Johnson Controls International's plans to
move out of downtown Milwaukee and shift employees to Glendale will make worse an already dire situation for the downtown office market, which is already dealing with the fallout of the COVID-19 pandemic and an oversupply of space, industry insiders said today.
However, a major tenant relocation creates opportunity for others.
That's the thinking of Milwaukee-area commercial real estate industry experts, in reaction to the JCI news.
The company announced today it will sell its downtown Milwaukee facilities at 507 E. Michigan St., and is working with CBRE to market the property.
JCI said it plans to lease its seven-building, 420,000-square-foot downtown campus from the buyer for two years while it completes its move to Glendale. The decision represents an eventual move of 1,260 jobs to Milwaukee's suburbs from the heart of the city.
“I think it’s going to pose a further challenge to the downtown Milwaukee office market, which is already seeing significant increase in vacancy and, unfortunately, a decline in the absorption that we had seen before the pandemic had set in," said James Barry, president of Milwaukee-based The Barry Co.
Barry said the downtown market had seen solid absorption of office space for roughly the decade prior to the pandemic. This led to the development of new buildings. For instance, the BMO Tower at 790 N. Water St. and the Huron Building at 511 N. Broadway, two Class A office buildings, both opened their doors last year.
Barry said the downtown office market was already softening a bit because of some oversupply leading up to the pandemic. But COVID-19 made things far worse.
"And now, unfortunately what we’re seeing is that there are large blocks of space in existing buildings and newly developed buildings that are having trouble moving," he said. "That’s going to be really challenging."
It will be especially challenging when considering hundreds of thousands of square feet of additional office space could hit the market in a couple years.
"Real estate is one of the largest costs for any business and is constantly being reviewed to optimize productivity," Tracy Johnson, president and chief executive officer of the Commercial Association of Realtors Wisconsin, said in an email. "CEOs have used the time during the pandemic to re-evaluate all expenses and operations. The announcement of Johnson Controls vacating its downtown office location certainly creates a hole in the downtown market but presents additional opportunity for well-located inventory."
Johnson added the downtown office market is currently hovering around 20% vacancy.
"While we will likely see more companies consolidate or vacate office space, there are others looking to expand or relocate," she said. "Activity has been picking up over the past few weeks, and we expect that many of the decisions that were put on hold early on the pandemic will start to move again."
Mark Irgens, CEO and manager of Milwaukee-based Irgens Partners LLC, echoed Johnson's sentiment. He acknowledged the move is a blow to downtown, but said the for-sale campus presents an opportunity to prospective buyers.
"It’s too bad they’re leaving downtown," he said. "Oftentimes situations like this brings along new opportunities."
Irgens Partners develops primarily office projects in the Milwaukee and Phoenix areas. It developed the BMO Tower and 833 East office buildings downtown. It is also working on office projects in Mequon and Brookfield.
The collection of buildings might make for a good mixed-use redevelopment project, Josh Jeffers, president and CEO of Milwaukee-based J. Jeffers & Co., said.
"I could foresee some of those buildings being converted to other uses," Jeffers said.
He said multi-family housing would make sense there, especially considering that sector of real estate has remained fairly strong. And though hospitality has been hit hard by the pandemic, there may be demand in the future for more hotel rooms once things get back to normal, he said.
Jeffers & Co. developed the Huron Building, and is working on downtown adaptive reuse projects at the former
Journal Sentinel complex and the
Milwaukee Athletic Club building.
Jeffers said the campus checks all the boxes for what his firm looks for in an adaptive reuse project. Some of the buildings appear well-suited for a conversion to other uses. Some of them are also historic, which could mean a chance to use historic tax credits in financing their redevelopment. It's also well-located for such a project.
It's certainly an opportunity Jeffers & Co. is keeping its eye on.
“I think we will certainly keep a close eye on what happens there and may make a run at it as well," Jeffers said.
JCI didn't specify the ongoing COVID-19 pandemic as a factor in its decision to leave downtown.
But city leaders noted the pandemic has impacted businesses.
"The current pandemic is affecting businesses in many ways," Lafayette Crump, director of the Milwaukee Department of City Development, said in a written statement. "Our channels of communication with Johnson Controls remain open. We know companies find the center of the city to be an ideal place to do business. The company’s employment and economic impact are important to Milwaukee, and we want Johnson Controls to be an ongoing part of our community."
The 507 E. Michigan site is also significant for Johnson Controls, which has operated there since 1902.
It wasn’t long ago that JCI was considering downtown Milwaukee as the possible site for a 50-story, 1.2 million-square-foot building. Those plans were rumored in early 2015. Then-CEO Alex Molinaroli said in September 2015 that a decision on the lakefront office tower at East Clybourn Street and North Lincoln Memorial Drive would come within a year. The company and city of Milwaukee even split the $500,000 cost of a feasibility study for the property.
By early 2016, however, the company had announced its deal to acquire Tyco, pulling its attention in other directions. By the spring of 2018, the site, owned by the state Department of Transportation, was
listed for sale.
