There’s an interesting redevelopment project underway in Menomonee Falls.
Dynamic Tool Corp., a plastic injection molder based in the village, is converting a former office building into a manufacturing facility.
The 110,000-square-foot building was used by Kohl’s Corp. until 2021, when the company vacated the space as it reassessed its office footprint amid the shift to remote and hybrid work. A year later, Dynamic Tool purchased the building and began major renovations.
“The building was just a wall-to-wall expanse of partition walls and cubicles, literally hundreds,” said John Berg, head of business development for Dynamic Tool. “But we removed all those, removed the drop ceiling, we are literally sawing through the existing cement floor and taking it out in large slabs and then will be pouring a significantly more weight-bearing floor in so that we can move in our injection molding machines. We’re basically going soup to nuts.”
As witnessed in places like the Historic Third Ward, Walker’s Point and Schlitz Park, Milwaukee is full of often-historic industrial buildings that were converted into office space. In all, about 5.5 million square feet of industrial space in Milwaukee has been converted into office space, according to one commercial real estate broker’s estimate.
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The shop floor at Dynamic Tool Corp.’s current facility at W133N5180 Campbell Drive in Menomonee Falls.[/caption]
Up until recently, however, it’s been rare to see a project like Dynamic Tool’s, in which an office building is converted into an industrial building.
“You never would have seen this type of conversion in the past,” said Jim Barry, president of Milwaukee-based commercial real estate firm The Barry Company. “You would have seen industrial shift to office because office was seen as a higher and better use. What you’re seeing now is nothing’s happening with these office buildings and consequently, industrial is the higher and better use.”
The project is emblematic of the nation’s post-COVID commercial real estate landscape, Barry added, in which market shifts have resulted in a strong industrial market, with historically low vacancy rates, and cultural shifts around office work have resulted in a glut of office space.
“In the (commercial real estate) hierarchy, office was once on top and industrial was on the bottom, and now you’re seeing industrial higher on the food chain than office, which is something I never thought I would see, but that’s the case,” Barry said.
Nationally speaking, the metro Milwaukee area, which includes Milwaukee, Ozaukee, Washington and Waukesha counties, is not alone in seeing more heat in the industrial real estate sector, but the Milwaukee area does stand out with the lowest industrial space vacancy rate among U.S. cities, leading companies like Dynamic Tool to take innovative approaches to navigate a tight market.
Milwaukee also stands out with its office market, in which, although vacancy is up, several trends have kept it relatively healthy and active, at least compared to many other major U.S. metro areas.
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Pandemic fuels industrial growth
Dynamic Tool, which was founded in the Milwaukee area about 40 years ago, had been experiencing steady growth for several years, Berg said, but the onset of the COVID-19 pandemic drove its growth to new levels.
In 2020, Dynamic Tool began making components for hand sanitizer bottles and dispensers, face masks, face shields and respirators.
“There were hundreds and hundreds of products that were impacted, and the volume quadrupled or even multiplied by 10 suddenly,” Berg said. “Because of the reputation we had, we were one of the beneficiaries of that.”
Pandemic-era growth, which has resulted in more than a 25% increase in employees for Dynamic Tool, led to the company’s need for more space.
“After COVID and some of the commercial real estate turmoil that happened as a result, the old Kohl’s building was (available at) an attractive enough price where Dynamic ownership envisioned that, since there are so many great things about this facility, that it beats converting a strict manufacturing facility that’s probably more expensive to begin with,” Berg said.
“But we’re certainly not the only company that can say COVID accelerated our growth,” he added.
"In the (commercial real estate) hierarchy, office was once on top and industrial was on the bottom, and now you're seeing industrial higher on the food chain than office, which is something I never thought I would see"
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Jim Barry, The Barry Company[/caption]
A shift in consumer demand, evidenced mostly by the rise of e-commerce, has led to an increase in warehousing and distribution needs across the nation. In southeastern Wisconsin, this trend is evidenced by a wave of development along the I-94 North-South corridor in Racine and Kenosha counties, but logistics demands have impacted the industrial real estate market closer to Milwaukee as well.
“It’s not as dramatic here as we’ve seen in Kenosha with Uline and Amazon, but Amazon and others have a presence here in metropolitan Milwaukee and there are lots of distributors who have last-mile requirements,” Barry said.
However, in metro Milwaukee, a significant amount of industrial growth has also been driven by manufacturers expanding.
“For a while, the third-party logistics groups really dominated the activity. Recently we’ve seen them pull back, and we’ve started to see the majority of our transactions related to manufacturing uses,” said Joe Carollo, vice president at JLL.
Nationally, construction spending related to manufacturing reached $108 billion in 2022, according to U.S. Census Bureau data. That’s the highest annual total on record – more than what was spent to build schools, health care centers or office buildings.
The uptick in manufacturing-related construction spending is a result of companies seizing on government incentives to expand their operations, such as in the electric vehicle or renewable energy space, and other companies that once relied exclusively on lower-cost countries to manufacture goods have found reasons to come home.
“The expansions that we’re seeing now, maybe 10 years ago would have gone and expanded into Mexico or another country, but with where the economy is now, more of that growth is happening locally,” said Gard Pecor, senior market analyst with CoStar Group, a commercial real estate analytics company.
“We do very good growing our own businesses,” said Jeff Hoffman, an industrial real estate broker and principal at Cushman & Wakefield | Boerke.
Due to the significant electrical servicing need that manufacturers require, Hoffman said, southeastern Wisconsin has a competitive advantage in the manufacturing renaissance thanks to the capacity it has available on its electrical grid from We Energies.
Space shortages and rent increases
Like much of the nation, the Milwaukee area is now seeing historically low vacancy rates in the industrial market, with CoStar Group reporting vacancy as low as 2.4% in metro Milwaukee, which is tied for the lowest industrial space vacancy rate in the nation with Greensboro, North Carolina; Grand Rapids, Michigan; and Miami, Florida.
“We’re in a really good spot, with some very strong growth with local manufacturers,” Pecor said.
Data also shows that southeastern Wisconsin has seen positive absorption, meaning an increase in total space occupied in the market, in the industrial sector every quarter since at least 2019, indicating that the industrial real estate market in the area continues to grow. Southeastern Wisconsin, including Racine and Kenosha counties, has absorbed a total of 24.8 million square feet of industrial space since the third quarter of 2019.
The result has been increasing competition for tenants seeking a limited amount of available industrial space in the area.
“Traditionally, we’d be working with a tenant and would have five or six different options within a geographic area for them,” Barry said. “Now, we have maybe one. We’ve had a number of prospective tenants or buyers who are just waiting because they have not found what they wanted.”
This is especially true in areas like Waukesha County. Brokers say that some municipalities, including Sussex, Pewaukee and the city of Waukesha have seen lots of new industrial development in recent years. However, that development is starting to slow down as the amount of immediately developable land in those places gets swallowed up.
The shrinking supply of available land is pushing more industrial real estate development outward to areas like Germantown, Oak Creek and Caledonia. It’s also driving rent rates and sale prices of industrial space up dramatically. Some area industrial space rental rates are now as high as $9 per square foot, which is almost double the rates a few years ago, according to brokers.
“Our prices and lease rates were always very stagnant, and we’ve seen a dramatic jump in both of those in the last couple of years,” Barry said. “Although we lag behind the rest of the nation, once we catch up, we don’t go back down.”
But brokers and real estate experts are bracing for maybe even more of a shortage of industrial space in the near term. Decades-high interest rates and increasingly high construction costs have made all types of development more expensive and complicated.
While the Federal Reserve’s theory is that higher interest rates will cool inflation and slow the economy overall, some locally are wondering if the area’s demand for industrial space will slow down as much as its real estate development.
“I think (the slowing) has occurred in the real estate area, but it hasn’t really occurred as much in manufacturing,” said Barry. “I do see moderation on the horizon. During my career, this is the strongest industrial market I’ve ever seen.”
Office market softens
Meanwhile, things have been trending in the opposite direction in Milwaukee’s office market.
The vacancy rate in metro Milwaukee has reached a near four-year high of 16.8%, or 9.4 million square feet, according to third-quarter data from the Commercial Association of Realtors Wisconsin.
Still, that’s lower than the national vacancy rate of 17.8% and that of most other large cities in the nation, according to data from national commercial real estate firm Commercial Edge.
One local office real estate broker described the Milwaukee office market as active, another described it as gradually rebounding.
“The market isn’t growing, and the data isn’t showing a dramatic increase in absorption of space, but there’s certainly a lot of users seeking office space, even if they’re jumping from building to building,” said Jenna Maguire, vice president of the Colliers | Wisconsin’s office brokerage group.
Part of the reason for the activity is that, nearly four years out from the pandemic’s onset, more companies are comfortable making decisions about what the future of their organization looks like as it relates to office space, while in 2020 or 2021, most users were looking for short-term renewals as they made those decisions.
“Now we’re seeing users who before were testing the waters or had been out of the market for a while are finally coming back and making some commitments,” Maguire said. “We’re past the ‘kick the can down the road’ decision-making approach.”
The work-from-home trend since the onset of the COVID-19 pandemic has hurt demand for office space in recent years. But many employers are now moving from language strongly encouraging their employees to work in the office to mandating it, according to Bill Bonifas, executive vice president at CBRE in Milwaukee.
But to convince employees to come back to work in person, employers need to enhance their office space, many brokers say.
“It used to be that seemingly people were more content with kind of normal office space because the goal was to do your job and get along with the people there,” Bonifas said. “Now it seems like everybody is really having to cater to their employees, so there is a complete flight to quality.”
For the first three quarters of the year, class A office buildings in the metro Milwaukee area have seen an additional 111,000 square feet of space occupied, while class B office buildings in the area have seen an additional 249,000 square feet of space vacated in the same time period, CARW data shows, which is a significant indicator of the flight to quality trend.
Further, for office buildings built in downtown Milwaukee since 2015 – the newest supply on the market – the vacancy rate is only 8%, which is down from 17% in 2021. Conversely, downtown office buildings built before 2015 – buildings that might have been struggling before the pandemic with about 25% vacancy – saw flatline vacancy levels until the pandemic, but now are at 45% vacancy, according to Pecor.
“The older class B, class C buildings that weren’t well leased beforehand just continued to lose tenants to some of these newer properties and on average are really struggling now,” Pecor said. “There’s just no demand for some of these properties, they haven’t seen tenant activity in years.”
Conversions, old and new
Historically, aging office buildings would have a secure future so long as they remained updated; however, several trends are complicating this.
The lack of velocity in the office market has resulted in stagnant rents, with rents even decreasing in some class B buildings, according to brokers. Little growth in rent rates combined with high interest rates and high construction costs has made the cost of renovating office buildings prohibitive in some cases.
“The whole calculus for office redevelopment is unraveling,” Barry said.
As a result, brokers and real estate experts predict more office conversions in the coming years to uses like hospitality and, more often, apartments or condos as demand for housing remains high.
One of Milwaukee’s most iconic office towers is slated to undergo such a conversion.
Built in 1989, the 35-story 100 East building was once one of the city’s premier office buildings. However, in 2021, the building fell into foreclosure after losing its anchor tenant, Michael Best & Friedrich, to the newly constructed BMO Tower.
Now, the building’s new owners are planning to convert it to 350 luxury apartments.
100 East’s sale was recently finalized, and the building was valued at $29 million, which is about $66 per square foot. Barry compared that figure to a second-generation industrial building – or a building that’s more than about five years old – in Menomonee Falls that’s selling for around $100 per square foot.
“You’re saying a second-generation industrial building is worth more than a downtown office tower on a price per square foot?” Barry said. “That takes the whole market upside down.”
Downtown Milwaukee’s building conversion activity was quite active even before the pandemic jolted the office market. Since 2015, 1.5 million square feet of downtown office space has been converted to other uses. That represents a 7.5% reduction in downtown office inventory, according to Pecor. The result has been 900 new multifamily units and 520 hotel rooms.
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100 East, 100 E. Wisconsin Ave., was recently purchased by developers planning to convert it to multifamily housing after the building fell into foreclosure in 2021.[/caption]
Downtown Milwaukee stands out
Despite the challenges to the local office real estate market, there have been several notable bright spots for downtown Milwaukee, which is holding up better than many big city downtown office markets across the country.
In the past five years, a growing number of companies have moved or added office space in or near downtown Milwaukee, with companies like Milwaukee Tool, Rite-Hite, Twin Disc, Regal Rexnord and Church Mutual collectively occupying more than 810,000 square feet of office space.
This year, companies like Veolia North America and Fiserv have announced plans to move downtown and occupy about 190,000 square feet of office space, and Northwestern Mutual also announced a 540,000-square-foot renovation of one of its existing downtown office buildings and will close its Franklin campus, moving those employees downtown.
“In every market across the country, there are places that are doing bad and places that are doing just fine, and the places that are not doing as well tend to be downtown areas,” Pecor said. “That is where Milwaukee really diverges from its peers and from the national picture overall.”
A good way to understand why downtown Milwaukee’s office market is standing out is to look at who was building what, and when.
Following an office building development boom in the 1980s, construction of new office development in downtown Milwaukee slowed for much of the 1990s and 2000s.
“We weren’t really building new office, or at least not a lot of new office, certainly not relative to our peers for a good 20 years,” Pecor said.
But since 2015, a flurry of new class A office buildings came online in downtown Milwaukee, such as 833 East in 2016 and the Huron Building and BMO Tower in 2020. These buildings boosted the city’s stock of high-quality office space, which has become paramount in employers’ post-pandemic efforts to lure workers back to the office.
“There’s a six- or seven-year period where we saw a decent amount of speculative supply, most of which was located downtown, with the overall amount of new supply delivered in the suburbs being relatively small, so when companies are looking for quality space, they’re looking toward downtown because that’s where all that quality space is,” Pecor said.
While many working in money management companies and high-end consulting firms, among others, tend to prefer high rises, businesses in fields like architecture or marketing tend to opt for loft-style office space, according to Bonifas. Milwaukee also has that to offer. Bonifas estimates that around 5.5 million square feet of old industrial space has been converted into office space in downtown Milwaukee and its nearby neighborhoods.
But flight to quality means more than simply having an amenity-rich building. Many professionals, especially of younger generations, are looking to work in vibrant neighborhoods within walking distance of restaurants, shops and entertainment; the neighborhood becomes the amenity and downtowns can be better suited to that, office space brokers said.
Another reason Milwaukee has become a destination for office users is its supply of housing. The Milwaukee metro has undersupplied its housing, especially in the suburbs, according to Pecor. This has made housing costs in Milwaukee’s downtown and the surrounding neighborhoods about the same price, if not cheaper, than many of the city’s suburbs.
“A lot of the talent that companies want lives in and around downtown, where we have seen really strong housing supply,” Pecor said. “Plus, a 25- or 30-minute commute is not very attractive to the younger generations.”
These factors, combined with comparatively short commute times, convenient parking and downtown crime rates down 30% since last year, according to Milwaukee Police Department data, have made the city an attractive destination for companies looking for office space.
“A lot of employees and leaders within organizations see downtown Milwaukee as being an approachable city,” said Michael Streit, executive vice president of JLL Milwaukee’s office brokerage group. “It’s a big city on a smaller scale, so there’s energy and comfort at the same time, which is an attraction.”
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The 25-story BMO Tower, 790 N. Water St., was completed in 2020 and has attracted tenants from other downtown office buildings including 100 East.
Credit: Valerie Hill[/caption]
Milwaukee’s office, industrial markets well-positioned
While there have been considerable shifts in Milwaukee’s office and industrial real estate markets, the shifts here haven’t been as seismic as in other cities.
While some cities like San Francisco, Austin or Seattle have seen office vacancy jump 8% or more since 2019, CoStar data shows, Milwaukee’s office vacancy only grew by about 4%, according to CARW data.
Similarly, some metros like Orlando, Columbus, Ohio and Washington D.C. have grown their industrial real estate sectors by more than 100% in the past year, data from Commercial Edge shows, Milwaukee’s market has only grown 5.6%, according to data from commercial real estate firm Newmark.
Southeastern Wisconsin has been known to lack large-scale investors that are willing to take risks on development, which, combined with the region’s conservative business culture, has kept the city from following the boom-and-bust cycle that many other big city markets do.
“Milwaukee is historically a market that underbuilds relative to demand,” Pecor said. “We typically have fairly low vacancies because we don’t do a lot of speculative construction locally.”
“We have a lot of assets, but what we don’t have is population growth,” said Andy Hunt, Vieth director of the Center for Real Estate at Marquette University. “That is a massive driver of real estate value and real estate development.”
The region’s seven largest municipalities all saw their population decline between July 2021 and July 2022, according to U.S. Census Bureau data released in May. In Milwaukee, the population was down 2,535 or 0.45% between July 2021 and July 2022, for a total decrease of 13,920 or 2.41% since the 2020 Census.
For the office market, slower population growth has meant that while other cities saw their skylines transform with new office towers, Milwaukee didn’t, but now – on the plus side – has significantly less office space to re-fill.
“Milwaukee has experienced a less-volatile situation with the office market,” Pecor said.
It also has meant that much of Milwaukee’s office space was filled by local companies, rather than satellite offices for national or international firms.
“After the pandemic, a lot of (out-of-market) companies looked at their office portfolio and decided to cut 30% of office space across the country,” Pecor said. “Well, that never really touched Milwaukee like it did other cities. A lot of our biggest office users are locally grown.”
On the industrial side, that’s also meant comparatively little speculative development and – while today some companies could use that development – if the industrial market turns downward, Milwaukee will be able to return to equilibrium quicker.
“In Milwaukee, our highs are less high than other places and our lows are less low,” Hunt said. “We’re always going to have an advantage in terms of never being as hurt when things aren’t good, and I think right now is a good example of that.”
