Milwaukee retail sector heats up

The retail sector may be the strongest segment of the Milwaukee area’s commercial real estate market in 2005, according to the 2005 Commercial Real Estate Forecast compiled by Grubb & Ellis/Boerke Co.
Although the proposed PabstCity project on the west end of the Milwaukee Park East corridor remains in limbo and in court, the development of The Shops at Pabst Farms and the reinvention of the Bayshore Mall into Bayshore, the North Shore’s Town Center, will provide significant opportunities for new, up-scale retailers to enter the suburban Milwaukee market for the first time.
Meanwhile, existing suburban malls such as Southridge, Brookfield Square and Mayfair mall are investing in renovations that should enable them to keep existing tenants and attract new stores, and the emergence of Granville Station (formerly Northridge Mall) should provide additional momentum to the region’s retail reincarnation.
The retail space at the Shops of Grand Avenue virtually filled up in 2004 after nearly 3,000 new apartments and condominiums were built in downtown Milwaukee in recent years.
"Downtown properties are becoming increasingly valuable, as retailers sense the area’s great potential. Retailers will find this to be a highly profitable area, due to population density," the Boerke report stated. "Improvement in the amount and quality of new inventory is the sunny forecast for Milwaukee retail in 2005. Empty space will slowly be absorbed, with the addition of new space necessary to keep pace with residential growth in the Milwaukee market."
The construction of the Milwaukee Public Market, which will link downtown to the Historic Third Ward, also will add to the retail momentum by fueling the redevelopment of nearby buildings south of the site, according to brokers.
The outlook for the downtown Milwaukee Class A office market is not as sunny for 2005, according to Boerke.
Although the market absorbed two new office towers in 2004, leaks are sprouting in other downtown buildings. The Class A office vacancy rate soared to 13.6 percent in 2004, its highest rate in more than a decade.
The Boerke report on office space contradicts the conclusions of the Polacheck Co. (see story below).
Terence McMahon, a principal at The Boerke Co. Inc., expects the game of office musical chairs to continue for a while in the downtown market. However, due to the high overhead and the conservative nature of the Milwaukee market, McMahon doesn’t foresee Class A rental rates falling to help fill the vacant space.
"We anticipate to have some absorption, but not to have any decline in rental rates," McMahon said.
"Despite these unusually high vacancy numbers, rental rates for Class A properties have not dropped significantly in 2004. We foresee the same for 2005," Boerke’s report stated.
A different dynamic is playing out in the suburban office market, where Class A vacancy rates have stabilized, but remain a whopping 14.2 percent.
The rental rates for Class A space in the suburban market are likely to decline in 2005 because of the growing demand for more affordable Class B space, McMahon said.
"The market is looking at more affordable buildings. I would say
price pressure is what’s happening,"
McMahon said.
In the industrial leasing market, Boerke foresees stronger growth
for space in the suburbs than in downtown Milwaukee.
"Due to a limited availability of desirable locations, downtown manufacturing companies continue their suburban exodus, while the suburban manufacturers are planning additions and facility expansions," the Boerke report stated. "Based on new and planned construction, every indication points to a strong 2005 performance for metro Milwaukee’s industrial segment."
Downtown office market picks up steam
By Andrew Weiland, of SBT
The market for Class A office space in downtown Milwaukee is strong and several proposals for new downtown office buildings are in the works, according to The Polacheck Co. Inc. brokers and the firm’s 2005 Real Estate Market Review & Forecast.
According to the report by Polacheck, a CB Richard Ellis Company, the downtown office market has a 16 percent vacancy rate, which is the same office vacancy rate for the entire metro Milwaukee area.
The downtown marketplace recently absorbed two new office buildings. Construction of the 227,000-square-foot 875 East building at 875 E. Wisconsin Ave. and the 205,000-square-foot Cathedral Place building at 555 E. Wells St. were completed in 2003, and in 2004, both buildings reached capacity or near capacity.
"The speed with which they have filled up has surprised me," said Steven Palec, senior vice president of the office property group for Polacheck.
The two new buildings lured several tenants from other downtown buildings, but 875 East also landed the new Roundy’s Inc. corporate headquarters, which moved to downtown Milwaukee from Pewaukee.
Downtown Milwaukee is a healthy market for class A office space, especially for newer buildings with more space for each floor, real estate professionals say.
Palec said the seven class A downtown office buildings, which include the U.S. Bank Center, the Milwaukee Center, 100 East Wisconsin, 875 East, Cathedral Place, the 411 East Wisconsin Center and 1000 North Water, are doing well.
"Those seven buildings are as healthy as you can imagine," he said. "Of those, five are virtually fully leased. So the class A market downtown is very, very healthy."
The success of the new buildings and the other downtown class A office buildings has led to speculation that another new class A office building would be successful. Several developers are working on proposals for new downtown office buildings, Palec said.
"There is talk of and I would say there are probably, believe it or not, five viable proposed (downtown office) projects," Palec said. "The question is how many and what kind of projects. I do personally believe we could handle another one."
All of the proposed office developments would have about 200,000 square feet of space, similar to the size of the 875 East and Cathedral Place buildings, Palec said. He declined to disclose additional information about the proposals.
One proposed office development that has been discussed publicly is Ovation Plaza, a high-rise office building planned by Irgens Development Partners LLC for the northwest corner of Water and State streets.
Another downtown office building could be built in the next year or two, Palec said, if a proposed building attracts an anchor tenant before construction.
"You’re not going to see anything speculative," he said. "It will be anchor-driven."
The office vacancy rate for the downtown area east of the Milwaukee River is at 14 percent, according to the Polacheck report. The office vacancy ratess for the downtown area west of the river is at 10 percent, and the office vacancy rate for the Historic Third Ward and Walker’s Point areas are at 38 percent, according to the report.
The total downtown office vacancy rate of 16 percent is equal to the office vacancy rate for the entire metro area.
The downtown office market is gaining strength, Palec said.
"There is a vibrancy to the downtown area that you could on a microview take a look at just by walking up and down the streets and seeing restaurants, nightclubs (and) human beings," he said. "There is a subtle vibrancy. Anybody that doesn’t want to be downtown is already gone. Everybody else is staying and encouraging others to join them."
However, some older downtown office properties, which are losing tenants to newer buildings, are struggling. In particular, the Reuss Federal Plaza, 310 W. Wisconsin Ave., which lost the U.S. Forest Service to the Gas Light Building in 2003 and will lose the Internal Revenue Service offices to 211 W. Wisconsin Ave. later this year, stands out as a loser in the downtown scene.
Located west of the Milwaukee River and situated near the Shops of Grand Avenue, Midwest Airlines Center and the Hyatt Regency, the Reuss Federal Plaza site might be better suited for a different use, Palec said.
"My personal opinion is I always thought it would make a better hotel than an office building because it is having a hard time competing as office space," he said. "It’s certainly not unsalvageable."
The West Allis submarket has the highest office vacancy rate at 20 percent, according to the Polacheck report, but that city is benefiting from the conversion of the former Allis-Chalmers industrial complex into up to 650,000-square-feet of office place. The facility, called Summit Place, has already attracted tenants for 200,000 square feet of space, and the redevelopment project is only partially complete.
The Wauwatosa submarket has an office vacancy rate of 12 percent and has attracted the 475,000-square-foot GE Healthcare headquarters, which is under construction in the Milwaukee County Research Park.
The Brookfield submarket has a 17 percent vacancy rate, Waukesha has a 15 percent vacancy rate, the Menomonee Falls/Park Place submarket has a 16 percent vacancy rate and the Northshore/
Ozaukee County submarket has a 12 percent vacancy rate, according to the Polacheck report. The total suburban vacancy rate is 15 percent.
"Vacancy is on the way down, and (lease) rates are holding steady, and that’s good," Palec said. "The worst thing that could happen in the office market would be overdevelopment, and we don’t have that."
The retail real estate market is also improving, according to the Polacheck report. The overall vacancy rate for retail properties in the metro area is at 7.06 percent, down from a 10 percent vacancy rate in 2003.
The Shops of Grand Avenue in downtown Milwaukee continued its comeback in 2004 adding several new stores including Old Navy, TJ Maxx and Linens ‘N Things to fill vacant space. Southridge announced Steve & Barry’s, Linens ‘N Things and Cost Plus World Imports will soon fill vacant space in the former Younker’s department store.
Mayfair Mall added popular chain restaurants PF Chang’s, Maggiano’s Little Italy and The Cheesecake Factory, their only locations in the state. Crate and Barrel will open its first Wisconsin store at Mayfair later this year.
More restaurant chains are looking for locations in downtown Milwaukee, said David Devorkin, executive vice president of Polacheck’s retail properties group.
"For a while, downtown Milwaukee from a restaurant standpoint was truly isolated. If you look at who we’ve gotten, Benihana, Rock Bottom, Applebee’s, all of those came back downtown over the last five years, where notoriously they did no business downtown, and that’s changed," he said. "Rock Bottom does an incredible amount of volume down there. And, we’ve got other national chains looking downtown as we speak."
However, shoppers in the region will have to wait until 2006 for the most significant new addition to the area retail scene, Polacheck brokers said. The conversion of Bayshore Mall in Glendale into a town center and the construction of The Shops of Pabst Farms will bring new retailers to the market.
Bayshore is owned by Columbus, Ohio-based Steiner + Associates, Dallas-based Corrigan Holdings and New York-based Mall Properties Inc. The redevelopment of the mall might be able to attract some higher-end retailers that would be new to the Milwaukee retail scene, such as Nordstrom, Polacheck brokers said.
"If anyone can do it, Steiner can," said Polacheck president and chief executive officer Max Rasansky. "Steiner is one of the top town square, lifestyle, high-end (retail) developers in the country and I think it is a phenomenal partnership with Corrigan. I think Bayshore is going to be wonderful. You’ve got to give it three years."
The outlook for the industrial real estate market is also looking up, Polacheck brokers say. The industrial sector of the economy is finally recovering from a harsh recession. The industrial vacancy fate for the metro area is at 6.92 percent, up slightly from 6.64 percent in 2003, according to the Polacheck report. Milwaukee County’s industrial vacancy rate of 7.14 percent is lower than Waukesha County’s 8.65 percent vacancy rate.
However, the increases in vacant space appear to the leveling off, according to the Polacheck report. In 2004, the industrial space vacancy rose by 909,374 square feet, compared with an increase of 2.7 million square feet in 2003.
"We are going, clearly in the right direction," said Roger Siegel, executive vice president of Polacheck’s industrial properties group. "The market is starting to come back. There is more space for lease then we would like to see, but it’s always tough to lease space. I think next year when we do our report, the numbers are going to look dramatically different. It has been a slow climb out of this (recession) but we’re going in the right direction."
January 7, 2005, Small Business Times, Milwaukee, WI