Downtown Milwaukee Continues Its Hot Streak, but Will It Cool in 2016?
The long-held perception of the Milwaukee office market is that it mostly trades tenants between buildings with one landlord winning at the other’s expense, while the overall pie remains the same size.
However, with cranes dotting the horizon, large blocks of vacant space quickly leasing up, a number of major new developments waiting to break ground, and the inflow of outside dollars into Milwaukee, the market has recently experienced some amazing deal velocity.
This activity is expected to continue as we head into 2016. However, the office market could slow down due to the completion of several projects currently under construction.
The greater Milwaukee office vacancy rate stood at 15.5 percent in the third quarter, down slightly from 15.6 percent in the third quarter of 2014. The vacancy rate in the central business district (CBD) dropped from 16.2 percent to 14.9 percent during the same period. Meanwhile, rental rates have increased slightly in both the overall market and the CBD.
Cranes in the skies
Construction on the Northwestern Mutual Tower and Commons began in late 2014 in downtown Milwaukee and is scheduled for completion in late 2017. A 32-story office tower will adjoin a two-block-long, three-story space known as The Commons.
The new development will span an estimated 1.1 million square feet and include a nearly three-acre public green space with abundant gardens and trees, benches and walkways, plus casual dining opportunities open to the public. Once completed, the project will preserve 1,100 downtown jobs while adding 1,900 new ones, according to the giant insurer.
Local developer Irgens started construction on the Meadowland Research & Technology Center, a four-story, 156,000-square-foot Class A office building in the Milwaukee County Research Park located approximately seven miles west of the CBD in Wauwatosa. The anchor tenant will be Zywave Inc., which will occupy approximately 78,000 square feet after outgrowing its offices in the same park.
Irgens is also nearing completion of the first multi-tenant, Class A office tower to be built in Milwaukee’s CBD in over 12 years. The building, located at 833 E. Michigan St., is currently 57 percent leased. While most of the announced tenants are already located in downtown Milwaukee, several are expanding their current footprint.
Scarcity of large spaces
A lack of large blocks of quality office space exists in both the CBD and the suburbs. This is evident by how quickly the large blocks have been backfilled in recent quarters, including Aurora Health Care leasing 80,000 square feet of space formerly occupied by Kohl’s Corp. at the Park Place office park on Milwaukee’s far northwest side. Similarly, Wells Fargo Home Mortgage announced plans to vacate nearly 240,000 square feet at Park Place, but 125,000 square feet of that space was leased before Wells Fargo vacated the building.
Among the many planned developments with an expected start date in 2016 is the Milwaukee Bucks’ arena district, which includes a $500 million arena for the NBA team and an estimated $500 million entertainment district surrounding the venue. The arena is slated to open in the fall of 2017.
Meanwhile, Northwestern Mutual plans to break ground in 2016 on a $100 million, 33-story residential tower that will also offer additional parking for its downtown campus.
Construction of Phase I of the $123 million Milwaukee Streetcar project also is slated to begin in 2016.
According to Milwaukee Downtown, the downtown Business Improvement District, there is currently $1 billion worth of projects under construction and an additional $1.3 billion in proposed projects.
Due to increasing prices in the major markets, in the past 18 months several outside investors have acquired office towers in Milwaukee’s CBD. Among the noteworthy transactions:
• Fulcrum Asset Advisors and Millbrook Properties acquired the 20-
story, 200,044-square-foot office building at 250 E. Wisconsin Ave.
• Chicago-based M&J Wilkow Ltd. purchased the 131,727-square-foot Gas Light Building at 626 E. Wisconsin Ave.
• Riverview Realty Partners, an affiliate of Connecticut-based Five Mile Capital Partners, purchased the 654,165-square-foot building at 411 E. Wisconsin Ave.
• Andover Portland Avenue Associates LLC, a Massachusetts-based group led by developer and investor King Weinstein, acquired the 108,671-square-foot Riverfront Plaza for $7.5 million
• A 99,450-square-foot building located at 241 N. Broadway sold at auction to an undisclosed buyer.
• R2 Companies acquired the 1.1 million-square-foot Post Office Building at 341 West St. Paul Ave. The Post Office building will continue to operate as a central mail sorting facility and retail post office for at least five years. R2 plans to work with the City of Milwaukee and local stakeholders to determine the best adaptive reuse for this site.
Cooldown in 2016?
Several significant changes will impact the shortage of space and may tip the scales to a surplus of space. In 2016, the FBI will move out of approximately 90,000 square feet at 330 East Kilbourn Ave., located in the CBD East submarket, to a single-tenant facility south of Milwaukee in the city of St. Francis.
Upon completion of Irgens’ 833 East Michigan in the first quarter of 2016, nearly 154,000 square feet will hit the market as direct vacancy. Consequently, as tenants move into the new tower, some will leave behind large blocks of space in buildings that are of lesser quality.
The departure of those tenants will provide an opportunity, or a liability, for landlords.
As Milwaukee’s pie grows larger, there is an excitement in Brew City. Still, it remains to be seen whether 2016 will leave our beer mug half full or half empty.
— By John Mazza, Vice President, CBRE, Brokerage Services. This article originally appeared in the December 2015 issue of Heartland Real Estate Business magazine.