Metropolitan Milwaukee has experienced a robust industrial real estate market for the past several years. This strength should continue in 2016 and for the foreseeable future.
Like many other metro areas, Milwaukee’s industrial sector experienced slow but steady economic growth as it emerged from the Great Recession. However, unlike many other metro areas, Milwaukee has not yet exhibited a strong uptick in new industrial development. Minimal speculative construction has occurred during the past few years.
Consequently, while demand for industrial space has continued to increase, supply has remained fairly flat. This phenomenon of increased absorption without a corresponding increase in new product coming to market has driven down the overall vacancy rate to slightly under 5 percent, near a record low, according to Xceligent.
Moreover, the new industrial development that has occurred has been primarily driven by users expanding, relocating or
James Barry III,
The Barry Co.
consolidating existing facilities, or by new build-to-suit or speculative developments undertaken by Milwaukee-based firms such as Zilber Property Group, Luterbach Properties, Briohn Building and Wangard Partners.
Larger regional and national industrial developers such as Centerpoint Properties and First Industrial Realty Trust, which once drove industrial development in Milwaukee, ceased construction in Milwaukee during the Great Recession and have not returned. (However, both firms have remained active in the southern Kenosha market).
Recently, however, there have been indications of renewed interest from national industrial developers. Liberty Property Trust, Ryan Companies US, Inc. and The Opus Group have all re-entered the Milwaukee industrial development market, and this is likely to be the beginning of a trend that should accelerate in 2016.
Scarcity of Available Space
Due to the lack of significant new industrial product in the Milwaukee market, the market for existing buildings both for sale and lease has remained strong. The number of industrial sale transactions has continued to increase, as has the volume of lease transactions.
This, in turn, has created a shortage of available properties both in certain size categories and in numerous submarkets. Buildings over 100,000 square feet are in particularly short supply, as are buildings in most size categories in the Waukesha County and North I-41 submarkets.
During 2016, this constricted supply will exert continued upward pressure on both lease rates and the price per square foot that can be commanded by owners in building sales.
Users of industrial space in the metro Milwaukee are generally doing well and continuing to expand. Still, there are several sectors, such as printing, mining equipment and power equipment, that appear to be faltering, which could result in several large blocks of space coming back on the market in 2016.
Notable Transactions
Recent high-profile industrial deals in the Milwaukee market include Harley Davidson’s sale of a 400,000-square-foot industrial building on Capitol Drive plant in Wauwatosa to an Arizona-based buyer affiliated with U-Haul for $5.25 million, Joy Global’s lease of 300,000 square feet at a property located at 10001 South Howell Ave. in Oak Creek; and Interstate Partners’ 78,000-square-foot build-to-suit lease for Promach Corp. in the Ridgeview Corporate Center in Waukesha County.
One issue that will be challenging to both users and developers of industrial space in Milwaukee is the limited availability of quality land sites on which to build.
There is high-quality, “ready-to-build” business park land available at the southern border of Milwaukee County along I-94 in Wispark’s 220-acre OakView Business Park, but most other available industrial land sites are either located on the periphery of the market or are infill sites that are not in business parks.
Developers seeking well-located quality land will need to be creative, much like Zilber was in successfully developing the Lilly Creek Business Park from an infill site in Menomonee Falls.
Strong Investor Appetite
Investors in industrial properties showed substantially increased interest in the metro Milwaukee market in 2015.
Dallas-based Westmount Corp. purchased a 10-building, 1.7 million-square-foot industrial portfolio from Centerpoint Properties; James Campbell Company of Los Angeles purchased a high-end multi-building industrial portfolio from Luterbach Properties; and Chicago-based R2 purchased the 1.1 million-square-foot downtown Milwaukee Post Office as a fully leased investment and possible future redevelopment property.
Added Investor Incentive
Milwaukee remains a highly attractive market for investors interested in competitively priced industrial product, and Milwaukee is currently in the process of being rediscovered by investors who have been focusing on other markets.
Milwaukee’s industrial vacancy rate is low, absorption is strong and the economic base is stable and diversified. Most importantly perhaps is that cap rates average 100 to 150 basis points above those found in primary markets such as Chicago. In 2016, more investors will likely give serious consideration to the Milwaukee market and more large industrial investment deals will get done.
Meanwhile, Milwaukee’s central business district has seen a flurry of activity involving the conversion of older, multi-story industrial buildings into new uses, such as multifamily, office, retail and self-storage. This trend will continue in 2016 in areas such as the Third Ward, the Fifth Ward, the Park East Corridor and Brewer’s Hill even as the supply of buildings available for conversion continues to decline.
Stars Aligned Nicely
In sum, 2016 should be another good year across the board for the Milwaukee industrial sector. The real estate fundamentals are in place for more development — some of it speculative — but this will occur in a steady and thoughtful manner.
Existing industrial property owners should see their properties increase in value and will likely enjoy modest increases in rents in 2016.
Finally, investors will continue to increasingly take note of the fact that they can achieve greater returns, without taking greater risk, by investing in the Milwaukee industrial real estate market.
— By James T. Barry III, President, The Barry Co. This article originally appeared in the February 2016 issue of Heartland Real Estate Business magazine.