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The industrial real estate market in Southeast Wisconsin continued its climb upward during 2012 as the overall vacancy rate fell from 7.1 percent to 6.5 percent. The result was positive net absorption of 3.6 million square feet for the year. This trend marks two-and-a-half straight years without a quarter of negative absorption.
Seven of the eight counties in the Milwaukee industrial market area posted a reduction in vacancies during 2012. In Kenosha County, for example, the vacancy rate dropped from 11.1 percent in the fourth quarter of 2011 to 9.4 percent in the fourth quarter of 2012.
Two transactions by Venture One Real Estate LLC accounted for most of the positive net absorption. The first transaction, which occurred in December 2012, was the sale of a 62,000-square-foot facility to EMCO Chemical Distributors Inc. This deal was followed shortly by Venture One’s acquisition of the 160,300-square-foot former Cenveo Inc. facility in Kenosha.
Kenosha’s industrial market should perform well this year because of overflow demand from the Racine County market, which will necessitate deals in Kenosha. The shortage of space in Racine County will make it a better candidate for build-to-suit and speculative developments in 2013.
Transaction Highlights
Strong demand in Waukesha County caused vacancy to fall from 5 percent to 4.1 percent during the course 2012. ABB Inc. purchased its building at 16250 W. Glendale Drive in New Berlin for $9 million. In order to create more space for manufacturing, ABB plans to move all of its administrative operations to Wauwatosa’s University of Wisconsin-Milwaukee Innovation Campus. Construction of the 95,000-square-foot, build-to-suit office property is expected to begin this spring and take a year to complete.
In one of the largest deals of 2012, Clarion Partners sold five industrial buildings totaling 606,903 square feet to Zilber Property Group for $29 million. The properties are located in Milwaukee, Oak Creek and Pleasant Prairie.
We continue to see significant activity in the Pleasant Prairie submarket. In addition to the Zilber deal, we saw Meijer purchase the SuperValu distribution center, a 580,000-square-foot facility on 125 acres for $29 million. Meijer, a Grand Rapids, Mich.-based chain of combined supermarket-discount stores, has plans to build a 253,577-square-foot addition to the building by 2014, all of which will help supply stores it plans to open in Oak Creek, Wauwatosa, Sussex, Grafton and Kenosha.
We’ve seen leasing activity persist throughout the last two quarters, so much so that landlords have become less aggressive with tenant improvement packages and free rent incentives. In addition, sale prices are stable and increasing in certain Southeast Wisconsin submarkets.
Strong market fundamentals, primarily low vacancy rates and a steady pace of absorption, indicate that the industrial real estate market should outperform the overall economy. In general, manufacturers in the Milwaukee area have expressed confidence that the industry will continue to rebound in 2013.
Most major economic indices, including the Institute of Supply Management, seemed to indicate that growth in the manufacturing sector may be tapering off. Manufacturing may be slowing down as the rate of GDP growth remains anemic, although this should have a minimal but notable effect on real estate in the region.
Uptick in Development
As we saw toward the end of 2012, development has begun to pick up, a trend we expect to continue in 2013. The Developer Survey, conducted by The Dickman Company Inc. in December 2012, polled 10 of Milwaukee’s largest developers, and provided further proof that build-to-suit projects will be more prevalent this year. Survey participants included Wispark LLC, First Industrial Realty Trust, Opus and CenterPoint Properties.
In fact, about 90 percent of the developers were already engaged in build-to-suit projects at the beginning of 2013. Speculative development is expected to a lesser degree (20 percent engaged in speculative projects), and only in cases where the project is partially leased.
The markets in which development is most likely to occur include Racine, Kenosha and Waukesha. Their vacancy rates are 3.1 percent, 9.4 percent and 5.3 percent, respectively. Kenosha’s vacancy rate is deceptively high. That’s because the existing inventory is either older or unable to adapt to current manufacturing and warehousing standards for ceiling heights and loading.
Based on the available data and our experience in the marketplace, we anticipate an even stronger 2013, both in sales and leasing and development of industrial product. Look for the decreasing supply to affect pricing levels. Expect landlords to offer fewer concessions to tenants and lease rates to rise slowly.
— Brian Parrish, vice president and partner of The Dickman Co. Inc./CORFAC International, and Zachary Noble, sales associate with The Dickman Co. Inc./CORFAC International