Gloom and doom. Doom and gloom. Those words were interchangeable and prevalent during the last few years in both economic and office real estate market analysis. But in the words of 1960s legendary rock group The Buffalo Springfield, ”Something’s happening here.”
That something is very good. While there will be setbacks, and it may take a year, it will be something very good. And that something is without the freewheeling lending market of the 1980s, without the sometimes illogical boom of the 1990s, and without the volatility of the past decade.
The Milwaukee office market is absorbing space, creating excitement with a vibrant downtown (especially in housing and dining) and ready for a positive rebirth. Now let me tell you what didn’t happen in 2011, and what won’t happen in 2012. And then allow me to tell you why 2013 will be spectacular.
The total inventory of the Milwaukee office market is nearly 28.2 million square feet. With approximately 6.4 million square feet available and nearly 5.8 million square feet vacant, the direct vacancy rate for the market as a whole is 19.7 percent. But in the financial area east of the River downtown market, the vacancy rate is only 8.2 percent.
Some of the prominent submarkets have experienced a drop in vacancy during the past year. Class A space in Mayfair has dropped to 5.8 percent from 16.2 percent. The Northwestern Milwaukee submarket saw vacancy fall from 21.5 percent to 15.2 percent. Total absorption was 187,278 square feet. However, 110,837 square feet of absorption occurred in the fourth quarter alone.
Thus far in 2012, the downtown market does have bragging rights to two substantial lease transactions. Baker Tilly has committed to lease 68,000 square feet by the end of the year in the U.S. Bank Center. Schlitz Park, a refurbishment, repositioning and reinvention of a large block of downtown space that has green aspects, also attracted two suburban users, AECOM and Streetlinks Lender Solutions.
Downtown Milwaukee is unrecognizable from the opening credits of Laverne & Shirley. In fact, take a look at the opening of the movie Bridesmaids for a real picture of the beauty of downtown Milwaukee. Taking advantage of aesthetics, lifestyle and numerous new housing options, downtown is poised for significant office growth. The Calatrava addition to the Milwaukee Art Museum is iconic. The adjacent Third Ward is teeming with vibrancy, restaurants, housing and recreation.
Within a 10-minute drive you can access the Harley-Davidson Museum and the home of the Milwaukee Brewers, Miller Park, a gem of a stadium that attracts some 3 million turnstile pushes a season.
What’s the rub for 2012?
I have spoken to a number of brokers about the lack of activity in 2011. While some brokers said 2011 was better than 2010, and a few benefited from foreclosures, I question anyone who says 2011 was good. When thousands of people lose jobs, lenders take a hiatus and government provides most of the construction work, that is not a good year. Companies that have hunkered down for years were still cautious.
Still, Milwaukee is home to a number of solid and growing companies that have weathered many downturns. What we haven’t had for 10 years is speculative development. There has not been a new office tower in downtown Milwaukee since two successful projects in 2001: 875 East Wisconsin and Cathedral Place, which were fully leased about the time of their completion.
The lack of large contiguous blocks of space coupled with the excitement new product can create is a recipe for an impactful new high-rise development. The reason a new building has not gone up yet is partly due to the difficult lending environment and the need for two anchor tenants. It is tough to put two law firms together, and the potential anchor tenants in the market have not always agreed on one project. But a new downtown office tower will work and will be built. The question is not if, but when.
What didn’t happen in 2011 was any significant growth, leasing activity, corporate headquarters movement and certainly not any speculative new office development. All of these things can and probably will occur because there is demand for new product and there is growth by existing companies.
The reason we are not going to see the results until 2013 is the reticence by some users to jump into a long-term commitment during the uncertainty of an election year. Even if a new project were to be announced tomorrow, the planning, permits and construction would delay immediate impact.
We also are on the verge of seeing a shift in office worker demographics. The idea of working for years to obtain an office with a window is no longer the norm. A growing number of workers untethered to their desktop computers will change the dynamics of office space needs. The office of the future will be smaller and feature more collaborative workspaces.
Milwaukee is well positioned for economic growth because of its smart and savvy business community. Just give it a year.
— Steve Palec is president and managing partner of the Milwaukee office of CresaPartners.