increase. At the end of 2010, the office vacancy hovered around 20 to 23 percent and has remained in that range for the first quarter of 2011. Sales and developments are still lagging a bit, but we expect to see an increase this year. 

The sale of the Loyalty Building at 611 N. Broadway Ave. and plans to convert it to a hotel have forced current tenants to find new space. Some have already found space, while others are seeking space close to their current locations. This activity has caused an increased buzz about the office market in the central business district. 

Von Briesen & Roper S.C.’s ongoing negotiations with developers still leaves everyone questioning if the company will relocate and initiate a new downtown office building. Baker Tilly Virchow Krause recently signed a letter of intent to lease space in Washington Square, a proposed downtown building comprised of predominantly office space. Godfrey & Kahn S.C. has also committed to this project and signed a lease. The recent commitments solidify the probability for Washington Square to break ground this summer. Those in the commercial real estate community are divided on the issue of a newly constructed office building — some want to see a brand new Class A building option for downtown, while others feel the vacancies in existing buildings are the priority.

Additionally, the Marcus Corporation/Von Maur project in Brookfield is drawing much attention. Although mostly retail, there will be a Class A office component to the project. The competition between the new space and existing Class A space in the Crossroads buildings just across the freeway should increase activity in that submarket.

— Steffi Krolikowski is a sales associate with NAI MLG Commercial in Milwaukee.

Milwaukee Industrial Market

The industrial real estate market for Southeastern Wisconsin in 2011 looks very positive. Many indications that started in the fourth quarter of 2010 have continued to become stronger in 2011. The most positive is the increased activity and closed deals in the brokerage community. During the first quarter of 2011, there was 1.09 million square feet of positive absorption, with the regional vacancy rate declining further to 8.2 percent.

When the economy slowed, the two areas that remained steady were the areas around the Milwaukee Airport (Mitchell International) and Pewaukee on the western edge of metro Milwaukee. These areas have a minimal supply of large available properties and have seen the most action in recent months. This activity should continue and, as the economy improves, expand into other areas as companies search for quality real estate.

In the last few years rental rates have dropped considerably, construction costs have risen, and developers can no longer afford to build speculative properties. Rental rates started to rise in the fourth quarter of 2010 and will continue to rise as the lack of space becomes more apparent as companies need to move. As rates get higher, demand will reach a point where new construction becomes viable again. The volume and sale prices for existing buildings have also started to increase and this should continue as lack of space may become an issue.

For the eight-county area of Southeastern Wisconsin in 2010, we saw the overall vacancy rate decrease from 9.2 percent in the first quarter to 8.6 percent in the fourth quarter. This occurred as the region experienced 1.98 million square feet of net positive absorption. While a tremendous amount of the positive absorption occurred in Racine and Kenosha counties, all of the counties, except for Milwaukee and Sheboygan, experienced a positive trend in vacancy and absorption statistics.

Milwaukee County saw a 9.2 percent increase in the vacant space, with 11.33 million square feet of currently vacant space at the end of the year. This amount is almost half of the vacant space for the entire eight-county metro area.

The bright spot for the overall market has remained Racine and Kenosha counties. For Racine County, the vacancy rate dropped from 6.7 percent (Q4 2009) to 4.7 percent (Q4 2010) with 790,960 square feet of positive absorption in 2010. For Kenosha County, the vacancy rate dropped from 13.1 percent (Q4 2009) to 9.7 percent (Q4 2010) with 1.66 million square feet of net positive absorption in 2010. A majority of this net change in absorption can be attributed to the new construction of the Uline Corporate Campus in Pleasant Prairie of approximately 1.1 million square feet on 20 acres.

Despite the positive news, we did note the closing of the Chrysler Engine Plant in Kenosha, totaling 1.9 million square feet on 109 acres.

While we are a healthy market, we are not robust. We are moving in the right direction. The industrial market is much better than it has been. We feel that overall the value of real estate will continue to rise and vacancy rates will drop as companies in our metro return to the marketplace.

— Samuel Dickman is chairman, Samuel Dickman Jr. is president and Brian Parrish is vice president with Milwaukee-based The Dickman Company, Inc./CORFAC International.

Milwaukee Retail Market

After what was a down year for the retail in 2010, as far as development and new stores are concerned, there is a reason for optimism for the retail market in 2011. In the past few years many issues stood in the way of new business in Wisconsin. Now with new leadership in place, Wisconsin is open for business. State and local governments are working with private industries to repeal a sick leave mandate and encourage the growth of private sector companies that create jobs. With the onset of a new year, Wisconsin has started down the path to economic recovery and with that retail expansion.

While the glory days of retail development in 2007 may take years to return, there have been some positive indicators so far in 2011. Large retailers such as Kohl’s and Target posted declines in same stores sales, however those drops were less than expected. Costco, which opened a location in Grafton 3 years ago and is scheduled to open a new 148,000-square-foot store in Pewaukee, posted gains for the month of March at stores open a year or more.

New retail developments have also been proposed showing increased confidence in financing and national retailer expansion. Iowa-based Von Maur has committed to a new $120 million open-air, mixed-use development in the Town of Brookfield that will change the landscape of upscale retail in Wisconsin. The Marcus Corporation, which is developing the project, says Von Maur will build a 150,000-square-foot store, in addition there will be 250,000 square feet of high-end fashion retail on site. At Simon’s Southridge Mall in Greenfield, Macy’s is rumored to be in line to replace the former Steve and Barry’s and Linens ‘n Things. HSA Commercial Real Estate has proposed the Mayfair Collection in Wauwatosa with retailers such as The Container Store and Nordstrom Rack, both of which will be first-to-market in Wisconsin. The Mayfair Collection is the first phase of the Burleigh Triangle, a proposed 62-acre, mixed-use development.

The Milwaukee market has also seen an increase in the turf war over market share for grocery sales. While Roundy’s has more than 54 percent of the market share, Woodman’s, Aldi, Sendik’s, Sentry and Walmart are jockeying to take a chunk away from Roundy’s. During the past 12 months, Walmart has aggressively pursued a number of new stores in the Milwaukee area looking to grow its Supercenter and new Neighborhood Market concept.

These projects show that the market has started to turn the corner, however there are still numerous assets around the state that could be in trouble of foreclosure. Local and state governments have realized the importance to create tax increment financings as a catalyst for new development and job creation. This kind of proactive thinking and progress needs to continue at the county and city level in Milwaukee so the market can continue its turnaround.

— Adam Connor is a vice president of Milwaukee-based NAI MLG Commercial in Milwaukee.

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