Despite a lack of sales or new construction projects, the Milwaukee office market has maintained a steady level of activity this year. “We’re busier this year than we were last year. Whether it’s productive for the economy is debatable, but it is productive for brokers,” says Bill Bonifas, executive vice president with CB Richard Ellis’ Milwaukee office.
Many of the deals Bonifas and other brokers in the city are working on are blend and extend deals, in which the landlord renews a tenant early and for a longer term in exchange for concessions, usually consisting of free or discounted rent. “Right now, the psychology is that an ounce of prevention is worth a pound of cure, so the smart owners are doing what they have to do to complete deals and keep their existing tenants,” Bonifas says.
Tenants in Milwaukee are happy to sign these deals, since it provides them with savings today. Landlords are also content because they have tenants secured in their properties, which helps keep the asset stable and puts the landlord in a better position to refinance the property. The landlord may be giving up some rent, but the tradeoff is worth it. “It looks like the sweet spot where everyone wins right now in this economy with these kinds of deals as long as no one gets unreasonable, including the tenants, who right now hold the cards,” Bonifas says.
Unfortunately, these deals do not help the overall market, since these tenants are rarely expanding. However, landlords are able to sleep at night and brokers make commissions, so blend and extend deals are definitely not a loss. In today’s current market, one would also expect to see a fair amount of sublease activity, but Bonifas says that huge amounts of space have not come to market, and instead are spread throughout the market in multiple buildings.
On the sales side, investment activity has halted. “Compared to the heady days of even a little over a year ago, when there were lots of investment sales every month, there’s almost nothing going on now,” Bonifas says, adding that a few value-add and vacant properties have traded, but that is all. Bonifas attributes this partly to the ever-present expectation gap between buyers and sellers, especially buyers that are holding out for what they see as an eventual wave of foreclosed properties, and partly due to a general lack of confidence in the market.
The development pipeline has slowed, with the only major project soon to be completed being a 56,000-square-foot build-to-suit for United Heartland in New Berlin. The project is scheduled for completion by the end of the year. In addition, a deal is soon to be signed in which a tenant will be downsizing to a new 30,000-square-foot facility from a 60,000-square-foot property. However, some activity could begin in downtown Milwaukee if several office users have their way. These tenants have handled the recession better than most and are looking for new space.
“There are several large tenants eyeing developments in downtown Milwaukee and trying to get something off the ground,” Bonifas says. In addition, Bonifas says that there may be a local developer that could make it happen. If any project was proposed, it would probably total 150,000 to 300,000 square feet and would not start until 2010 at the very earliest.
— Coleman Wood